美卡多 (MELI) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to MercadoLibre's Fourth Quarter 2017 Earnings Call. (Operator Instructions) And as a reminder, this conference is being recorded.

Now I would like to welcome and turn the call to Federico Sandler, Head of Investor Relations.

Hello, everyone, and welcome to the MercadoLibre Earnings Conference Call for the quarter ended December 31, 2017. I am Federico Sandler, Head of Investor Relations for MercadoLibre. Our senior manager presenting today is Pedro Arnt, Chief Financial Officer.

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 projections are reasonable in view of the currently available information, you are cautioned not to place undue reliance on these forward-looking statements. Our actual results may differ materially from those discussed in this call for a variety of reasons, including those described in the forward-looking statements and Risk Factors sections of our 10-K and other filings with the Securities and Exchange Commission, which are available on our Investor Relations website.

Finally, I would like to remind you that during the course of this conference call, we may discuss some non-GAAP measures. A reconciliation of those measures to the nearest comparable GAAP measures can be found on our fourth quarter 2017 earnings press release available on our Investor Relations website.

Now let me turn the call over to Pedro.

Thanks, Federico. Hello, everyone, and welcome to our fourth quarter conference call for 2017. Let me kick us off today with a general comment regarding the state of the Internet and digital businesses throughout Latin America. We believe that we continue to be in the early phases of the change in consumer behavior towards online offerings that drive the growth of our company, and the pace of this change is encouraging. Some of the main structural factors that underpin e-commerce and FinTech in Latin America continue to take shape through the growth of the installed base of smartphones, increasing consumer familiarity and affinity with buying and transacting online, greater number of broadband users, rising demand for online financial services and growing interest on behalf of traditional retailers and brands to find technology partners to support them in developing their growth strategies. All of these aforementioned structural factors, we believe, are the catalysts that will continue to fuel the growth of MercadoLibre for many years to come. As a consequence of these macro factors, combined with our own improved consumer offering, we've been able to close one of the strongest quarters in our history on the tail end of one of the strongest years our business has had. We're excited to see how the company continues to benefit from these strong secular tailwinds, while we continue to outperform and grow aggressively. And we are even more excited about the prospects for our company as we move into 2018 and beyond.

Let's now take a look at how we closed this record 2017 with an outstanding fourth quarter that carries us into 2018 with great momentum. Let me just remind you that greater detail on this can be found in the accompanying presentation to these prepared remarks.

The following key performance indicators represent quarterly results versus the same period last year. Units sold grew 57.5%, reaching 81.2 million. Gross merchandise volume rose 132% on an FX-neutral basis, reaching $3.6 billion. Excluding our Venezuelan operation, gross merchandise volume accelerated on an FX-neutral basis to 66.5% year-on-year, reaching $3.2 billion. Total Payment Volume grew 94.5% on an FX-neutral basis, reaching $4.3 billion, and excluding Total Payment Volume in Venezuela on an FX-neutral basis, grew 85.2% year-on-year, reaching $4.3 billion.

Total payment transactions in number grew 72% to 73.2 million payments processed. And registered users were up 36.2% year-on-year after we added 10.7 million new users during the fourth quarter of 2017.

As units sold, GMV and TPV metrics indicate, both our Marketplace and Payments businesses had a stellar quarter, and we are pleased to see this strength is evenly spread across multiple geographies. Our Brazilian and Mexican businesses performed well, while Argentina, Colombia and Chile also delivered encouraging results.

This aforementioned strength across multiple geographies has also translated into solid top line results. Excluding our Venezuelan operations, top line accelerated for the second consecutive quarter to 75.3% year-on-year. Revenues in U.S. dollars grew at a healthy 70.5% year-on-year.

The results we delivered during the fourth quarter are a consequence of our customer-centric approach anchored around our free shipping and loyalty programs. And as a result, we have increased our investments in branding and customer acquisition as we've seen positive effects of increased marketing spend on acquiring customers and engagement from existing ones, improvements which, as I've just outlined, also had an immediate impact on our revenue growth.

Before I delve into greater detail in the quarter, I'd like to take a moment to quickly go over a few annual highlights for 2017 that accentuate how the market potential I just talked about has impacted our business positively, allowing us to deliver a historic annual result. During 2017, we crossed the $1 billion mark for the first time, delivering record net revenues of $1.4 billion, a growth rate of 65.6% versus 2016. Units sold accelerated for the third year in a row to 49.1% year-over-year, reaching 270.1 million items sold for the year. Gross merchandise volume rose 87.8% year-on-year on an FX-neutral basis, reaching $11.7 billion. Excluding Venezuela, that same metric accelerated to 45.9% year-on-year, reaching $10.6 billion. Total Payment Volume grew 77.1% on an FX-neutral basis, reaching $13.7 billion. Excluding Venezuelan TPV growth on an FX-neutral basis of payment volume was 77.8% year-on-year, and reached $13.5 billion. While Total Payment Volume and transaction numbers grew at 66.8% year-on-year and reached 231.4 million payments processed throughout the year. Finally, registered users grew by 21.7% as we reached 211.9 million registered users after having added 37.7 million incremental users during the year.

Now let's take a look at the key initiatives and quarterly results by business, starting with the Marketplace. We are encouraged by how strong execution continues to be on that front. Case in point, our focus marketplaces in Mexico and Brazil were the high point for the quarter, delivering exceptional results in key metrics such as units sold, gross merchandise volume growth, depth of selection, user engagement and revenues, while also meaningfully growing the penetration of the value-added services that we offer our users. Additionally, we're also pleased to report that several of the product enhancements that have allowed us to gain significant traction in Mexico and Brazil are beginning to deliver positive results in Colombia and Chile as well, while we are seeing the fastest pace of growth in over 5 years in terms of units sold and gross merchandise volume.

Let me get more specific on these issues. Mexican units sold grew triple digits for the second consecutive quarter to 126% year-on-year growth, up from 46.9% 1 year ago. In Brazil, units sold also delivered strong results, growing year-on-year 68.2%. That's the seventh consecutive quarter of unit volume growth above 50% and also the fastest pace of growth in over 5 years in Brazil. Gross merchandise volume was also very strong during the quarter and reflect the same trends that we have just outlined in items sold growth. On an FX-neutral basis, Brazilian GMV accelerated for the third consecutive quarter to 71.3% year-on-year. Mexican GMV growth was another high point, not only accelerating for the ninth consecutive quarter on an FX-neutral basis to 90.6%, but also delivering the fastest pace of growth in over 5 years. In line with that, Colombia and Chile are also delivering multiyear high gross merchandise volume growth rates on an FX-neutral basis, accelerating to 32.6% and 50.9% year-on-year, respectively.

Moving on, our business vibrancy metrics continue to demonstrate healthy growth rates across most geographies as well. Specifically, on a consolidated basis, unique buyers for the quarter grew over 20% for the eighth quarter in a row and almost 12 percentage points higher than 1 year ago. In this respect, I'd like to take a moment to highlight Brazil and Mexico, as each grew unique buyers to multiyear highs of 48% year-on-year for Brazil and 70.7% year-on-year, respectively. In this respect, I'd like to take a moment to highlight Brazil and Mexico, as each grew unique buyers to multiyear highs of 40.8% year-on-year and 70.7% year-on-year, respectively. As a consequence of this, we have been able to drive greater user engagement as well during the year. For 2017, items bought per buyer in Brazil has grown almost 25% versus 2016, while during the same period in Mexico, units purchased per buyer has grown by almost 60%.

On the supply side, we continue to make strides onboarding more inventory as our SKU assortment continues to deepen. Live listings being offered on MercadoLibre's marketplaces accelerated for the second consecutive quarter to 56% growth year-on-year during the fourth quarter, reaching 114.1 million live listings. Seller vibrancy and engagement was another high point of the quarter in both Brazil and Mexico. Unique sellers accelerated for the third consecutive quarter to 34.2% in Brazil year-on-year, while Mexico accelerated for the fourth consecutive quarter to 28.9% year-on-year. Additionally, during 2017, items sold per seller in Brazil grew 25% versus 2016, while during the same period in Mexico, units sold per seller has grown an outstanding 66%.

Let's take a second to give you an update on the momentum we are generating on mobile, another key avenue for growth and investment for us as we transition from a desktop-centric to a multi-device ecosystem. The important metric here is that exiting the quarter for the first time ever, gross merchandise volume for mobile devices exceeded 50%, reaching 53% of total GMV. When looking at monetization levels on our marketplace, results are also reassuring. On an FX-neutral basis, Marketplace revenues in Mexico, Brazil, Argentina and Columbia as well as Uruguay are all growing above 50% year-on-year. Mexico is worth highlighting here, as its FX-neutral revenue growth rate was the highest in over 5 years during the quarter, reaching an outstanding 124.5%, while Brazil accelerated for the fourth consecutive quarter to an equally solid 79.9% year-on-year.

Throughout the year, we continued to move forward in our efforts in carrying out critical, technical and operational capabilities around the development and management of warehousing and transportation networks in Brazil and Mexico, added additional carriers across multiple geographies and grew our free shipping initiatives in most of our main markets. All of these significantly contributing to the positive results I've just outlined.

If we look on a country-per-country basis, during the fourth quarter in Mexico, adoption of MercadoEnvíos reached 75% of units sold versus 50% during the same period in 2016. It's important to note that shipped volume in Mexico has been outstanding as well, as it has grown items shipped by over 200% year-on-year every quarter since the first quarter of 2017.

Brazil also had highlights on the logistics front. Items shipped through MercadoEnvíos grew over 70% year-on-year for the second consecutive quarter, reaching 35.8 million items. Envíos penetration gains in Colombia and Chile have also been worth noting, as they have gained 21 percentage points and 36 percentage points, reaching 60% of all sales and 47%, respectively.

Additionally, on the free shipping front and confirming how high demand elasticity seems to be to the product, we are pleased to report that exiting the quarter, over 70% of our gross merchandise volume that is shipped through MercadoEnvíos is already being done so free to the buyer.

Let me now move on to our payments business, MercadoPago. Let me start by saying that we are satisfied with the results that we've delivered during the last quarter. We're operating at a time when change is sweeping through the financial services industry in the region driven by a rise of mobile technologies and the acceleration of money becoming increasingly digital, and we continue to make significant progress towards our vision of building out a next-generation digital financial platform to service our consumers.

Starting with our on-platform payments business on MercadoLibre's marketplace, on a consolidated basis and excluding Venezuela, penetration of MercadoPago rose 4 percentage points versus the fourth quarter of last year, reaching 89% of total gross merchandise volume. These solid penetration gains were driven in part by our decision to make adoption of our MercadoPago platform mandatory for 100% of listings in Mexico and all new item listings in Chile. On a country-by-country basis, Mexico led with 98% penetration versus 86% during the same period last year, while we also delivered strong penetration gains in Colombia, Chile and Uruguay. Case in point, Colombia increased 22 percentage points versus last year to 82%. Chile grew 34 percentage points to 75%, while Uruguay grew 24 percentage points, reaching 41% gross merchandise volume paid through the MercadoPago platform during the fourth quarter.

Complementing these solid penetration gains, on-platform total payment volume on an FX-neutral basis grew in excess of 50% year-on-year for the seventh consecutive quarter to $3.2 billion, while total payment transactions reached an all-time high of 50.1 million payments processed. Let me remind you that that's the 14th consecutive quarter of growth in excess of 50% for the aforementioned metric.

During the quarter off-MercadoLibre, payment performance was also positive, as our Merchant services business once again grew faster than the overall growth of e-commerce. Great execution of commercial initiatives, automated onboarding of merchants, strong seasonal campaigns such as Black Friday and Cyber Monday and outstanding results in our MPOS and mobile wallet initiatives resulted in off-platform Total Payment Volume growth on an FX-neutral basis of 127.9% year-on-year. That's the third consecutive quarter of triple-digit acceleration in that metric. It is also worth noting the solid execution in Brazil, delivering off-platform total payment growth on an FX-neutral basis of 163.4% year-on-year, while Argentina, Mexico and Chile have grown off-platform Total Payment Volume at or above 60% year-on-year for in excess of 10 quarters. All this also measured on an FX-neutral basis.

In terms of our off-line mobile payment solutions, sales and adoption of our mobile point-of-sale devices continue to gather steam in both Argentina and Brazil. When compared to the fourth quarter of 2017, we've multiplied the number of mobile POS devices sold in Brazil by nearly 13x, while in Argentina, we have grown sales of those devices by a factor of 20.

Before I move on, I'd like to take a moment to talk about our momentum in the merchant credit initiative, Mercado Crédito, which complements our digital payments platform. Credit is a flywheel for MercadoLibre, which benefits not only our consumers but also our merchants. Mercado Crédito is helping us to grow payment volume, drive a positive network effect for our businesses and is also allowing us to deepen further our relationships with our merchants while helping them grow their businesses. As such, we are observing merchant sales increase after receiving these working capital loans that we extend, while we also observe reduced merchant churn and higher satisfaction rates.

In line with that, we're pleased to report that during the quarter, we sustained the traction in originating merchant loans in Brazil, Argentina and Mexico, while still maintaining low rates of bad debt.

That wraps up our remarks on operations for the quarter. We've accomplished a lot during 2017, and are confident that 2018 will be a year where we can further consolidate our value proposition and further demonstrate that MercadoLibre can continue to be a leader in a region rapidly moving towards online commerce and digital payments.

Before I walk you through our financial results in detail, I'd like to first note that these have been impacted by a recent decision to deconsolidate our Venezuelan operations. We have determined that we no longer have full accounting control of our subsidiaries in that country as a result of Venezuela's recent selective default determination of increasingly restrictive exchange controls, sanctions on government officials and other operating restrictions that have hindered materially our ability to make key financial decisions for that market. As a result, we have deconsolidated our Venezuelan subsidiaries effective December 1, 2017 and recorded a loss of $85.8 million pertaining to investments in Venezuela, including net assets, intercompany balances and intangible assets. This deconsolidation implies that beginning December 1, 2017, MercadoLibre no longer includes the results of its Venezuelan subsidiaries in its consolidated financial statements.

With that important clarification, let's now take a look at how operational highlights I have just walked you through have flown into our financials for the fourth quarter of 2017.

During the quarter, we delivered record net revenues of $437 million, growing at 70.5% year-on-year. By segment, Marketplace revenues, driven by the business factors we described earlier, accelerated to 116.1% on an FX-neutral basis. Excluding Venezuela, but also on an FX-neutral basis, Marketplace revenues grew almost 16 percentage points above the same period last year, accelerating to 76.1% year-on-year growth. Marketplace revenues in U.S. dollar came in at a solid 71.2% year-on-year.

Non-Marketplace revenues also experienced solid growth rates during the quarter. On an FX-neutral basis, non-Marketplace revenues accelerated to 76.4% year-over-year. Excluding Venezuela, and also on an FX-neutral basis, non-Marketplace revenues grew an equally solid 74.4% year-on-year. Non-Marketplace revenues in dollars came in at 69.5% year-on-year growth. Some of the main contributors to the growth in non-Marketplace segment were: financing fees, which accelerated for the second consecutive quarter to 75.9% year-on-year growth driven for the most part by lowering financial cost in Brazil that have improved the spreads on our loans; adoption of our credit product in Brazil resulted in FX-neutral revenue growth of 110.5% year-on-year for that business line.

MercadoPago payment processing revenues accelerated to 103.2% year-on-year on an FX-neutral basis, driven by solid gains in payment volume outside the marketplace through strong mobile and seasonal initiatives combined with gains in merchant onboarding.

Brazil led the way again when it comes to off-platform payments with an outstanding performance as it delivered the 11th consecutive quarter of revenue growth for that business line, above 90%, when measured on an FX-neutral basis. Advertising revenues accelerated to 66.8% year-on-year also on an FX-neutral basis, driven by our Product Ads solution as new placements and search queries coverage resulted in increased unique impressions. Display advertising also contributed to these strong results, doubling U.S. dollar revenues through successful trade marketing and programmatic initiatives.

And finally, on the non-Marketplace businesses, Mercado Crédito grew revenues triple digits year-on-year, both in US dollars and on an FX-neutral basis as we continue to grow out our merchant portfolio of loans by over 10x over last year, and also offer cash advances to a greater number of merchants on our platforms.

Moving down our P&L, gross profit grew 25% to $203.4 million, which led to a gross margin of 46.5% of revenues versus 63.5% 1 year ago. The main drivers of gross margin compression during the fourth quarter can be mainly attributed to investments in our free shipping and loyalty programs in Brazil and Mexico, which accounted for a reduction of 1,870 (sic) [1,810] basis points of gross margin. Additionally, higher cost of goods sold related to the sales of our mobile POS payment devices and warehousing costs primarily in Brazil contributed to an additional 230 basis points of margin compression when compared to the same period of 2016. These effects were offset, to some extent, by 190 basis points of sales tax leverage. And furthermore, collection fees contributed 130 basis points of improved margin due to lower cost of processing credit cards in Argentina. Combined, these effects resulted in a gross margin compression of 1,590 basis points versus the same period for last year.

Moving down the P&L, operating expenses totaled $268 million, up 173% over last year's fourth quarter. The breakdown of OpEx lines is as follows: sales and marketing grew 141.9% year-on-year to $117.4 million, or 26.9% of revenues. This resulted in 793 basis points of margin contraction from sales and marketing. Higher off-line and online marketing investments mainly in Brazil, Mexico and Argentina contributed 956 basis points of this compression, and additionally, increases in our bad debt contributed an additional 58 basis points, which were partially offset by approximately 220 basis points of scale in PR, buyer protection and salaries and wages. Product development expenses grew 30.1% to $34.2 million, representing 7.8% of revenues in the fourth quarter versus 10.2% a year ago. 107 basis points of scale were driven by salaries and wages, notwithstanding having grown our IT headcount by almost 200 employees during the quarter. The rest of the year-on-year accretion, 136 basis point mainly reflect maintenance cost and offices expenses growing less than revenues within our product development organization.

As reported, G&A was up 31.7% year-over-year to $30.6 million, representing 7% of revenues. The 207 basis points of scale in G&A are largely driven by salaries and wages. And as previously mentioned, as a consequence of the deconsolidation of our Venezuelan subsidiaries, we recorded an $85.8 million deconsolidation charge during the quarter. As a result, operating income for the quarter was negative $64.6 million. If we exclude the deconsolidation charges from Venezuela and operational results from that market for the entire quarter, operating income would have been $12.7 million or 3% of revenues versus 7.1% in the third quarter of 2017. Beneath operating income, we benefited from $8.9 million of interest income, down 13% due to lower interest rates in Brazil and Argentina. Lower float in the latter country also contributed to the year-on-year contraction.

We had $6.8 million in financial expenses, mostly related to the corresponding interest accrual on the convertible bond issued June 2014. For ForEx, we saw a $2.2 million loss versus $0.5 million loss in the fourth quarter of last year. This foreign exchange losses are explained for the most part due to the Brazilian real and Mexican peso depreciation over our net liability position in U.S. dollars. This was partially offset by a ForEx gain due to the Argentine peso depreciation over a net monetary asset position in U.S. dollars.

Income tax expense was $3 million during the quarter versus $16.3 million, mainly as a result of lower pretax income, taking into account that the loss of deconsolidation of Venezuela is nondeductible for tax purposes. As a result of all this, we delivered net loss of $67.7 million for the fourth quarter, resulting in a basic net loss per common share of $1.53.

However, excluding Venezuela, the business delivered net income of $8.8 million, a 2% net income margin and earnings per share of $0.20. If we only exclude the deconsolidation charges, net income would have been $25.3 million, a margin of 5.6% and earnings per share of $0.57. All this compares to $51.3 million and a 20.4% margin on earnings of $1.16 a year ago.

Purchases of property and equipment intangible assets, advances for fixed assets and payments for businesses acquired net of cash acquired totaled $31.3 million during the quarter. Cash, short-term investments and long-term investments at the end of the quarter totaled $632.4 million.

We declared a quarterly dividend of $6.6 million or $0.15 per share payable on January 12, 2018, to shareholders of record as of the close of business on December 31, 2017.

One important announcement regarding dividends. After revealing our capital allocation process, the Board of Directors has concluded that we have multiple investment opportunities that can generate greater return to shareholders through investing capital into our businesses instead of a dividend policy. Consequently, the decision has been made to suspend the payment of dividend to shareholders as of the first quarter of 2018 as it will free up capital for investments in multiple projects throughout our different platforms.

Before I end the call, I'd like to take a moment to thank all of MercadoLibre's customers and employees for having made 2017 one of our best years ever. We've made significant advances executing against our strategy, enhancing even further our capabilities in payments and commerce. We look forward to continuing to lay the groundwork for long-term sustainable growth in our businesses and updating you on those improvements.

And with that, we'd like to now take your questions. Thank you very much.

(Operator Instructions) And our first question is from the line of Stephen Ju with Credit Suisse.

So Pedro, I guess, these are my new changes. I might be splitting hairs here, but the purchasing velocity per unique buyer. That has been growing pretty much linearly since 2015. That did not grow as rapidly on a sequential basis. So any way to characterize how much was this may be due to Venezuela or any other factors? I guess, another way to ask this is how much the deconsolidation hurt your unit growth projection? And secondarily, as promised, you continue to try to solve for growth as the marketing dollars have seen a pretty meaningful step-up here. So is it safe to presume that the lifetime value of the customers you're acquiring now are pretty similar to what was the case during the second and the third quarter? Or have things changed a little bit?

Stephen, let me start with the second one first. I think what you're seeing is, first of all, a seasonal increase in advertising and marketing spend. Lifetime value, sequentially, we haven't seen any changes that are material. We do think that the holiday season is primed for more investments as we see more and more consumers beginning to shift significant portions of their consumption online. We want to make sure that we're capturing those consumers. And so, in general, I think, we have said throughout the year, that you would see nonlinear marketing investments quarter-to-quarter. And our thinking, in terms of customer acquisition, given the user experience that we can now offer is that we're very much in a phase where we will be very inquisitive in terms of new users, and also, getting existing users to transact online with us. So hence, the margin compression, both for the quarter, but also for the full year, when we look at marketing spend. We are investing more in acquiring customers because we're seeing those customers much more active than in the past. On units sold. The month of deconsolidation at Venezuela does affect the numbers. But because it's only 1 month out of 3, it doesn't necessarily alter the trend. I think we're seeing still very healthy unique buyer purchases during the quarter, it was still an all-time high. But sequentially, you're right, that the improvement wasn't as marked as previous quarters.

Our next question comes from the line of Scott Devitt with Stifel.

I haven't come across an 18-year-old company growing 100% before. So congrats on that. And I have 2 questions, if I could. First one, just to maybe follow-up on Stephen's, about buying rate. And you do continue to grow new buyers at a very high rate, but there's a significant contribution still coming from existing users purchasing more items. And the factors seemed to be changes to the platform in recent years relating to price or shipping subsidies, speedier access that users are getting to the platform because of mobile NVOs and the improvements in terms of logistics, and then, payments and lending. And so I'm just wondering if there's anything that you would identify in there or otherwise that are more significant in terms of the drivers of the increased purchase rate of existing users? Or is it fairly balanced? And then, secondly, Pedro, you mentioned continued strong growth in units sold by merchants. And I'm just wondering if merchants are having any challenges acquiring inventory fast enough to keep up with the pace of the platform growth. And if so, how much success that you're having in bringing new merchants on to the platform as well?

Great. So I think as we've said. It's not that easy to parse out what the impact of the multiple improvements in the user experience are and attribute specific amounts of the growth to the different items. But we can do is just notice specific launches or specific product changes in how the cadence of growth changes before and after those modifications. And looking at it that way, clearly, free shipping was the most significant individual catalyst is accelerating, if we shared our thought process behind that, we really think that, that, in the consumers mindset is what eliminates the most significant friction to moving a purchase behavior from offline to online is that it doesn't have that incremental cost on the online purchase. I think, there are other elements that are also helping. I mean, our loyalty program is now rolled out and we are seeing lift from consumers that start moving up the loyalty levels and begin to incremental engagement with the platform. And again, in general, the overall buying experience that also has a lot to do with the mobile apps, the functionalities, has really improved significantly over the past 2 years. So they all contribute. If we had to highlight one, I would say, shipping. And then, the fact that payments MercadoPago on is now 100% of all sales or nearly 100% in most of the large market, because obviously, then we have a huge partner friction that existed. And then, shifting over to the merchant question that you asked. Selection has continued to improve. We saw 114 million listings. That's an all-time high. Obviously, arriving at the site and finding what you're looking at -- for, is huge in terms of improving conversions. Traffic conversions have continued to go up. And I don't think we're seeing limitations with inventory. What we're seeing is that the growth in merchants has picked up. Q4 had the highest growth rate of merchants year-over-year for 2017. And so, and so far as any individual merchant potentially runs into inventory limitations, there are other merchants that will step in and fill that GAAP, and hence, the acceleration in merchant growth.

And so did the shipping subsidies, Pedro, become -- you're tweaking them as time passes and favoring different types of merchants. And as we think about the business over the longer term, that becomes a component of the expense structure of the business. Is it something that lessens over time or completely fades away when you get to a certain level of scale in terms of GMV, where it's less required? Could you just talk about that a little bit more as well, in terms of just thinking about the long-term ramifications of -- in the shipping subsidies as the biggest driver of growth.

So I think, we don't see this as a promotional action. We see this as something that we would like to build into the value proposition of MercadoLibre. So in that sense, we've never set any time line in which we've said, we will move away from free shipping. I think, we focused elsewhere. We focused on, how can we tweak both the revenue model, but also gain as much scale advantages as possible so that we can continue to offer widespread free shipping as part of our value proposition and make the financials more and more favorable to us. And that's the combination of continuing to share the burden of free shipping with merchants, they are getting, in exchange for that, more and more volume that's going through our platform enhanced and directly to them. And then, the second part of that, is just to drive down the overall cost on our shipping networks. I'd say the focus right now has been more on how do we manage pushing some of that cost on to the merchant base as intelligently as possible and use it to also align incentives. So better merchants with better service levels. We will subsidize more than those that don't have those higher service levels. And so we're using the push offs of cost also to align better overall experience on the platform. And I think, mid- to long-term, once we've built out the network and we've got it to be a faster and more reliable and we have more scale, we will start to increasingly focus more and more on driving down the cost piece of that. And so under current thinking, the long term vision is this part of our value prop, but we certainly think that we can make the economics improve through playing with the pricing model and just benefits of scale, which in logistics are very, very, very relative.

Our next question comes from the line of Deepak Mathivanan with Barclays.

Two questions for me. So first, can you break down the different components of the non-marketplace revenues? Off-platform processing is growing much faster. How big is that piece currently, versus other components, like start on financing and Mercado Crédito? And then, second question. Recently, we noticed that you made some adjustments to the seller fee structure in Argentina? Is that precursor to potential free shipping launch? Or is it just a reflection of market trends there? And more broadly, kind of when should we expect a wider logistics push into Argentina?

Great. So let me start with the second one. We have launched our free shipping initiative in Argentina during this quarter. The price increase, as we carried out in many markets, and just relating to my previous answer that part of being able to afford the investments and subsidize your free shipping is to tweak the pricing model was in anticipation of that. So Argentina already has free shipping live. In this initial iteration, the threshold for free shipping in Argentina is somewhat higher than in many other market. It's about MXN 1,400, which is about $70. So certainly the higher than in the other markets. But that's one of the many moving pieces that we can move around, either lower that or increase that if P&L considerations will shift in that direction. So yes, we've launched free shipping and loyalty in Argentina, as of Q1 and it was launched in mid-January.

That's helpful. And then, on the breakdown of the non-marketplace revenues, with respect to off-platform processing fees versus installment?

Yes. Great. So one second. So in general terms, the mix percentage of the different -- do you want them within non-marketplace?

Yes -- or as a percent of total revenues. Just trying to sight the different pieces of the payments business.

Yes. Absolutely. So the largest contributor in terms -- so payments, overall, is slightly below 30% of our revenue base already. So it continues to grow faster than core marketplace. Remember, this does not include payments that occur on the marketplace. So this is fully our -- the combination of our merchant services businesses. So of that roughly 28%, about 14.5% comes from financing, whether that be -- and that's not our balance sheet financing. That's just the spread we make on financing that's issued by credit cards and banks to the consumer. There's about 9%, which is the merchant service business. So processing payments for other online properties, they're slightly less than 2%, which is already the sale of mobile POS devices. And then, they're slightly below 2%, that is our Mercado Crédito business. So it's the actual on balance sheet, primarily, merchant-lending, but some of that is consumer lending. Those comprise the pieces of the payments ecosystem that have size today. Then, the remainder to get to that 28.5% are still very small. It's the digital wallet, which is the QR code business, and then, some other FinTech initiatives we have that are very, very small.

And our next question comes from the line of Mike Olson with Piper Jaffray.

Just following up on free shipping in Argentina. It sounds like that's being rolled out maybe less aggressively than in other markets. But either way, how might that initiative impact overall company operating margins as it is rolled out? Is it material to overall company operating margin? Or not really in its current form? And then, secondly, as you mentioned, you discontinued your dividend to invest in growth of the business. And could that be from the combination of both organic and acquired growth? Or are you primarily implying that it would be organic? And if it were to be from acquisition, I guess, you can't say specifically, but conceptually, what type of acquisitions could make sense?

Great. So again, on the free shipping, I think, the best we can say is we really believe that this is a strong, differentiating factor of our value proposition. It requires significant scale to be able to offer widespread, very low cost or free shipping. I think we've seen, globally, the impact that can have in customer loyalty, customer lifetime value, even in customer acquisition. And so this is something that, we think, is a core part of the value proposition were offering. And what we're trying to do is to manage the P&L as efficiently as we can as we move forward, continuing to solve in this phase of the business, primarily for top line growth, gross merchandise volume growth, market share gains. Like I said in the opening and in the prepared remarks, this is still very early days of e-commerce in the region. We see enormous opportunity going forward. We see some ever improving customer lifetime values. And so I think we're much more focused on offering widespread free shipping on our Argentine network, even if that does impact our margins. And then, through pricing, which we've already done, through scale, through some of the stuff mentioned before, we'll try to manage the financial model through this investment cycle as efficiently as we can. In terms of the dividend policy and the suspension. I -- by no means are we indicating that this is intended specifically for nonorganic growth. I think what we're saying is that we see multiple significant areas where we can invest for long-term growth, not only in our marketplace business, where we've talked about shipping and buildout of fulfillment and logistics. We've also talked about category expansion. There are many categories that have significant share of wallet of consumers that we are still not very actively participating in, and that we'd like to start being more active in offering a better user experience for our users in. And then, the many things that we're doing in the FinTech space, which, we think, also, has enormous upsides for the company. So given that we are in the investment cycle and we're talking about that, and you're seeing it in our financial model, we really think that there is a better return to shareholders in using that extra cash to invest in the businesses than the payout of the dividend that we had.

And our next question comes from the line of Robert Ford with Bank of America Merrill Lynch.

Pedro, if I'm looking at this correctly, the loan book for Mercado Crédito to merchant seems to be in excess of $70 million. And I was wondering if you could help us understand the business opportunity. What rates are you charging right now for working capital loans and cash advances? And what do you estimate the addressable market to be for seller credit? And then, as you develop that, could you give us a little update in terms of where you are in the evolution of a consumer financing solution?

Great. So your estimation, in terms of the size of the loan book, is correct. We see -- not only because of global peers, but just what we see in the region where working capital loan, especially, the medium- and small-sized merchants, are not very available. The existing financial system doesn't necessarily serve them very well. And when it does serve them, it serves them at exorbitantly high interest rates. So we think we can be very efficient here because of all the data we have on these merchants. We use MercadoPago, and we can charge rates that are very attractive, but that are also sustainable in terms of our merchants. The rates vary, obviously, by specific merchant credit and merchant risk. I think, the averages we've disclosed are, ballpark, around 40-ish-percent in Argentina, similar number in Brazil, which is where both those countries is where a majority of the loan book is. And obviously, this is still very early stage. Not only because of potential more merchants that we can prescore and start offering this to, but eventually, also, as we get better, we can start targeting intelligently Pago merchants away from the marketplace. And I don't think we've given any indication of TAM, but we think, this is a very attractive business. Just, also, one clarification. I think, we've always said that we don't necessarily plan to hold these books on our balance sheet. A lot of the work that's being done right now is to fed up multiple ways in which we can securitize and offload part of these loan books because we think that the size it has will allow us and then, sort of -- it will make more sense to not keep that on our balance sheet, but to securitize those. In terms of consumer, there already is a small consumer book. It's a small fraction of the 70 million. It's still sub-10 million. That's something that we also think is an even bigger TAM, but one that probably will grow out slower and more cautiously. But that, also, is something that, eventually, we think, could be a very, very large business.

Our next question comes from the line of Brad Erickson with KeyBanc Capital.

I just have 2. One, you may have given it, but did you give the portion or could you give the portion of free shipping units in Brazil? And then, should we think that the portion -- that portion of preshipped units, should continue to rise? Or are we now approaching a more stable level in terms of mix of overall unit shipment results?

Great. So in terms of the total, total units that are sold in Brazil, so none of those that go through MercadoEnvíos, but off the total platform, slightly less than 50% are already being shipped to the consumer without him having to pay for it. That means that either the seller is paying for it or a combination of the seller and MercadoLibre are paying for it. That's up about 500 bps from the previous quarter, but if you look sequentially, Q3 to Q4 increased less than Q2 to Q3 and less than Q1 to Q2. So we are seeing that curve flatten out, which makes sense. But again, as I said before, I think what we're trying to do here is to manage as much free shipping for buyers as possible, while reaching the P&L objectives we have. And that's something that will be a constant effort on our behalf. So as we improve cost and as other things happen, we will try to continue to push the percentage of free shipping up, for as long as we can.

Got it. That's helpful. And then, looking longer term into the second part of your -- the back part of your answer there. I think you talked about a multiyear goal of that kind of a $4 billion number in revenue looking out many years. I guess, relative to the scale-driven cost reductions you'd hopefully be achieving at those levels, is the thesis that like even with the significant free shipping exposure you're talking about, you'd still hope to see out margins return to historical levels, say 20%? Is that too ambitious? Or does that longer-term target assume margin levels, I guess, below the current historical levels?

Yes. We don't guide, and so I don't think we've ever communicated any sort of short- or long-term target objective.

And our next question comes from the line of James Friedman with Susquehanna.

Pedro, I too wanted to ask about the payments Pago business. I was wondering is -- so is the growth -- the off-platform growth is -- how would you characterize the dynamic between how much of the growth off platform is coming from new merchants, versus penetrating the installed base of existing merchants with your payment solution?

So let's see, we're trying to see if we can get them. We call that sort of monthly receivers, which is the number of accounts that receive monthly it's not a number we disclose. Directionally, there is significant growth in that away from marketplace payments business across the board. So if I look at the number of MPOS devices that we're distributing, which is a proxy for new merchants, that's growing extremely well in all markets. And then, just on the digital merchants that we're acquiring, we've seen a significant pickup in the mid- to long-tail merchants as we've improved a lot self-onboarding and some of the automatic usage and deployment of Pago technology on the merchants' websites. So I would say that for the MPOS, the offline to online business, obviously, a lot of that is new merchants -- primarily, new merchants. And then, in terms of the merchant services business, the incremental growth is roughly distributed half from existing merchants growth and the other half is actually onboarding new merchants.

Okay. That's helpful. It's topical because (inaudible) added 1 million merchants in the last year. So we're trying to calibrate that. And then, if I could ask a follow-up. So -- yes, so when you were decomposing -- and first of all, those metrics were really helpful, the 28% of total, the 14% from financing, the 9% from merchant services. I appreciate the decomposition there. I was just wondering, the numbers you were giving, 28% of total revenue being from Pago, that is -- correct me if I'm wrong, but that's not including payments on the marketplace? Would you happen to have that number inclusive of the marketplace?

So you're correct. That doesn't include the marketplace. That's all MELI, that's not Brazil, right? So that includes markets with Pago that's newer and less penetrated. And then, again, because of our revenue model, you can't really talk of marketplace payment revenue per se because we charge merchants a single marketplace fee, and that includes payments. So in our U.S. GAAP financials, there are no payment revenues that are -- that we generate on marketplace. The revenue is all in the non-marketplace business. The only payment revenue that we have on marketplace is financing, and that is included in the number that I gave you.

Our next question comes from the line of Irma Sgarz with Goldman Sachs.

Also, a couple of questions into that FinTech direction. Mercado Crédito, could you just shed some light on sort of how you think about the growth there and managing the risk in the book going forward? I know you said that you'd be looking to not necessarily keep your loans on your balance sheet. But my question is more into the direction of whether you'd be looking for a banking partner to continue to grow the business, to sort of leverage the risk models? That's my first question. And then, the second question, off-platform and it was very helpful on the earlier questions the detail you provided. But my question, really, in terms of your off-platform strategy, could you just sort of talk a little bit about what your marketing strategy or your go-to-market strategy there is? And whether you have ambitions to -- in the offline market, the competition is overly quite intent and that off-platform offline market, whether we should be imagining that to continue to be a very small side business? Or whether you actually intend to put some more significant resources behind that.

Sure, Irma. So I think there's 2 elements to your first question on the loan book. First of all, I think, when you look at the merchant business, we are very comfortable with our internal ability to manage risk. As a matter of fact, we think it's a competitive advantage given, as you well know, that these merchants significant portion of their sales are being processed through our payment products. And so we have very, very strong data capabilities and risk models to assess these merchants. So when you look at the historical default rates of the multiple vintages we have right now, and even when we look at the newer vintages when we start expanding the credit book, we're still extremely comfortable there. You asked about growth. I think, we're focused on well-managed risk growth. So the business is growing nicely, but we take into account also how well we're managing the risk. Then, the final piece is offloading some of that risk as we securitize the loan book, and that also helps the cash flow following that business. So in summation, I think, there we're very comfortable with our own internal capability and the data we have to score the merchants. We think it's a competitive advantage. On consumers, which is a larger addressable market, probably, the reason that it's still a smaller part of that overall loan book, is that we are being very cautious there and we're moving forward more cautiously because of managing the risk profile. I think we'd be open to see if there are additional inputs of data. We certainly are talking to other financial institutions in terms of buying that book and working together. So that's something that we don't write-off. There is nothing that we've announced or nothing in place currently. I think that was the first question. Second question. We've seen the offline -- the mobile POS business, being one of the fastest-growing portions of our payments network. We think it's a very, very large addressable market and it's a business that we will continue to increase our investment behind. We've already began to do that. Because we're seeing very good returns, both in terms of user adoption, but also, the economics around that business as we've grown it out. So you will see a ramp up in investment behind that piece of the payments ecosystem as well as the others the merchant service business that we didn't ask for a longer amount of time.

And our next question comes from the line of Thomas Champion with Cowen.

This is Bill on for Tom. I just wanted to ask, can you talk a little bit more about the fulfillment initiative in Brazil and just discuss the progress there in the last quarter in terms of volumes? And just how far away we might be from reaching a point of critical mass where it begins to drive down the cost due to economies of scale?

Yes. So this is very important for us. It is something that will also be a large area of focus, especially for this year. Moving as much of our inventory from merchant's locations to it being collocated within our fulfillment centers. We have fulfillment centers live and operational in Brazil and Mexico. They are still a very small portion of overall sales. Low-single digits in the case of Brazil, but operationally, it's working very well. It's growing nicely. We're seeing improved service levels of items that are shipped out of the fulfillment center, and obviously, it simplifies the network because you eliminate first mile altogether. And so that lowers the cost. So the answer is, we're not seeing any impact of that flowing through our P&L right now because it's fairly nascent, but this is one of the areas of greatest focus for us. And hopefully, we can report on update on the upcoming quarters.

and our next question is from the line of Masha Kahn with Deutsche Bank.

I've got a question on fulfillment. Can you update us where you are in terms of fulfillment in Brazil? And what sort of fulfillment cost, if any, you could give us in a sense of what they are, and where you are in terms of onboarding merchants on to the fulfillment services?

Yes. So again, I think, early stage, but operational. We're seeing good results coming out of that. I think it's too early to give too much detail on what's the impact of cost versus the DropShip model and whatnot. It's still a subscale network. But I think, again, it's live. It's operational. We're in the process of onboarding merchants. Brazil has complexity in terms of fiscal structures and whatnot that we're working through. We're optimistic about the fulfillment operations, and we think that it will be one of the areas of focus in 2018. And that we will be updating you guys on as the year advances. And as hopefully, those operations begin to grow out.

And our last question is from the line of Marcelo Santos with JPMorgan.

I have 2 questions. The first is on the classified business. I just wanted for you to explain a little bit more on the comments you made on the press release on the meaningful advances you're doing in Brazil and Argentina on the classifieds. And the second question is just to get an update on how -- if there is any effect on the sales regarding the changes in Brazil on the packages? I think, when you deliver a package to the post office, you need not to put in fiscal invoice. So is there any impact on your sales that you have noticed? These are the two questions.

Okay. So let me start with the classified one quickly. The vision we have for the classified business is that we think that the latest feature is that we're launching, and they are already live, are to try to move the classified business towards more of a transactional model, whereas you see a car, a motorcycle, eventually real estate and services that you like rather than simply enlisting that you then have to contact the realtor or the dealer or the individual, you can actually reserve that car or that real estate, and that would, until a certain amount of time passes, not allow the realtor or the car dealer to sell that card to anyone else and it starts moving classifieds towards the transactional model. That's been launched in Argentina and Brazil, gaining good traction Argentina, but it's a product that we'll continue to work on and tweak. We think it's a great value prop for both the buyer and the seller because it's much more of a qualified lead business model, and we think it will be an interesting value proposition in that market. In terms of the changes in the documentation required to ship logistics. In Brazil, we continue to see our MercadoEnvíos penetration and MercadoEnvíos adoption in Brazil perform well sequentially. We've had to develop some product tweaks to facilitate the printing out of those incremental data for sellers to include in shipping packages. So we've worked from a technology angle to make that transition easier for our merchants, but we haven't seen any material impact on our business that's been negative. So I think it's something that, for now, we're comfortable with.

And this concludes our Q&A for today. I would like to turn the call back to Pedro for his final remarks.

Thank you. Thanks, everyone, for listening in. We are truly excited about everything that's going on in the company. We're very pleased with the rate of growth of our transactional volume, of our revenue. We continue to feel that we're firing on all cylinders, and we look forward to keeping you up-to-date, and hopefully, maintain the momentum as we advance in 2018. Thank you.

And with that, ladies and gentlemen, we thank you for participating in today's conference. This concludes the program, and you may all disconnect. Have a wonderful day.