美卡多 (MELI) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the MercadoLibre Q2 2018 Earnings Call.

(Operator Instructions) And as a reminder, today's conference call is being recorded.

I'd now like to turn the conference over to Federico Sandler.

Please go ahead.

Hello, everyone, and welcome to the MercadoLibre Earnings Conference Call for the Quarter Ended June 30, 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 in 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 on this call for a variety of reasons, including those described in the forward-looking statement and risk factors section of our 10-K and other filings with the Securities and Exchange Commission, which are available on our Investor Relations website.

Finally, I'd like to remind you that during the course of this conference call, we may discuss some non-GAAP measures.

A reconciliation of those measures to the nearest comparable GAAP measures can be found in our second quarter 2018 earnings press release available on our Investor Relations website.

Now let me turn the call over to Pedro.

Thanks, Federico.

Let me kick off today's call by saying that our business continues on a positive trajectory.

The outlook for our industry is as positive as ever, and our investment thesis remains intact.

The Internet is rapidly becoming a driving force for Latin America to develop and modernize faster, turning a history of underdeveloped infrastructure in the areas of retail and banking from a disadvantage to an advantage as it allows for innovation to flourish unencumbered by existing legacy players.

It is in this context of inefficient retail and payments industries that we are deploying our technology solutions, allowing consumers to leapfrog traditional means of buying, selling and paying, straight into digital use cases.

This long-term secular trend, digitally enabled commerce and money bodes well for MercadoLibre's future growth prospects and marks the path for significant long-term value creation for both our users and shareholders.

Never losing sight of this promising long-term outlook, it is also fair to say that the second quarter of this year has been a transitional quarter for us with mixed results.

As a consequence of events in Brazil that were beyond our control, principally, the price increases from our major postal partner and the May truckers' strike that lasted 10 days and had a negative impact on e-commerce, we've had to adjust our operational model to rebalance growth and profitability.

Throughout the quarter, we have had to carry out price increases, limit the amount of shipping subsidies offered and accelerate the deployment of our logistics operations in Brazil and Mexico so as to be able to return to profitability during the second half of the year.

As a consequence of these necessary modifications, we have seen a deceleration in our growth rates in these markets.

Notwithstanding this lower yet still robust growth, we trust the operating model put in place for the second half of 2018 is the correct profitable one that sets us up for the sustainable long-term value creation I outlined in my opening remark.

With that context, let's begin by taking a look at our Marketplace business highlights for the quarter.

Let's start with our largest market, Brazil.

On an FX-neutral basis, GMV there grew 44%; and items sold, 43% year-over-year.

The deceleration in growth is explained for, by the most part, the price increases carried out in late March, tougher comps and the truckers' strike that started during the end of May and finally, rationalization of the availability of free shipping subsidies in certain routes and categories carried out in June.

Beyond Brazil, on a per-country basis, results were more encouraging.

In Mexico, another critical market for us, FX-neutral GMV grew at 73% and continued to grow at one of the fastest rates of the last few years.

Items sold in Mexico grew at a very strong 91% year-over-year as our free shipping program reached 92% of shipped merchandise volume and was complemented with successful execution of seasonal promotional initiatives during the second quarter, such as the Mexican Hot Sale week.

Argentina continues accelerating, both in units sold and FX-neutral GMV basis.

FX-neutral GMV grew for the third consecutive quarter above 50%, reaching 57% growth year-over-year.

Items sold delivered the fastest pace of growth in the last 10 quarters, growing 54% year-over-year, aided in part by easier comps as well as promotional initiatives similar to those in Mexico.

Colombia was a highlight for the quarter as we reignited bright vibrancy on the platform as our free shipping and loyalty programs begin to gain critical mass there.

From a GMV perspective, on an FX-neutral basis, Colombia delivered the fastest pace of growth in the past 5 years, reaching 45% year-over-year, while items sold also followed suit, accelerating to an all-time high of 100% year-over-year growth.

And finally, Chile, which is also on a solid growth trajectory, delivered FX-neutral GMV growth of 53% year-over-year, while in units sold, it delivered a record 82% year-over-year growth, as MercadoPago gained rapid adoption on our marketplace there, and free shipping also expands its footprint.

Growth during the quarter had a strong impulse from increases in buyer engagement.

Brazil, Mexico and Argentina are all maintaining user engagement momentum as items per unique buyer per quarter grew again above 20% when compared to last year.

Chile and Colombia grew at an even faster clip in this metric at 42% year-over-year and 32%, respectively.

Consequently, items sold per unique buyer accelerated for the 21st consecutive quarter and surpassed 5 items purchased per quarter when looked at on a consolidated basis for all our marketplaces.

These segment results in our key retail performance indicated translated into a strong consolidated marketplace quarter.

During this quarter, units sold on a consolidated basis grew 39% to $85.4 million.

However, if we exclude Venezuela from last year's comp now that we have deconsolidated that operation, same-country items sold growth was 51% year-over-year.

Gross merchandise volume reached $3.14 billion, growing 15.2% year-on-year in dollars, while on an FX-neutral basis, GMV growth was 35.9% year-on-year.

Here again, if we exclude Venezuela, same-country GMV growth was 29.3% in dollars and on an FX-neutral basis, would have been 52.5% year-on-year.

Same-country unique buyers grew by 16% versus the prior year and excluding Venezuela, unique buyers would have grown by 24% year-on-year.

And finally, live listings, where we remain the top e-commerce offering in product assortment, accelerated for the 6th consecutive quarter, above 50% year-on-year.

It was also the first time in our history that we exceeded 150 million listings available on our websites.

Before we move on to Payments, let me give you a quick status update on where we are on our logistics initiatives.

During the month of June, we launched our second cross-docking center in Brazil, contributing incremental capacity to our logistics network and allowing us to gain more control over network efficiency.

Exiting the quarter, close to 10% of the shipped volume in our Brazilian operation was being handled by partners on our logistics network of cross-docking and fulfillment centers versus the remainder of the volume still running on our DropShip network.

Mexico continues to delight our consumers with great service levels in logistics.

98% of shipments there were made within the promised delivery window, and 78% of these occurred in less than 48 hours.

We're also able to report that during the month of April, we began operations of our new 323,000 square-foot fulfillment center in Mexico City, managed with our in-house proprietary warehouse and transportation management technology.

Although at quarter's end we were still fulfilling single digits of total shipped orders from that fulfillment center, the amount of orders we are processing is growing fast, and we expect for our fulfillment solutions to grow in share of payments for many years to come.

In Argentina, we drove adoption of shipments made on our network to a record-high 40% of shipped volume entirely through our existing cross-docking centers as fulfillment operations operated for MELI are only scheduled to launch there in the first half of 2019.

Let's now move on to Payments, an ever-more important building block for our business.

The growing scale of MercadoPago in tandem with better user engagement and higher retention were powerful catalysts that contributed to the solid on-marketplace payment volume growth we delivered during the quarter.

On an FX-neutral basis, consolidated on-marketplace Total Payment Volume grew by 49% year-over-year driven by strong penetration gains in Chile, Colombia and Uruguay, which were partially offset by lower TPV growth in Brazil.

Almost 9 out of every 10 items sold on our marketplaces are now already being paid for and settled with MercadoPago.

As a result of this nearly full adoption of MercadoPago on our marketplaces, we now can increasingly reassign resources in the Payments teams towards our off-marketplace opportunities in FinTech, where we believe the opportunity is enormous.

With greater focus in resources than in the past, our off-marketplace efforts are beginning to pick up steam.

TPV grew 142% on an FX-neutral basis and 96% in U.S. dollars, growing almost 3x faster than on-marketplace growth TPV on an FX-neutral basis.

The excellent execution in off-platform payments efforts both online, through our merchant services business, and off-line, through our mPoS offerings and mobile wallet businesses, are resulting in a growing share of payment volume away from MercadoLibre's marketplaces.

Over the last year alone, off-platform Total Payment Volume has gained almost 10 percentage points, reaching almost 1/3 of total payments during the quarter.

On a segment basis, Brazil was a stellar performer again as FX-neutral off-platform Total Payment Volume grew for the fifth consecutive quarter above 100% year-over-year and delivered the fastest pace of growth in over a year, reaching 170% year-on-year.

Argentina followed suit, delivering the second straight quarter of FX-neutral off-platform Total Payment Volume that was north of 100%.

Mexico, Colombia and Chile were also strong contributors, with FX-neutral TPV accelerating on a year-on-year basis to 88% in Mexico, 103% in Colombia and 110% in Chile.

Let me now take a moment to talk about the biggest driver of this growth in off-marketplace payments in Brazil and Argentina, our online to off-line initiatives powered by the rollout of our mobile point-of-sale devices and co-branded credit card units.

When we began distributing mobile PoS devices, we made our first steps in providing bottom-of-the-pyramid merchants the ability to accept credit cards and offered them opportunities to engage in commerce whence they were traditionally excluded.

The growth of the mPoS devices sold and FX-neutral TPV yielded from mPoS devices in Brazil and Argentina have been key levers to continue scaling off-platform payments ecosystem, and this quarter's results were an example of that.

On an FX-neutral basis, TPV on mPoS grew north of 550%, both in Brazil and Argentina, as we continue to serve long-tail merchants, a segment of sellers we believe is still largely underpenetrated.

Mexico also delivered encouraging results on the mPoS business, with record sales of devices in May and June as we launched a new device and improved performance of online customer acquisition channels.

On the card side, the installed base of cards has reached nearly 1 million prepaid cards linked to Pago accounts in Brazil, Argentina and Mexico, allowing our users to use their stored balances on our merchant mPoS devices or wherever Mastercard is accepted, both in online and off-line venues.

During the quarter, we also took further steps to grow our off-line service offering through the build-out of a proprietary alternative payments network powered by QR codes and our digital mobile wallet.

In our view, this network has the potential to empower millions of people throughout Latin America to participate more actively in the formal economy than ever before.

As such, we officially launched our QR Code and mobile payment ecosystem in Argentina this quarter as we began to scale our 2-sided payments network, adding important lighthouse merchants that drive greater frequency of use and payment volume.

Along those same lines, we are encouraged to see unique payers and unique collectors in our mobile wallet business growing well as each type of user grew triple digits year-on-year during the quarter, albeit still from a small base.

And finally, within the FinTech ecosystem, our merchant and consumer credit business is also performing well.

We are proud to be able to empower buyers and sellers by improving the flow and access to credit to them, and we took important steps in those respects during the second quarter, principally in Brazil.

On the merchant side, we began to unlock capital constraints to growth in our credits business as we began securitizing funding from private investors in order to provide loans to our merchant base without being limited by our own capital capacity.

On the buyer side, we launched our consumer credit lending business, taking another important step in stimulating demand by offering more compelling credit offerings to them.

This is an important milestone for us as it will not only begin to allow many of our buyers who do not hold a credit card to be able to purchase on credit in our marketplace but also improve the value proposition for those buyers who do own a credit card but are constrained by its low limits.

During the quarter, our credits business surpassed the $10 million mark in revenues for the first time, reaching $13.9 million, growing triple digits, both on an FX-neutral basis and in U.S. dollars, on a credit portfolio of $112 million.

Having covered the strong quarterly KPIs, let's move on to a more challenging picture on the financial side.

As mentioned earlier, financial results during the first half of the year were affected by the abrupt changes in the cost structure of our logistics operation at a period in which our free shipping offering has been in rapid expansion.

Consequently, Q2 was a transition quarter where we spent the better part of the period adjusting our financial model in order to realign with our commitment to deliver profitable growth.

We feel that we have made strides in this direction, and we'll continue to make changes to our pricing model and free shipping program as we see fit and have found pricing levels towards the end of the quarter that deliver both profit and growth once again.

During the second quarter, gross billings came in at $432 million, a 36% growth, and on an FX-neutral basis, a 65% year-on-year growth.

This marks the 14th consecutive quarter of FX-neutral growth above 60% year-over-year.

On a by-country basis, gross billings were strong across the board.

For the second quarter of 2018 and on an FX-neutral basis, gross billings would have been as follows: 68% for Brazil, 78% for Argentina, 63% for Mexico, 64% for Colombia, 62% in Chile and 84% in Uruguay.

All of these expressed on a constant-currency basis.

Shipping subsidies totaled $97 million, down 13% versus last quarter.

This quarter-on-quarter contraction was attributed to 2 main factors.

The first one is related to our efforts in optimizing the unit economics and subsidies in our free shipping program in Brazil where we limited the availability of free shipping for certain categories and routes, second and third cities of the Northeast of Brazil, as a response to the price increases from our main logistics partner at the end of the quarter.

The second is due to the Brazilian truckers' strike.

This action affected volume of sales and shipments of free shipping for approximately 10 days during the end of May and beginning of June.

As a consequence of this tinkering and optimizing of the free shipping program, we were able to accelerate net revenue growth versus Q1 as it came in at $335 million, growing 18% year-over-year and accelerating 14 percentage points to 44% year-over-year when looked at on an FX-neutral basis.

Bear in mind that the during the quarter, U.S. dollar growth rates were negatively impacted by the devaluation of currencies in Brazil, Argentina and Mexico.

The Argentine peso devalued by 33%, the Brazilian real by 11% and the Mexican peso by 4.5%.

On a segment basis, as reported quarterly net revenue year-on-year was solid as well.

Brazil grew at 40%, Argentina at 68%, Mexico at 71%, Colombia at 51%, Chile at 42% and Uruguay at 84%.

All of these, once again, expressed in constant currencies.

Non-marketplace revenues were a strong contributor to revenue growth, reaching $179.2 million, growing 72% in U.S. dollars and accelerating for the sixth consecutive quarter on an FX-neutral basis to 96% year-over-year.

Non-marketplace revenue growth was driven, for the most part, by the stellar performance of our Payments revenue stream off-marketplace, which on an FX-neutral basis, grew above 100% for the second consecutive quarter, reaching 132% year-on-year growth; and advertising, which also contributed to the strong performance in the segment, accelerating to 65% year-on-year growth on an FX-neutral basis and gaining share as a percentage of revenues.

Gross profit ascended to $159.7 million during the quarter, representing 48% of revenues versus 60% in the second quarter of last year.

This deterioration in gross margin is primarily explained by the formulaic changes in revenues due to the implementation of ASC 606.

For comparative purposes, COGS, as a percentage of gross billings, represented 40.6% this quarter versus 35.5% for the same quarter last year.

Additionally, the cost of mPoS devices, issuance of MercadoPago credit and debit cards, increased collection fees from our growing Payments business and increasing costs of deploying our infrastructure on public clouds explain the gross margin compression.

We have included a detailed breakdown of these and also the OpEx margin evolution I am about to cover in the slides that accompany this presentation.

Operating expenses totaled $188 million or 56% of revenues versus 50% of revenues during the same period last year.

OpEx margin deterioration is also primarily explained by the formulaic changes in revenue recognition due to the implementation of ASC 606.

For comparative purposes, operating expenses as a percentage of gross billings represented 44% this quarter versus 45% for the same quarter last year.

As reported, drivers of OpEx compression were incremental marketing costs as we continue to invest for growth, increased loan loss provisions as our credit portfolio grows and buyer protection payouts as a consequence of deteriorated service levels by logistics partners during the quarter in Brazil.

Operating losses, therefore, amounted to $28.2 million or negative 8.4% of revenues versus negative $29.4 million in the prior quarter despite having been impacted by increased shipping cost in Brazil during the entire 3-month period versus only 14 days during the first quarter.

Further down on our P&L, and with details also presented in the accompanying slides, we reported a net reported loss of $11.3 million and a basic net loss per share of $0.25.

Operating cash flow for the quarter was $144.2 million.

The increase in net cash provided by operating activities during the 3-month period was primarily driven by improvements in the cash generation of our Payments business in Argentina as we discounted a larger volume of receivables than in the past.

Wrapping up, purchases of property, plant and equipment, intangible assets and advances for fixed assets totaled $24 million during the quarter.

Cash, restricted cash, short-term investments and long-term investments at the end of the quarter totaled $605 million.

This concludes my review for the second quarter.

Summarizing what we've seen, we believe that the secular trend of the Internet and e-commerce in the region are playing to our strengths, leaving us well positioned to drive our future growth.

As we move into the second half of 2018 and beyond, we will continue to drive sustainable efficiencies through cost discipline while also fostering innovation, reducing complexity in our processes and improving the user experience for our users.

I look forward to keeping you updated as we continue to grow our platforms and strive to capture the still nascent opportunity behind payments and commerce throughout Latin America.

And with that, we can now take your questions.

(Operator Instructions) And our first question comes from Mike Olson of Piper Jaffray.

I had 2 questions.

First, should we assume that you're planning to return to profitable growth in Q3 and beyond?

And if so, what would that focus on becoming profitable again do to GMV and revenue growth rates in Brazil?

Should we expect further deceleration due to less free shipping and lower subsidies, I guess?

And then second, is advertising becoming material to revenue at this point?

Do you expect we'll see it continue to make up a larger portion of the mix?

And is it fair to say that advertising is a higher-margin business than any other segments of your business?

Thanks, Mike.

So on Q3, we can get into details once we announce the Q3 numbers.

As you know, we don't guide.

I think what we've tried to say is that what we are carrying out is a balancing act between growth and profitability, always continuing to prioritize growth and thinking through investments that benefit us in the long term, we will continue to carry out.

And so I think what you've seen us trying to adjust throughout the second quarter to find that right balance is what we will continue to do going forward.

Advertising is a high-margin business for us.

It's a business that has been delivering very solid growth rates, but I wouldn't call it material yet.

It still represents low single digits of overall revenue of the gain in share.

I think there's a lot of long-term potential there.

But at its current size, despite its growth, I wouldn't call it a material portion of our business.

And our next question comes from Stephen Ju of Credit Suisse.

Pedro, I think your items sold per buyer continues to accelerate, as you called out earlier.

And I guess, we'd like to look at the rate of change in that metric as well.

And I think, the rate of change, I think, it seems like that the latest cohort of buyers you're bringing in is purchasing at probably over 10 items per buyer.

So I'm just wondering if that's, directionally, the correct item to look at?

And it seems to suggest that people are purchasing at a velocity that's 2x what they might have been doing a year ago.

So I'm just wondering if you're seeing a material improvement in customer lifetime value there.

Sorry, Stephen, bear in mind that the improvement in engagement is not solely driven on very, very active new cohorts but also on improved engagement levels from existing cohorts.

So overall, we continue to see improvement.

Yes, the newer cohorts typically are more active.

But if the math you're doing is assuming the older cohorts are flat and then all the incremental is from the newer cohorts, you're probably going to overstate the level of activity in the newer cohorts.

What we're seeing as a consequence of the improved experience of the free shipping program, the loyalty program that's beginning to kick in, is just, in general, more purchases per user.

And our next question comes from Ravi Jain of HSBC.

Pedro, could you just give us a little bit color on your fulfillment build-out in Brazil?

Are you actually seeing sufficient CapEx spend by the third-party logistics providers for the scale that you are planning to build out and some color on the evolution of what we should expect in the next 6, 12 months?

And the second question would be on the mobile wallet adoption, some color on that, whether that is accelerating the QR Codes penetration as well in Argentina and in Brazil.

Great.

So on fulfillment, like we said, we have opened a fulfillment center in Brazil.

We also began to expand the footprint at cross-docking centers we have.

So far, we have not come up with any sort of constraints in terms of existing floor space or CapEx that had been given to us by our providers.

And so we continue to expect to ramp up both of those pieces of our own network, both fulfillment by MELI services that are nascent but growing nicely and also the cross-docking operations that allow us to receive packages at the cross-docking centers from one set of carriers, do the middle mile with a second set of carriers and then last mile with a third set of carriers, which means significantly improved service levels and also lower costs.

And so what you should expect from us as the year progresses is a greater number of our shipments moving away from the DropShip network, primarily ran by Correios, more and more to fulfillment and cross-docking centers that then allow us to use different, more efficient carriers.

This is Marcos.

On the mobile wallet front, basically, we have been processing QR payments for some time, but we basically really launched it in May in Argentina -- end of May in Argentina.

During April and early May, we were building a solid merchant network.

And at the end of May, we launched aggressive promotions with all of our user base.

We also migrated the prepayment functionality which was only available from a -- as a follow-up to the MercadoLibre app, which has a wide distribution base.

And we are very excited by the early results.

It's still very early to tell because, understand, we launched end of May where we have only 1 month in the quarter, but we are very excited with the growth we are seeing.

And our next question comes from Deepak Mathivanan of Barclays.

Two questions from my side.

So regarding the new 5 reais seller fee for lower ASP items that you have put in place recently in 3Q, are you seeing any signs of seller growth impacted by the new fee?

How are sellers generally reacting to it?

And then second question, nice to see the volumes on cross-docking ramping in Brazil.

What will be the long-term monetization model for fulfillment solutions?

Is it something that you think you can generate additional revenues, either as incremental take rates, or is it a solution to drive higher velocity and better user experience?

Great.

So the new structure on flat fees, I think, has as an objective to generate incremental revenues that allow us to then reinvest in building a better user experience, primarily by being able to offer free shipping on shopping carts where the inventory is still not fulfilled by us, it is being fulfilled by multiple sellers, and we have to pay more than 1 shipment within a single shopping cart.

And so in terms of generating that incremental revenue, it's been successful, and we haven't necessarily seen significant seller pushback in terms of seller churn.

What it does do by design almost is since it generates a flat fee per unit sold, it has a much greater impact on the sellers' margin on lower average ticket items that on higher average ticket items.

And so we've seen greater headwinds to units sold than we have to GMV.

I think all in, we're very pleased with the results because they align with what we were trying to do, which is to generate the incremental revenue so that it could be reinvested in a better shopping cart experience for users, regardless of if the inventory is being fulfilled by us or not.

In terms of cross-docking and fulfillment, I think the current strategy is much more focused on rapidly ramping up that service offering.

It allows us to lower the cost of shipping.

It allows us to offer much faster and more reliable shipping.

And we think it really, really strengthens the value proposition of our marketplace for both our buyers and sellers, if all of these shipments are going on our own network or being fulfilled by us rather than through the DropShip model.

So that's where the focus is now, is on better time and lower cost.

I think longer term, we can consider whether we also want to turn that into a revenue generator or not.

It's not where the focus is right now.

And our next question comes from Brad Erickson of KeyBanc Capital Markets.

A couple of follow-ups here.

First, are you able to unpack kind of the exact impact of Brazil GMV from the truckers' strike from the deceleration in the quarter?

And then second, can you just remind us what your free shipping exposure was in the quarter in terms of the portion of units in Brazil and just kind of how that compared quarter-over-quarter?

Okay, great.

Sorry.

So as you know, parsing out specific drivers when things are happening on the site simultaneous is more of an art than a science.

I think directionally, our sense is that the truckers' strike could have impacted marketplace in Brazil by anywhere between high single digits to low teens of GMV.

And again, this is all happening simultaneous with the changes that we've been carrying out to the free shipping program and many other things.

In terms of the exposure to free shipping, I think -- sorry, to -- just to make sure I understand the question, is it the coverage of free shipping during the quarter or what percentage of shipments are going on our network versus the DropShip network?

The latter.

Okay.

So if you take into account the ramp-up in our cross-docking plus our fulfillment, yes, it's beginning to get into high single digits of overall GMV.

And bear in mind that the fulfillment centers were launched about a quarter or 2 ago, so it's still early but really beginning to ramp up if we combine cross-docking and fulfillment, but still a long way to go.

Got it.

And then just a follow-up on the mobile PoS units that you're shipping.

Just talk about how you're finding the cost of customer acquisition there evolving and maybe just talk about any potential for maybe bigger spending campaigns, marketing campaigns down the road as you look to build that off-line part of the business.

Customer acquisition growth has been flat in the recent months in Brazil, also stable in Argentina.

I think we are comfortable with the level of spending in Brazil.

Of course, we would like to grow as fast as possible, but we are comfortable with the level of acquisition cost of -- per consumer.

And our next question comes from Richard Cathcart of Bradesco.

Just one on Payments, actually, in Brazil.

Richard, sorry, your voice is very, very faint.

Sorry about that.

So just on Payments in Brazil, there has been some noise recently about changes, kind of various potential changes to Central Bank regulations, perhaps moving payment terms on credit cards from D plus 30 to D plus 2. So I just wanted to ask kind of in your mind, what are the potential big changes in regulation on the horizon that could potentially affect your Payments strategy?

And kind of how do you think they could potentially affect the business?

So those rumors, actually, they have been kind of ongoing over the last several quarters already.

And so far there has been no changes.

Remember that in our case, we are not an acquirer.

We get paid by acquirers.

We're an aggregator.

So if we were to get paid in D plus 2 instead of D plus 30, it would be a positive for us.

Most likely, that will imply a change in commercial conditions.

So it's not so easy to forecast what will happen.

But I do think it still remains to be seen if there will or not be any changes in Central Bank.

(Operator Instructions) And our next question comes from John Coffey of Susquehanna.

Pedro, when it comes to off-marketplace Pago on third-party websites, can you say what's bigger for you now, at least in TPV, would this be white label processing or the more payments made via the Pago button?

And how would you expect that balance to look over the next few years?

Sorry.

So we -- so you're asking for what we call the merchant service business, which is payments on other digital properties.

What the most predominant form is, payment buttons or...

Or more the white label, where I know you do some processing for some websites where maybe MercadoPago wouldn't show up at all in name, but it would be behind the scenes.

Okay.

This is Marcos, John.

I'd say it varies on a country-by-country basis.

In Brazil, it's mostly white label, so you will not see MercadoPago so often because it's mostly API integration, server-to-server integration.

In the case of Argentina and Mexico and the smaller markets, at many times, we own the checkout, so you will see MercadoPago checkout more often.

But as customers and merchants get more sophisticated in every market, we tend to see higher impact of white label in the checkout.

Okay.

And do you expect that -- so you expect probably as merchants get more sophisticated across all of your markets, there will probably be more white label as an overall percentage.

Do I understand that right?

Yes, that's correct.

And our next question comes from Bob Ford of Merrill Lynch.

Pedro, can you comment a little bit about the behavior of your seller and consumer portfolios?

And now that you've secured third-party funding, how should we think about the ramp of those services?

Okay.

So as we mentioned, the consumer credit business continues to evolve very positively, becoming an increasingly larger contributor of revenues for us.

When we mentioned that they are a contributor of incremental bad debt, I think primarily what we're trying to say is, previous years, we didn't have this business, and so there wasn't any bad debt to book.

Now that we have it, it's margin contraction but not because the level of bad debt is something that is of concern to us or exceeds our expectations.

And we feel that it's appropriately priced bad debt.

And so that business continues to be incrementally contributor in terms of revenue and is still a margin-attractive business.

I think the funding primarily has begun to free up cash for MELI.

It's one of the drivers of the improvements in cash flow for the quarter.

It doesn't necessarily signal that we will accelerate the rate of distribution of credit because we continue to take a long-term approach to this, and we want to make sure that we continue to manage risk accordingly.

And so just because we have third-party capital to deploy doesn't mean that we are going to alter either our models or launch more aggressive models or necessarily accelerate this beyond the same prudent approach we've been taking so far.

We think the long-term opportunity here is significant.

But we also think that by taking it step by step is how we will generate the most value as we learn our way through both merchant and consumer credit.

And I'm showing no further questions at this time.

I'd like to turn the conference back over to management for any closing remarks.

Well, as always, thank you for everyone for your interest, and we look forward to giving you a third quarter update, answering some of the questions pertaining to the third quarter that we left open now.

And for us, it's back to work.

There's still, I think, a lot going on at the company we're quite excited about, and we will report back in a quarter's time.

Ladies and gentlemen, thank you for participating in today's conference.

This does conclude the program, and you may all disconnect.

Everyone, have a great day.