美卡多 (MELI) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the MercadoLibre Q1 2018 Earnings Conference Call.

(Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to introduce your host for this conference call, Mr. Federico Sandler.

You may begin, sir.

Hello, everyone, and welcome to the MercadoLibre Earnings Conference Call for the Quarter Ended March 31, 2018.

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 during today's Q&A session.

This conference call is also being broadcasted over the Internet and is available through the Investor Relations section of our website.

I remind you that management may make forward-looking statements relating to such matters as continued growth prospects for the company, industry trends and product and technology initiatives.

These statements are based on currently available information and 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 statement and Risk Factor 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 first quarter 2018 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 first quarter conference call for 2018.

Let me get us started off today by laying out a 3-point summary of the highlights from this quarter.

First, and most importantly, our key volume and operational metrics across businesses continue to deliver above-market performance, sustaining some of the fastest rates of growth we have seen in the last few years, despite having the Easter holiday season that took place in the first quarter this year versus having occurred during the second quarter last year.

Hence, we continue to build our position as a preferred commerce and payments provider for Latin American consumers.

Second, our U.S. GAAP revenues, as reported under new revenue recognition standards that came into effect during the quarter, will show slower growth and the just mentioned underlying business volume metrics as a consequence of free shipping investments being netted out of revenues rather than as costs of net revenues from this year onwards.

And third, due to unplanned cost increases from shipping carrier partners in Brazil, our margin structure for this quarter that is already the seasonally weakest quarter of the year came in below our expectations.

Despite accounting and cost structure modifications, we remain encouraged by the sustained pace of growth in business metrics, as I'll detail in a second, and are confident that we can optimize our pricing and cost structures to return our financial model to the appropriate profit level, while continuing to solve primarily for our objective of share gains, volume growth, and scale competitiveness.

With that, let me now walk you through a detailed overview of the business metrics I've just alluded to, starting with marketplace, key business trends by geography.

Our Brazilian business grew units sold by 68%, and GMV, on an FX neutral basis, by 71% year-on-year, as our free shipping program, which has already reached 62% of total sales measured by volume, continues to drive the business, also complemented by incremental customer acquisition spend as we continue to observe improvements in customer lifetime values that encourage us to invest more aggressively in customer acquisition.

It's important to highlight here that we have been able to sustain yet another quarter of historic market-leading growth rates despite increasingly tougher comps.

Additionally, Brazil has delivered record buyer engagement in terms of items sold per unique buyer, accelerating for the fifth consecutive quarter.

Moving on to Argentina, where the business continues to recover both from our units sold and GMV perspective.

On an FX neutral basis, gross merchandise volume grew above 50% for the second consecutive quarter, reaching 53% growth year-on-year.

Items sold delivered equally solid performance, growing 44% year-on-year, one of the highest growth rates in 5 quarters.

This was, in part, aided by easier year-on-year comps but also due to the positive impact of the launch of our free shipping and loyalty program, Mercado Puntos.

And Mexico still yielded the second highest growth rate ever from a GMV perspective.

Mexican GMV grew, on an FX neutral basis, at 77% year-on-year, while units sold also did so at an even stronger 106% year-on-year.

This is the third consecutive quarter of triple-digit growth in units sold for that geo.

We also saw record buyer engagement metrics in Mexico, even within the previously mentioned context of having lost an estimated 6 percentage points of GMV growth due to the Easter holiday that happened in March this year.

We are also encouraged to see significant acceleration in countries like Chile and Colombia, which are beginning to take shape as complementary engines of growth for the company.

Chile grew units sold at its fastest pace on record, accelerating to 83% year-on-year, while GMV, on an FX neutral basis, accelerated to 58%, boosted by the combination of our free shipping and loyalty programs and increased marketing investments.

Exiting the quarter, free shipping had already reached 77% of total merchandise volume sold.

Colombia is following suit as well, delivering the fastest pace of gross merchandise volume growth in the past 6 years, which was, on an FX neutral basis, 44.6%, also on the back of the success of free shipping and higher investments in customer acquisition.

It's not a coincidence that within less than 1 year of launching in Columbia, our free shipping program already covers 50% of total gross merchandise volume sold.

In line with that, units sold accelerated to an all-time high of 68% year-on-year for the first quarter of 2018.

As a result of these solid results by segment, consolidated marketplace KPIs delivered yet another quarter of great performance across the board.

During the first quarter of 2018, on a consolidated basis, units sold grew 51% to $80.1 million.

Excluding Venezuela from last year's comp, now that we have deconsolidated that operation, would yield units sold growth of 66% year-on-year, the second highest growth rate in unit volumes over the past 6 years.

Gross merchandise volume surpassed the $3 billion mark, reaching $3.1 billion, growing 34% year-on-year in dollars, while on an FX neutral basis, GMV growth was 43% year-on-year.

Again, if we exclude Venezuela, GMV growth was 54% in dollars, and on an FX neutral basis would have been 64% year-on-year.

Unique buyers on our platform grew by 28% during the quarter versus prior year quarter, also one of the highest growth rates in unique buyers over the last multiyear cycle.

Excluding Venezuela from last year's comp, unique buyers would have grown by 38% versus the prior year.

Units sold per unique buyer accelerated for the 16th consecutive quarter.

This means an individual consumer is buying 50% more from us on a quarterly basis than they were just a few years back.

And finally, live listings, a measure of the depth of inventory on our platform, grew by 50% year-on-year during this quarter, reaching 127 million listings.

That's also the fifth consecutive quarter of growth in this important KPI above 50%.

Let me move on to payments.

MercadoPago has also kicked off 2018 on a very strong note.

On-platform Total Payment Volume grew by 62% year-on-year on an FX neutral basis.

Strong growth and adoption of MercadoPago in our Brazilian and Mexican marketplaces, where penetration reached 100% of gross merchandise volume as well as Argentina, where penetration continue to grow reaching 98% of gross merchandise volume were the most significant drivers of growth.

In line with that, Chile and Colombia are also contributing, as they are in marketplaces.

On-platform MercadoPago penetration in Chile gained 35 percentage points versus last year, reaching 77% of GMV, while Colombia gained 20 percentage points to 79% of GMV, now being paid for using MercadoPago.

We also continue to see growth and tremendous future potential in MercadoPago away from our marketplace.

We continue to engage both consumers and merchants as we grow our scale and generate more value for our growing base of payers and receivers.

Many of these businesses are key additions that generate payment used cases that are attractive to millions of existing and future Pago consumers.

Some important adds during the quarter were: one of the largest telecom operators in Latin America in Movistar; leading camera equipment manufacturer, Nikon; OfficeMax; and Groupon, just to name a few.

From a geographic standpoint, Mexico and Chile were highlights for the quarter, growing the merchant services of marketplace Total Payment Volume, on an FX neutral basis, by 63% and 157% year-on-year, respectively.

Argentina also contributed to this growth story as it maintained its momentum growing merchant services Total Payment Volume on an FX neutral basis for the third consecutive quarter above 60% year-on-year.

Our offline efforts are beginning to take off as well.

Through the build-out of our mobile POS network and MercadoPago wallet-enabled payment services, we are reaching more and more consumers in the offline world.

Mobile POS Total Payment Volume was an important contributor to the results of this off-marketplace segment as we continue to witness a strong acceleration in devices sold that yielded, on an FX neutral basis, total payment growth in the mPoS segment of nearly 450% year-on-year in Brazil.

While in Argentina, the trend was equally encouraging as TPV for mobile devices grew, on an FX neutral basis, north of 1000% year-on-year, while sales of devices also grew above 1000%, albeit both coming from a small base.

We also continued to execute behind our efforts to build out our mobile wallet network.

During the quarter, we significantly boosted these efforts by integrating payment functionalities into the MercadoLibre app, which now enables payments capabilities for the installed base beyond just kind of MercadoPago app users, creating an installed base that is roughly -- approximately 14x larger in terms of daily active users on the MercadoLibre app than on the MercadoPago app.

One more note on our FinTech initiatives and their progress.

During the first quarter, we surpassed the $100 million mark in our merchant credit portfolio for the first time.

Mercado Crédito is a strategic offering for our ecosystem, which will increasingly drive merchant sales growth, strengthen synergies with our marketplace and, ultimately, build higher merchant loyalty and retention.

As we dive deeper into how our merchant cohorts perform, we continue to observe that those merchants who adopt our credit solutions not only see an increase in their sales volume on our platforms but they are also continuing to take on additional working capital loans to keep funding their growth on MercadoLibre.

We will continue to invest behind these innovative credit offerings in order to provide financial solutions to our small- and medium-sized sellers and help them scale their business faster.

Let's now get on to financials, where, as I briefly mentioned in the introduction, changes brought about by FASB ASC 606 revenue with contract with customers apply to our shipping subsidies impact our numbers with regards to revenue recognition.

I'd like to remind you that greater detail on this can be found in the accompanying presentation to these prepared remarks as well as in our 10-Q filing with the SEC.

When we began to offer free shipping services, either partially or fully subsidized by us, we determined that the amount we subsidized was a form of consideration, such as the sales incentive in the form of free shipping.

This meant that we provided a consideration to the buyer, which consisted of a free service.

Consequently, in the past, we accounted for the cost to be characterized as an expense in the cost of net revenues as opposed to netting it out of net revenues, given that it was recognized in the third-party shipper's income statement.

Going forward, however, this interpretation will change as we adopt ASC 606.

From now on, in the instances where MercadoLibre subsidizes the cost of shipping, we will account for those costs by netting them from revenues as opposed to booking them directly as a cost line item under cost of net revenues, as in the past.

As a result, and in accordance with ASC 606, shipping subsidies for the 3-month period ended March 31, 2018, amounted to $112.5 million versus $4.3 million for the same quarter a year earlier.

The year-on-year increase in these shipping subsidies came about mainly as a result of 2 factors.

First of all, during the prior year quarter, free shipping had only been launched in pilot phase in Mexico, whereas this year free shipping already covers 62% of GMV in Brazil, 77% in Mexico, 48% in Colombia and 44% in Chile.

This growth in coverage, maintaining all other variables constant, would have a loan accounted for an incremental $102 million of subsidies for shipping costs.

The second factor is that we've incurred additional costs due to an unanticipated price increase by our main shipping carrier in Brazil, Correios, that amounted to an incremental $11 million.

This price increase was made retroactive to March 6, while our price increases to pass on some of these increased costs to our buyers and merchants and, therefore, partially offset the increase in price, occurred later on only in mid to late March.

So if we combine the price increase and the incremental adoption of MercadoEnvíos and subsidies to free shipping, we get to a total of $112.5 million of shipping subsidies during Q1.

One final clarification on this respect.

The adoption of the aforementioned new revenue recognition standards will not have a material impact on the company's consolidated balance sheets and statements of cash flows or net income.

Moving on down our financials.

As now reported on a full retrospective basis in accordance to FASB ASC 606, net revenues ascended to $321 million, a growth rate of 19% year-on-year in U.S. dollars and 30.1% on an FX neutral basis.

If we exclude the netting revenue effect in accordance with ASC 606 on free shipping costs, then these gross billings would have been $433.5 million, a growth rate of 58.2% year-on-year in dollars and $70.3 million year-on-year on an FX neutral basis.

Please refer to an accompanying table in our 10-Q and earnings press release filed with the SEC in order to reconstruct these gross billing numbers.

On a segment basis, first quarter revenue growth was as follows: 18.9% in Brazil, 79.6% for Argentina, 39.1% for Mexico, 35.5% in Colombia, negative 3% in Chile and 90.6% in Uruguay.

All of these expressed on an FX neutral basis.

If we exclude the effects on net revenues in accordance with ASC 606 on a segment basis, monetization trends were strong in all countries.

For the first quarter of 2018, gross billings growth would have been as follows: 78.5% for Brazil, 87% for Argentina, 77% for Mexico, 61% in Colombia, 47% in Chile and 91% in Uruguay.

All of these also expressed on an FX neutral basis.

Additionally, and also as a result of the implementation of ASC 606, we have changed how the information is presented for net revenues in the products and services we offer.

As of January 1 this year, net revenues from shipping services will be included as part of our enhanced marketplace services and no longer accounted for in nonmarketplace products.

With that, from a product revenue stream perspective as-reported basis, enhanced marketplace revenues, which now include the shipping revenues and subsidies, decreased by 21% year-on-year in U.S. dollars to $141 million.

This year-on-year decrease was driven by the effect of adopting ASC 606 during the quarter primarily.

Nonmarketplace revenues grew by 97% in dollars to $180.3 million.

If we break down nonmarketplace revenues, payment revenues, including all of MercadoPago nonmarketplace revenue streams, grew, on an FX neutral basis, by 130% year-on-year to $145 million.

Other nonmarketplace revenues, including classifieds and advertising, grew 31% in dollars year-on-year to $35 million.

Looking at our cost structure for the quarter, the combination of a seasonally weaker margin quarter, aggressive planned for investments in sales and marketing and the unplanned changes in our shipping cost structure led to lower than anticipated EBIT and a quarterly loss.

Gross profit ascended to $163 million, representing 51% of revenue versus 63% in the first quarter of last year.

This deterioration in gross margin is primarily explained by the formulated changes in revenue, meaning a lower revenue basis and, structurally, from the following factors: added costs from the growth in our investments in delivering best-in-class customer service to our users, which resulted in a 110 basis points of margin contraction; 177 basis points of year-on-year margin contraction that's attributable to investments in hosting as we deploy away from our private cloud to public clouds that give us greater agility and flexibility and develop our ops; 411 basis points of margin contraction that came about from the collection fees due to incremental adoption of payment solutions; and rapid growth in our mobile POS businesses that led to 409 basis points of gross margin compression as the cost of selling hardware grow to support our quickly expanding merchant network in Brazil and Argentina.

Operating expenses totaled $192.2 million or 60% of revenues versus 39% of revenues during the same period last year.

In addition to a same formulaic impact of a lower revenue base, the 20% margin contraction was driven primarily by the following factors: 833 basis points of incremental customer acquisition and branding investments as we continue to invest for sustained top line growth and brand equity creation, as improved lifetime values bolster our confidence in the long-term returns behind these investments; 511 basis points of incremental spend on buyer protection, mainly as a result of late delivery, credits granted to buyers as MercadoEnvíos grows adoption on our marketplace; 157 basis points of bad debt provisions, mainly from loss provisions on our average merchant and consumer credit portfolio that stand at roughly 4.66% loss ratio during the quarter; and 291 basis points in G&A increases, mainly driven by accruals on our long-term retention plan.

These combined effects yielded an operating loss of $29.4 million or negative 9.2% of revenues versus 23.5 during the same period last year.

Below operating loss, we benefited from $9.2 of interest income, down 24.4% year-on-year as a result of lower interest rates in Brazil as well as lower float in Argentina.

In our ForEx line, we saw a $5.6 million gain attributed for the most part to the devaluation of the Argentine peso and the Brazilian real over U.S. dollar net asset positions, accounting for $3.1 million and $0.9 million, respectively, and also a $1.7 million gain arising from the Mexican peso revaluation over the U.S. dollar net liability position in Mexico.

We had $10.7 million of financial expenses, mostly corresponding to financial interest related to working capital funding for the payments business in Argentina, Uruguay and Chile, and also to interest accrual on our convertible bond issued in 2014.

The aforementioned effects led to a net loss before taxes of $25.4 million for the first quarter of 2018.

Income tax gain was $12.4 million, mainly as a consequence of higher pretax losses recorded in Mexico and Brazil, partially offset by a higher income tax expense in our Argentine subsidiaries during the first quarter of 2018 due to a higher pretax margin.

All of this results in a net reported loss of $12.9 million and a basic net loss per share of $0.29.

Purchases of property plant and equipment, intangible assets and advances for fixed assets totaled $23 million during the quarter.

Cash, short-term investments and long-term investments at the end of the quarter totaled $543.3 million.

Before I end the call, I'd like to state that we're as excited as we have ever been about our growing business.

We will continue to drive the success of the company through building on our market position as a leading innovator throughout Latin America and leveraging our regional breadth, trusted brand and increasing installed base of engaged users.

Going forward, executing on this business plan will continue to be our first order of priority.

We will strive to maintain ourselves as a leading e-commerce and payments platform in the region while delivering a sustainable financial model that finds the right balance between earnings and investing behind innovation to deliver benefits for our users.

We have the conviction that as we follow this path, we will deliver long-term shareholder value through an increasingly attractive and growing ecosystem.

We're excited about the opportunity that lies ahead of us and look forward to updating you on our progress throughout the remainder this year.

Thank you.

And with that, we can now take your questions.

(Operator Instructions) Our first question comes from Stephen Ju with Crédit Suisse.

Pedro, can you talk about your efforts in Brazil to decrease your dependence on Correios given the price hikes?

And what you're going to be tweaking on a go-forward basis in terms of either just passing on some of the incremental cost to either the seller or the buyer?

I know you guys have kind of rolled through some of those changes already, but interested what the strategy is going to be on a go-forward basis for the balance of this year.

Hi, Stephen.

Thank you.

So as you know, part of our strategy in terms of building out our logistics network is to complement our existing DropShip network with increased volumes out of our fulfillment centers and DropShip centers and build out an increasingly more robust network with multiple carriers.

But there is a silver lining to the Correios price increase with that, to a certain extent, the increased cost on the DropShip network probably generates an added incentive for sellers to more quickly move over to the other alternative.

And I think primarily the fulfillment option, which is one we're quite enthused about.

And so I think the plan remains the same as it's always been.

The increase in cost hopefully adds slight tailwinds to that migration, more and more towards fulfillment and other carriers that we will be onboarding on our network.

And then in terms of how we manage the financial model, I think what's already been done is what we can state.

We don't guide other than that.

But what we've already done in terms of pricing in Brazil is we have passed on some of those costs on to buyers and sellers.

We continue to offer significant subsidies to try to drive the lowest cost of shipping possible on our platform, but we've also passed on some of those incremental costs as we also try to manage the financial model in a responsible and healthy way.

And if I may follow-up here.

Between, I guess, the many different initiatives right now in logistics, payments, et cetera, where are you focusing your engineering resources right now?

So probably I would say the 2 areas of great focus for us in terms of company priority and, therefore, where engineers are being distributed are logistics and the build-out of the technology that operates our warehouses and that runs the intelligence for our DropShip network and all of the other initiatives we have around logistics.

And the second area, which is one we continue to think has tremendous opportunity and we're seeing some very solid early-stage results from is the entire payments business.

The next question comes from Franco Abelardo with Morgan Stanley.

First question is on the GMV growth.

How much of the slowdown in local currency GMV to 54% this quarter is related to the changes in the free shipping incentives that's implemented after the Correios price increase in Brazil?

And considering that those adjustments were done only March this year, is it fair to assume further GMV slowdown in the second quarter?

And if not, what are the initiatives that MELI can take to avoid or minimize those impacts?

That's the first question.

Also related to that, we couldn't see unique sellers metrics.

How much did you grow your unique sellers base this quarter?

Or maybe on a more qualitative approach, have you seen some of the sellers at MELI platform migrating to all the marketplace platforms that have been very aggressive in Brazil on your competitors?

Those are my questions.

Great.

So first of all, let me just recap some of the numbers from my prepared remarks.

Brazilian growth merchandise volume, on an FX neutral basis, didn't decelerate.

It's actually sustained the same level of growth from the prior quarters, and it grew 71% year-on-year in Brazil.

So our Brazilian business continues to perform very strongly despite the price increases towards the end of the quarter.

When we look at the supply side, which is obviously an important part of driving that continued very strong growth in merchandise volume, we disclosed sellers and buyers on an annual basis not on a quarterly basis.

I think I gave a readout for live listings, which is probably a metric of depth of inventory on the platform.

At the end of the day, I think consumers are interested in being able to find the product they want.

Obviously, more sellers means you have a deeper inventory, but that's probably a more useful metric.

Live listings in Brazil year-on-year grew by 52%.

We continue to see very solid gains in terms of sellers.

We haven't seen any material change in seller churn, so it's not something that's concerning us at this point.

If sellers leaving MercadoLibre to go sell elsewhere and no longer sell on our platform, that's not something that is concerning us right now.

And again, I think the most important part of the question is Brazil really had a very, very, very solid quarter in terms of unit and volume growth rates.

Okay.

So as a quick follow-up, so you don't expect impact from the changes in shipping cost to the GMV growth in Brazil?

Or is this something that -- maybe the comparison base are also getting harder in the second quarter, is something that makes sense to expect only in a directionally way, not asking for guidance here?

Yes.

So again, we tend to not make any forward-looking statements.

I don't think you've characterized what I said though.

I think I said, look, Brazil had a very solid quarter.

We continue to see a business that's performing incredibly well.

There is elasticity, obviously, to total costs.

And when you pass cost on to consumers, that does generate some reverse elasticity.

So no, it's no that it -- not that it doesn't have any impact.

And clearly, March was weaker than previous months.

But overall, I think given the magnitude of the price increase, the site continues to perform very strongly.

Our next question comes from Irma Sgarz with Goldman Sachs.

Just when you sort of look across your different geographies and specifically in Brazil, it looks like a significant amount of your growth, I guess less so in this quarter, but generally, the growth has been coming across the different geographies from lower ticket items.

And the unit growth or volume growth has been quite substantial, specifically in the markets where you've got earlier rollout of free shipping, like in Chile and Colombia.

But even in Mexico, where it's already, obviously, in place for a longer period of time.

So wondering how do you think about the burden that this volume growth drives in the form of free shipping for your business?

And how do you look to continue?

Does it mean that it makes you more vulnerable in geographies where a lot of the growth has been coming from volumes, and where you're seeing -- and from lower ticket items and where you're seeing shipping rates going up?

Hi, Irma.

So let's parse out your question because I think there's some few things in there.

So first of all, the dramatic increase in our cost basis on shipping is a Brazil-only phenomenon, right?

If you look at Brazilian gross merchandise volume on FX neutral basis, it actually grew more than units.

The average selling prices in real is slightly up in Brazil.

I think you're accurate in saying that the price increases have a greater impact on lower ASC items from a volume perspective.

From a cost perspective, because we tend have less subsidies on cheaper items, it's the contrary.

But yes, in the case of Brazil, I think the headwinds from the price increase impact lower ASPs more than higher ASPs, and that's part of the delta between volume growth and unit growth in the quarter.

I think the other geographies, we haven't seen significant changes in our cost structure.

We continue to see robust growth.

I think we highlighted Chile and Colombia, that they've been performing incredibly well, and that's primarily on the back of the growth and adoption of MercadoEnvíos and our free shipping initiatives.

So in other markets, we continue to see strong growth and no impact on lower or higher ASP items.

And that's very clear.

When you just think -- if you would just help us think philosophically about when you see elasticity as being a little bit more negative for -- let's say, for the lower ASP items in Brazil, for example, would you tend or would management tend to increase the subsidies to hold up the volume growth?

Or would you say there is a point where you want to be preserving profitability even if that means that the GMV growth on the back of lower volume growth will be potentially slowing down more than you had maybe initially expected?

Irma, so I think one thing we've always said about how we manage the cost structure and shipping is that there are many different levers.

I think it's a constant process of iteration.

If you look at the lower ASP items since the Correios price increase, they've actually gone already through 2 variations in prices.

So clearly, as a data comes in, I think where we're reassessing what's happening to volume, what's happening to profitability, and that's the way we intend to manage this going forward.

I think we don't want to overreact and slow the business down too much.

We've said all along, we manage for long-term growth and scale.

On the other hand, we do want to be cognizant of our financial model and so we have passed on some of the incremental cost to consumers.

And like I said, we've only changed prices twice on lower ASP items.

So it's an ongoing profits of iterating and trying to find the right equilibrium.

And we'll continue to tweak the price structure as we go forward.

Our next question comes from Deepak Mathivanan with Barclays.

This is Aki on for Deepak.

So 2 questions on Argentina.

And the first thing is I'm wondering if you could talk about the financial impact from the currency volatility that we have seen recently?

And then secondly, on the free shipping adoption, anything you can share there in terms of what percentage of units that are under free shipping program or any other metrics you can share there on Argentina?

Okay.

So I'll take the first one first because that's easy.

Too early to tell.

Obviously, there's a part of our business, which is the Mercado Crédito business for installment plans on MercadoLibre that have an underlying cost basis, determined by the cost of borrow in Argentina.

We tweak precious little bit as rates have moved.

But this is the last few days, so no read-throughs that we can announce yet when.

When we announce the next quarter, we'll give you some more visibility.

We don't really have any right now because it's -- we're right in the middle of everything.

In terms of free shipping, Argentina continues to -- I think, MercadoEnvíos grow penetration as a consequence of shipping and loyalty.

As -- it's been a country that's always had lower penetration than the other markets and that -- although it continues to be the case, the percentage of volume that is being bought with free shipping is already up to almost 1/3 of total GMV.

So it's definitely moving in the right direction.

Our next question comes from [Robby Jang] with HSBC.

A quick question here.

So look at the cash flow basically from operations and CapEx, et cetera, it's probably a negative $50 million to $60 million, a part of it is working capital.

But the question I have is within the nonmarketplace revenue streams, which of them are you kind of the most excited, which can accelerate rapidly and offset the investment that you're doing in free shipping and customization cost, et cetera?

I mean, do you have a target for free cash flow for the year?

Or thoughts on that would be really helpful.

And the second question, just following up on an earlier question on fulfillment in Brazil.

Just more kind of a 2-, 3-year horizon, where do you see fulfillment as a percentage of GMV by MercadoLibre in 2, 3 years from now?

Do you see it going to 50%?

Do you see it closer to 100% in 3 years?

I mean, just some thoughts on that will help us.

Great.

So in terms of nonmarketplace businesses, and I think there are 2 pieces to your question.

I don't know if they're necessarily linear in the answer.

In terms of the nonmarketplace businesses, like we said before, the nonintense marketplaces, I think there's a lot of optimism and within the company around the payment space in the payments opportunity, we think those could be significant contributors to revenues and margin.

The cash flow on payments, because of the way we manage it where we are generally selling receivables, selling coupons, and we've stated our goal to also sell the loan portfolio as we move forward, potentially is also positive.

And I think you need to think of that business as a financing business where cash flow calculation is slightly different.

So longer term, it could be a cash generator.

Shorter term, as we accumulate the loan book, which actually potentially attracts consumer.

We don't disclose any annual cash flow targets or quarterly cash flow targets.

And I think the business continues to be an investment cycle, so it's probably not the moment for us to be focusing on cash generation.

I think we're fortunate enough that most of our businesses are cash flow positive.

We don't really have strong CapEx investments in our fulfillment operations because of the way we manage these for now are primarily lease agreements, long-term lease agreements.

And so they're more OpEx than CapEx for us, and that also generates an asset-light and cash-generative business profile even as we get more and more into fulfillment and logistics.

And segueing on to fulfillment and logistics, again, we don't disclose long-term goals.

I think we have said that we really believe and we're seeing that in Net Promoter Scores and user data that the user experience, when items are being fulfilled by us, it's already delivering better results, faster times and higher NPSs.

So it's really important for us to move volumes towards fulfillment at whatever pace we can.

The faster the better.

Probably a little bit early for us to have a clear sense of where it will be in 3 years.

This is still very early stage.

I think if you keep asking the question over the next few quarters and we have a little bit more history in both Brazil and Mexico and eventually launch Argentina, then we can give you a better answer of where we think we can be in a few years.

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

Pedro, I have 3, if you -- if I may, please.

In your comments you mentioned confidence in terms of optimizing pricing and cost to return to profit.

Can you touch on some of the specific adjustments that you may be considering?

And then second, the Brazilian Association of E-commerce was able to obtain an injunction on Correios price hikes, that seems to be holding up so far.

Can you talk a little bit about the difference in jurisprudence behind your earlier injunction and theirs and your ongoing efforts to obtain a similar rollback on the Correios pricing?

And then lastly, could you touch a little bit on how GMV is trending in Brazil in April and early May now that you've seen a more extended period of those higher shipping costs in the system?

Great.

So adjustments in profit, a few things about it or returning to profitability.

Q1, by design, was already going to be a low margin quarter.

It has a lower revenue base, a lot of the salary adjustments and cost adjustments are already made.

So there's a natural tendency built into our initial projections of margin improvements as the year progresses.

Obviously, we were already running at a low-margin projection and with the change in cost in Correios, plus some incremental cost from late deliveries from the fourth quarter, where we were paying out the credits in Q1, I think pulled us below the profit level into the red.

So there's just natural scale as the business grows going forward.

We have passed on some of those price increases to both merchants and consumers.

That happened towards the very tail end of the quarter and delayed because if you recall, Correios was able to reverse the original state retroactively.

So there's a delta of about 3 weeks, I think it is, between the effective price increase and our reaction by passing costs on to consumers.

So there's some incremental margin improvements for -- on that.

And then going forward, I as I said in my earlier remark, I think we continue to tweak the pricing on different routes, different weights and different specificities, so it's not a blanket price increase as the last one.

Now we get more into fine-tuning with a combination of those things.

We, at this point in time, with the knowledge we have now, get us to profitable quarters going forward.

Second question on the injunction.

So not a lawyer here, but the initial reversal of the state on our process was reversed not on any technical merit but simply because the residing judge was not in attendance.

And so it was reversed until his return to his -- if -- he is back, he has now begun to hear the case, and we don't know when he will eventually put forth his new ruling.

But so on our end, there isn't any technical or jurisprudence that we've used to reverse the space.

It was essentially I'm an interim and so I'm not going to rule on this.

And then the final piece, I think, implied in your question is under process law in Brazil, we can't be party to 2 rulings, so we decided to not ask why or if we can use the other one but rather to stick to our guns with the merit of our case, which is -- we think, is actually stronger.

So now we just need to wait for the residing judge to rule.

And then the final piece on GMV.

Again, we don't comment on the existing quarter.

I think we've said that the tailwind of March, there is some elasticity to price increases and we can give you guys the full readout when we get to the next quarter.

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

Just first kind of a housekeeping question.

Just even with the net -- the new net revenue reporting, gross margin still came in pretty far below the pre-shipping levels.

Can you just highlight maybe what's driving that?

Great.

So just -- I'll walk you through very quickly.

You actually have in the PowerPoint that accompanied the prepared remarks, a waterfall that breaks out the gross margin trajectory year-over-year.

The biggest impact is obviously just the lower revenue base when compared to prior year.

The reason for that is that there's significantly more free shipping subsidies in Q1 of '18 than there were in Q1 of '17.

And so that's the biggest driver of gross margin compression.

It used to happen at the COG level under the new accounting for revenue norms.

It happened at the revenue level because it's -- the growth in GMV, the growth in units, the growth of most of the KPIs that drive a lot of the variable costs continued to be trend line where they were, but revenues obviously are growing at a much lower trend line because of the contra revenues there included in the calculation.

And then incrementally, if you just want to see which cost have grown the most, most of the margin compressions of about 450 bps are concentrated in the sale of the mobile POS devices.

That business is growing incredibly fast, but it does have a short-term gross margin impact because of the cost of the devices.

Second, collection fees, mainly from payment processing as Pago continues to grow very, very well.

And then the last 2 are some hosting costs as we move from private cloud to public cloud.

And then customer service and user experience costs, but again, those grow primarily variably in line with units sold in TPN, whereas revenues are now growing at a lower trend line.

Got it.

And then just in light of the Correios situation, have the intermediate targets for margin that you and the board target changed at all?

Meaning -- I'm sure the longer-term targets are unchanged, but is the board now willing to say -- incur maybe slightly larger costs during this period given how much of it is simply out of your control?

So again, we don't disclose those targets.

I think what I said in the previous answers is this is a company that really is looking at the long term and is primarily focus on sustaining its top line growth.

And top line, I think, we should look at it for this particular conversation until we comp out the year in terms of the gross billing metric that we now offer in the disclosures and GMV, right?

So how much is our gross merchandise volume growing?

And so I think given that, the process now is one of tweaking and trying to not simply defend a specific margin or EBIT target but rather make sure that we're looking at sustaining the growth of the business, a race to scale, but at the same time, making sure that we're doing it in a way where we're continuing to manage the financial model responsibly.

And we've always said those targets are artificial constraints that help us make that decision and allocate capital as we move forward.

Got it.

And then just one last one, if I could.

Any more color on the sales and marketing spending?

Seems like that ticked up a lot.

You mentioned it was some planned thing.

Just any color on sort of what those things were would be great.

Okay.

So a couple of things here.

I think in terms of the underlying customer acquisition costs, those have gone -- or investment, those have gone up.

Obviously, revenues are also up, so margin contraction there isn't as significant, just the customer acquisition costs.

What we called out in the prepared remarks probably had -- so there's about maybe 700-ish, 800-ish basis points from customer acquisition cost of contraction.

The majority of our marketing investments continue to be performance-based and online-based.

It's 830 basis points there.

Then there are another 510 basis points, which are the credits to buyers who receive their packages later than our delivery promise, and some of those were spillover from Q4.

And then there are another of 160 basis points from bad debt.

A lot of that is on the growing portfolio of consumer credit.

That still has a very attractive default rate given what the interest rates in Latin America are, it's around 4% default rate, but it did add about 160 basis points of margin contraction at the bad debt level.

Our next question comes from John Coffey with Susquehanna.

This is a payments-related question.

I was wondering how should we think about the relative growth of Pago mobile, Pago off-platform and the Pago when it's weight labeled for third-party websites?

This is Marcos.

So in terms of the off-platform business, the 3 of them are improving very aggressively.

When you look at total second (inaudible) 107% year-on-year, that's in dollar terms and 132% year-on-year in local currency.

And if we're to open that between the 3 different businesses we're in off-platform, both wallet and mPoS are growing above.

In the case of mPoS, growing at 100% year-on-year.

And there's a wallet, 300% year-on-year.

So there's -- those growing faster than the fewer online merchants have.

Okay.

Great.

And just one last follow-up.

What do you find as the biggest hurdle when you're signing up merchants to use Pago?

So I think we've had different challenges in each of the countries.

We are not placing huge merchants, huge (inaudible) throughout merchants.

I think we are entering to 3 very different businesses.

One is the wallet, the other is mPoS and those are usually -- most of them long tail end customer, and lots of them, but we'll bury more volume per month when it comes to larger merchants, mostly online.

And so that's basically they're -- it's switching goals and division cost and it's usually a hurdle and so both of these are usually longer, but I don't see enough data as a huge part.

Our next question comes from Richard Cathcart with Bradesco.

So a couple of questions I'd like to ask on shipping in Brazil.

First of all, Pedro, you mentioned that the MELI fulfillment option, you're seeing kind of better user engagement metrics around that.

One of the reasons, I think, because you're managing to get deliveries out more quickly.

Could you just let us know how quickly you are managing to get those deliveries done through the fulfillment center?

And how that compares to the Correios deliveries?

And then secondly, just a kind of more medium- or long-term question about logistics in Brazil, given the e-commerce is growing so much, we're seeing a lot of volume growth at MELI and also other companies and you're trying to kind of shift your alliance off the Correios onto third-party providers.

Is there any concern that there may be a capacity crunch at some point in the future amongst these third-party courier businesses?

Great.

So -- great.

So -- let's see.

The delivery times, we don't disclose.

I think it's suffice to say that the fulfillment times are significantly better in terms of total times when they go from our fulfillment centers to consumers versus Correios.

And I think that the combination of both our fulfillment delivery average time in Brazil right now actually being quite good for the market.

And that the Correios average, given that they also happen to do a lot of the more remote deliveries, is not that good.

So we don't disclose the Delta, but certainly, it's a material difference in terms of how long it takes us to get something between quick to your doorstep if it's fulfilled by us versus the average of the Correios or DropShip network.

There are certain deliveries that -- on the Correios network, primarily the more dense and the more competitive routes, where we actually use the faster option, FedEx.

And so those have competitive speeds.

But when we look at the average of the DropShip network, the difference is quite significant.

In terms of capacity going forward long term, it's a good question.

I think -- I don't know the answer to that.

I do think that we clearly are very focused on that, on making sure that we're doing everything that's within our control, to continue to onboard as many new merchants.

And when I mentioned at the beginning the build-out of our network design, what we're trying to accomplish is to make sure that where to start building out an increasingly more complex network where we can start doing zone skipping, where we can start breaking out regional carriers for specific regions.

And so again, we will have to figure out a way to find the necessary capacity to deliver for the growth of our business.

And that will be a combination of adding more and more carriers and potentially figuring out other innovative ways to deliver goods.

And just a quick follow-up on that second answer, if I may.

Roughly how many third-party carriers do you use at the moment?

I mean, is it kind of in the 10s, teens or kind of bit at going for the 100s?

Not at all.

I think currently, it's closer to single digits.

I think as we grow that out, I don't know what the endgame is.

I don't think it will be in the 100s over the next few years.

But certainly, we will continue to on board more and more carriers.

I think another consequence of the significant price hike from Correios is that it's also obviously accelerated our appetite and our focus and, therefore, the engineering that we're putting behind the onboarding of growing number of carriers.

Our next question comes from Tom Champion with Cowen.

Thank you for all detail and transparency around the price hike.

And not to belabor the point, but for those of us not located in Latin America, I'm just wondering if you could talk a little bit about how other carriers or logistics providers might be responding to Correios' moves.

Are they looking at this situation opportunistically and trying to win your business?

And then maybe just a small housekeeping item.

Going forward, will your reports resemble today's where you provide the billings, shipping and net revenue detail or will it just be on a net revenue basis?

I think the honest answer to the first question is I don't know how the local Brazilian logistics carriers are reacting.

I'm looking around the table, but I don't have anyone from the logistics organization here.

So we'll get back to you on that one, I don't want to make anything up.

We're also -- in terms of our focuses, yes, we have signed agreements with a growing number of the well-known carriers and are working on onboarding them right now.

How they've reacted from a price perspective or how aggressive they've been commercially.

I -- we'll get back to you on that one.

Disclosure, sorry.

So I think, at least for the fourth quarter transition period going forward, where we have the most marked differences because of the dramatic growth in our shipping subsidies, our plan is to continue to disclose gross billings.

I think beyond that, it will just be a matter of seeing whether it continues to be as relevant in understanding the underlying trends in the business.

Or if once we've already normalized the rapid growth of shipping subsidies, they won't be necessary.

So we'll reassess sometime around next year.

For the next few quarters, I think barring any unexpected situation, you can expect to continue to have that breakout because it really is fundamental in being able to understand how the business is performing.

And I'm not showing any further question at this time.

I'd like to turn back the call over to our host.

Great.

Thank you.

Lots of questions, so we appreciate the interest.

Obviously, there's a lot going on.

And as always, we look forward to speaking with you again with the progress on second quarter of this year in a few months.

Thank you very much.

Well, ladies and gentlemen, this concludes today's presentation.

You may now disconnect, and have a wonderful day.