美卡多 (MELI) 2018 Q3 法說會逐字稿

Hello, everyone, and welcome to the MercadoLibre Earnings Conference Call for the Quarter Ended September 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 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 statements and Risk Factors section of our 10-K and other filings with the Securities and Exchange Commission, which are available on our Investor Relations website.

Finally, I would like to remind you that during this conference call, we may discuss some non-GAAP measures.

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

Now let me turn the call over to Pedro.

Hi, everyone, and thank you for joining the call.

I'm pleased to report another quarter of solid performance in our business.

From a top line perspective, gross billings ascended to $463 million, growing 25% in dollars and 48% on an FX-neutral basis.

On a country-by-country basis, gross billings were even stronger in our main countries: 69% growth for Brazil, 83% for Argentina and 84% for Mexico.

From a bottom line perspective, operating losses showed a 61% reduction versus last quarter, coming in at $11 million and with a breakeven EBITDA as we've continued to make progress over the last 3 months in adjusting our operational and financial model for sustainable profitable growth despite strong currency headwinds and additional adverse policy changes from our carriers in Brazil.

Before I walk you through the highlights for the quarter, one comment on disclosure.

You'll notice that many of the metrics we had been sequentially updating in the past will not be covered in my prepared remarks today as we've now included them in an accompanying presentation to the third quarter 2018 earnings script available on our website.

So let's begin this time with a FinTech progress report as it has become a growing area of focus for our organization.

Quarterly TPV reached $4.5 billion, a growth of 74% year-on-year on an FX-neutral basis, excluding Venezuela.

During the quarter, off-platform TPV explained 80% of the total incremental Total Payment Volume as we increasingly focus our efforts on our growing online to off-line payments offerings, successfully expanding the financial services we offer our merchants and growing the markets we are currently in.

During the month of September, for the first time ever, not only MercadoPago processed more total payment transactions off-platform than it did on MercadoLibre marketplaces, but total payment transactions surpassed the 100 million mark in a single quarter.

This is a testament to the strides we've made growing our FinTech ecosystem over the last few quarters.

This growth has been driven in large part by our mPoS business, which continues to fire on all cylinders.

During the quarter, and on a consolidated basis, FX-neutral Total Payment Volume from mobile POSs grew 636% year-on-year.

Going forward, we'll remain focused on merchant sign-up as we look to continue growing the number of net new ads to our mPoS solution, which is already robust and forming a large and growing installed base of active merchants processing payments through us.

We see this segment as a still underserved and very large total addressable market that is also going to be key to the distribution of most financial products and services we will develop in our FinTech portfolio.

We're also very pleased with the progress we're seeing in our mobile wallet initiatives, which have reached an important milestone this quarter, crossing the 1 million monthly active payers mark in a single month.

In line with that, active payers grew triple digits in Brazil, Argentina and Mexico during this quarter.

Through the MercadoPago wallet, an individual can set up our mobile wallet within minutes and be able to send peer-to-peer payments, top up his mobile device, pay for utilities, store money and pay physical-world merchants via our growing QR payment network.

As we continue to build greater ubiquity and add more usage cases to our 2-sided network, Total Payment Volume from the mobile wallet on an FX-neutral basis should also continue to grow triple digits year-on-year in Brazil, Argentina and Mexico as it did during the third quarter of 2018.

This quarter also marked an important breakthrough in the rollout of new FinTech products as we launched our asset management feature in Argentina.

Since its launch, we are enthused to see that asset management users have invested almost 20% of the total stored balance that existed in MercadoPago, indicating good product market fit from the get go and increasing our commitment to the regional rollout of this new product.

We believe that all these results are indicative of the large market opportunity that exists for this type of service.

Unbanked or underbanked users typically struggle with savings products as they usually do not have the know-how to access more sophisticated options and are generally offered less competitive yields on traditional savings accounts.

So in essence, what we believe makes our asset management product disruptive is its ability to bring an inclusive and attractive wealth management product to individuals and SMBs with minimal transaction costs and complexity.

Today, if you're a small saver in Latin America, there are very few venues to invest your money in, and that bodes well for us as we are uniquely positioned to change that as we scale out these asset management products throughout the region.

Let's move on to some of the highlights in the Marketplace business now.

The Marketplace business continues to show great resiliency.

We've delivered solid growth rates despite increasingly tougher comps and reductions in shipping subsidies we offer.

On a consolidated basis, gross merchandise volume reached $3 billion.

On an FX-neutral basis, that growth is up 28% year-on-year.

However, excluding Venezuela, which we've deconsolidated this year, FX-neutral growth would have been an even stronger 38% year-on-year.

On a market-by-market basis, Mexico continues to consolidate as an engine for growth in our business.

Since early 2017, we've grown the size of that business by a factor of roughly 2.5x as we leverage our depth and breadth of selection, fast and free shipping value proposition and aggressive customer acquisition investments to gain incremental share of wallet from our Mexican buyers.

Consequently, Mexico has delivered 7 consecutive quarters of items and FX-neutral GMV growth above 65% year-on-year, all this at the same time as we continue to hold our leadership position in brand awareness and reach in Mexico.

As we continue to build out these scale advantages in that market, we grow our level of comfort in our competitive position and ability to eventually deliver a profitable and growing P&L for that market.

Moving on to our largest market, Brazil.

Marketplace grew on an FX-neutral GMV at 33% year-on-year, sustaining 12 consecutive quarters of FX-neutral growth above 30% on the back of tougher 2-year comparisons and shipping subsidy reductions we carried out in order to improve monetization rates and unit economics in that market.

This is an encouraging data point as in Brazil, according to EBIT, e-commerce is calculated to be growing at roughly 15% year-on-year in local currency, indicating we continue to gain share of overall e-commerce despite the deceleration in our business.

Staying on Brazil.

As a result of launching the BRL 5 flat fee in July for all items sold worth less than BRL 120, and also the restrictions that we placed on selling items worth less than BRL 6, units sold have decelerated sharply to 1% year-on-year.

Although this is never optimal, it is self-inflicted and comes with the intended benefit of growing average ticket levels that drive the improved economics for our free shipping program that we were able to deliver during the quarter.

Also important is that despite the reduction in these sales of low-ticket items, volume per unique buyer continues to grow at a healthy clip both in dollars and local currencies.

Moving further south, Argentina continues to maintain momentum both on an FX neutral basis in GMV and also in units sold growth, rising to 49% year-on-year for both metrics as our free shipping and loyalty program continues to gain traction despite the challenging macro and currency trends during the quarter in that market.

On free shipping, we're pleased to report that within less than a year of the launch of the program, almost half of all our sales in Argentina are already being delivered to consumers without them having to pay anything for the shipping.

Let's now move on to our logistics progress report, another critical building block of our enhanced marketplace vision.

The adoption of our proprietary logistics network is making strides.

Exiting the quarter, over 15% of the shipments through MercadoEnvíos were sent through it rather than on our DropShip network.

As we continue to have greater control over the end-to-end shipping experience, we visibly eliminate friction, improve customer satisfaction and consequently drive greater frequency of use and share of wallet.

Not only is the mix of shipments through our prop network growing but the efficiency of that network is also improving.

Over the last year, we've been able to shorten our lead times by almost 20% on a consolidated basis on that proprietary network.

Brazil is the geography where we've observed the greatest improvement as we shorten lead times by 1.9 days versus last year.

Additionally, we've also improved lead times in Mexico and Argentina, where we've seen improvements of approximately half a day in both countries.

We've also made advances in enhancing our DropShip network in Argentina, where we've launched a MercadoLibre Flex logistics solution.

This application will enable our sellers to adopt proprietary MELI technology while leveraging their existing logistics relationships with small carriers to deliver products within hours in large metropolitan areas through our MercadoEnvíos logistics network.

One final update on delivery times, a key metric we use to guard service levels.

During the quarter, on a consolidated basis, the percentage of items delivered within 48 hours increased by 15 percentage points versus a year ago.

Mexico has led the way, with almost 80% of all volume being delivered in 2 days or less, while Argentina and Brazil also continued to improve their share of shipments delivered in that time window.

Now that I've covered the key highlights on operational KPIs for the quarter, let's move on to financials, where we've continued taking steps to balance our financial model as a result of the unforeseen changes in cost structures of our logistics operations in Brazil during the previous quarters of this year.

We feel we've made inroads on that trajectory towards profitability despite additional pressure during this quarter from unforeseen and large currency devaluations.

Going forward, we'll continue to make changes in shipping subsidies and pricing as we see fit in order to finally achieve this goal.

On top of the solid growth in gross billings during the quarter that I mentioned at the opening, increased efficiencies in managing subsidies also drove strong revenue growth on an FX-neutral basis.

Consolidated net revenues came in at $355 million, accelerating on an FX-neutral basis 14 percentage points sequentially to 58% net revenue growth year-on-year.

Just as with gross billings, on a country-by-country basis, net revenues were strong in our main countries: 56% growth for Brazil, 68% growth for Argentina and 168 percentage growth for Mexico, all of these expressed on an FX-neutral basis.

Gross profit ascended to $170 million during the quarter, representing 48% of net revenues versus 58% in the third quarter of last year.

Net realizable value discounts on mPoS devices, warehousing costs and increasing costs of deploying our infrastructure on public clouds explain the gross margin compression.

We've 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 $181 million or 51% of revenues versus 49% of revenues during the third quarter of 2017.

Main drivers of OpEx margin compression this quarter were attributed to buyer protection payouts, increased loan loss provisions from our credit portfolio and incremental marketing costs as we invested behind promotional campaigns and online advertising.

For comparative purposes, OpEx as a percentage of gross billings was 39% this quarter versus 40% the same quarter a year ago, a 100% basis point leverage in operational expenses.

As a result and as mentioned earlier, operating losses contracted by 61% versus last quarter to $11 million despite higher free shipping penetration on a sequential basis as we better optimize the availability of our free shipping and loyalty options and have driven better economics behind these.

Below our operating income, we saw $15.9 million in financial expenses attributed for the most part to interest accrual on the new convertible note we issued this quarter due 2028 and also working capital facilities we took out in Argentina, Uruguay and Chile.

Interest income decreased by 39% year-on-year to $8.6 million due to the devaluation of the Argentine peso and the lower float in Argentina as we've launched our asset management product.

Our ForEx line was positive $3.9 million as a consequence of $5.2 million gain arising from U.S. dollar revaluation over our Argentine peso net liability position in Argentina, which was partially offset by $1.3 million of losses arising from the appreciation of the Mexican peso over our U.S. dollar net asset position in Mexico.

As a consequence of all this, net loss as reported for the third quarter was also lower versus the previous quarter at $10.1 million, resulting in basic net loss per share of $0.23.

That wraps up the high-level strategic review of the quarter.

We remain convinced that a key measure of our success will be the value we generate over the long term for our shareholders.

This value will come to fruition as a direct consequence of how quickly we solidify and extend our current leadership position throughout the region.

The hurdles and threats we will face to achieve our long-term vision are: aggressive, ingenious and well-funded competitors; growth challenges and execution risks; and the need to deploy considerable investments to meet an expanding opportunity throughout multiple countries.

However, not only online commerce and FinTech is still huge and underpenetrated market, but we feel very positive about what we've accomplished so far this year and continue to remain even more excited of what we will be able to achieve as we move into the end of this year, 2019 and beyond.

Thanks.

We can now take your questions.

(Operator Instructions) Our first question comes from Mike Olson with Piper Jaffray.

You focused a lot on payments in your prepared remarks.

Just wondering what you're seeing from a competitive standpoint for payments in the region.

Is the case where multiple players can win in the midst of a huge market opportunity?

Or is it more of a winner-take-all market in your view?

So this is obviously a very, very large TAM.

This is a combination of both our aspiration to gradually move consumers away from cash payments to digital payments, combined with having a very strong value proposition or consumers in the region that today are nonbanked or underbanked, in addition to whatever opportunities exist to gain bank consumers and existing plastic or digital transactions.

So the size of the opportunity really is enormous.

And given the size of the opportunity, obviously, competitors will arise.

But as always, if we continue to focus on ourselves in the long term, we think there's a chance to build a very, very healthy and sizable business there.

Our next question comes from Stephen Ju with Crédit Suisse.

Pedro, I want to talk about your efforts to take down pressure in Brazil and decrease your dependency on Correios.

Wondering as of this quarter like what percentage of the units in the country are now off-Correios and how much you think you can pull off on either a quarterly or on an annual basis.

So we disclosed the consolidated number of shipments that go through our prop network.

We're not disclosing that by country.

Suffice to say that we continue to make some positive moves in terms of building all the necessary building blocks for our proprietary network in Brazil.

We now have a fulfillment center that's operational and very, very rapidly expanding in square meter footprint.

We have multiple cross-docking stations.

We're beginning to aggressively do zone skipping and optimizing on that network.

So I think a lot of the heavy lifting, what we've been doing over the last 3 or 4 quarters, should begin to give us better and better returns as we move into the fourth quarter and 2019.

We still have a significant reliance on Correios for this holiday season and probably moving into the beginning of next year.

I think, fortunately, Correios' efficiency and their performance has also dramatically improved over the past few months, which is one of the reasons we've seen the improvements in delivery times that we've mentioned in the prepared remarks.

So I think things are moving along very well on that front, but building out a logistics network is something that will take multiple quarters and we'll continue to give you progress reports on that as we move forward.

Our next question comes from Ravi Jain with HSBC.

Just following up of the payments question here.

Given all the competitive landscape you're going to see, especially in Brazil, can you just conceptually give your views on 3 different streams -- one is the payments on platform, one is off-platform online and off-platform off-line -- as to where is the biggest growth opportunity?

And how will the profitability of these 3 different streams in the longer term differ from each other?

That would be really helpful.

This is Osvaldo.

So what we've seen today is we are very pleased with how we have been evolving.

First, online -- first, on platform and then online, that where we see today is that e-commerce presence has weakened in Latin America, reaching 4% or 5%.

The addressable market is significantly higher off-line than online.

And that is what we are seeing in terms of growth rate -- growth with our mPoS and wallet and where we are seeing most of the growth over the last year.

And we expect that trajectory to continue, and so we will lead that eventually.

Off-line will be larger than online.

Clearly it's a long way to go there because majority of our volume comes from MercadoLibre, and that already, the mPoS group and the web group are significantly adding more growth than the traditional online merchant services.

Our next question comes from Franco Abelardo with Morgan Stanley.

My question is about the sellers base especially in Brazil.

Did you see any churn in the sellers base after the flat fee rate and maybe because of competition arising in the marketplace environment in Brazil?

Are you continuing to see new sellers entering your platform?

Great.

So when you look at the results in Brazil, right, growth in GMV above 30% coming in at 33%, that's significantly above everyone who's reported so far.

And I think that it's a confirmation that the business in Brazil, despite the strong headwinds from cost pressures and all the tinkering that we've been undertaking, continues to perform very well.

There has been a decrease in overall number of new sellers as we, by design, began to remove the sale of very low ASP items.

But if you look at gross merchandise volume, essentially what we've done is we've increased the ASP and we've removed a lot of very low-value items that were also very difficult to conciliate with our very aggressive and very well received by our consumers free shipping offering.

I think seller churn from competitive pressures or from the modifications we've made don't seem to be something that's excessively negatively or materially negatively impacting the results in Brazil.

Our next question comes from Marcelo Santos with JPMorgan.

It's Marcelo here.

I had a question about the changes, the fine-tunings you're making in Brazil, tweaking the prices, the subsidies.

Is that mostly over?

I understand it's never over, but is it mostly over, the bulk of the changes?

And do you think now you have more stability on that front?

Or you are still looking to make some more tweaks and maybe to improve profitability?

So as you can see from the evolution in the profitability or the reduction in EBIT losses, we've obviously gone in the right trajectory over the last 3 quarters.

I think a lot of the significant modifications were carried out over the last 2 quarters.

Now going forward, we need to continue to monitor what happens with pricing and continue to adjust if prices have similar levels of changes as they did in the past, which we don't anticipate.

But the reality is that especially the state-owned carrier has continued to change their commercial conditions over time.

And also as we continue to improve in terms of more fulfilled delivery, more delivery on our proprietary network, that also could potentially open either the need or the possibility to continue to change pricing and costs.

So I do think it's going to be an ever-evolving situation, but the big impact like the introduction of the flat fee or the reduction of key routes, which were the most significant drivers of changes in costs but also changes in demand, I think were carried out in the prior quarters.

Our next question comes from Thiago Bortoluci with Goldman Sachs.

My question is on Brazil GMV growth.

We saw change in the growth drivers this quarter, with growth being much more driven essentially by prices, not by volumes.

Is it fair to assume that this trend should continue during the next 3 quarters until we see a normalized comps for the flat fee?

Or was there any specification impacting only this quarter?

So just to clarify terminology, yes, you're correct.

What we did is eliminate -- literally, you can no longer list items on the platform for less than BRL 6. So that has eliminated a lot of transactions that we no longer wanted on the platform, which has slowed down unit growth significantly.

But when you look at volume growth, because the average selling prices are now higher as we've removed that very cheap long-tail stuff, it has actually held above-market rates of growth of 33%.

And that's something that as you anticipate, we should expect to remain in place until we comp this quarter next year because we don't have any current plans to reintroduce listings for less than BRL 6. So growth over the next year will be focused on gross merchandise volume and not so much units because of this change in policy.

Our next question comes from Deepak Mathivanan with Barclays.

So first, can you talk about potential operational constraints that you would see this shift into more 1P managed logistics solutions?

In other words, do you think there are sufficient partners out there that can support the volumes to achieve your goals on this program?

And then secondly, when should we expect some kind of monetization initiatives to kick in and cover some of the costs associated with warehousing and cross-docking that you're incurring for this?

So our answer on operational constraints, I think, continues to be consistent with the prior quarters.

We continue to add a growing number of carriers to our proprietary network that are doing increasing percentages of last-mile delivery, that are doing zone skipping efforts for us.

And so far, we have not come up against availability of carrier capacity on our prop network.

Now our prop network is still in the early stages and will continue to grow at a very rapid pace, and we'll see what happens in the future.

But so far, we haven't come up against capacity constraints nor do we anticipate that going forward.

In terms of the management of profitability and costs, we have carried out the corrections over the last few quarters.

What we said is we'll continue to tinker.

We believe that as we begin to offer more and more fulfillment service for our merchants and continue to improve delivery times in Brazil, which should sustain above-market levels of growth in our business if we're able to deliver on all that.

There continues to be room for pricing on the platform, especially for the sellers who we will be fulfilling for and taking care of their deliveries on our proprietary network.

So we do think that there still are possibilities and drivers for margin improvement.

That's not where the focus is right now.

The focus continues to be on rapidly rolling out our proprietary network.

Our next question comes from John Coffey with Susquehanna.

My question is on mPoS.

In Brazil, there's a number of competitors trying to set up SMBs for credit acceptance.

How does Mercado differentiate itself such that new merchants sign up with you instead of PagSeguro or another competitor?

I think that we can just -- what we're doing is twofold.

First is we are leveraging our institution and marketing initiatives that is driving most of our sales in terms of mPoS.

And then, in terms of what we are doing is we're offering a comprehensive financial solution.

So we started offering merchant codes a long time ago, a couple of years ago for the network dealers in Brazil and Mexico.

And then, we had extended that to our mPoS initiative.

In that way, we have gained a lot of volume over the last year, and we're very excited we're able to grow from here.

And our final question comes from Richard Cathcart with Bradesco.

I just wanted to ask a question about the merchant credit in Brazil.

Just wondered what you're seeing relatively early on in the product life but what you're seeing in terms of demand from the sellers and what you're learning about risks.

And then, also if you could just kind of give a bit of a view of whether you're looking at this product mainly as a way to drive your own revenue growth or whether it's also where you're kind of trying to help the sellers to drive their own GMV growth on the platform, which in turn will also help your GMV growth.

So let me take the financial question, and then Osvaldo can give you some color on the demand we're seeing and how that business is performing.

The credit business, not just in Brazil but overall is one that we're very enthused about.

We're seeing very good results there.

We see it as both.

We see it as a business that will be one of our drivers of monetization and high margins, but at the same time, it also is an extremely important driver of our sellers being able to sell more as it's becoming for many sellers a prime source of working capital to grow their businesses.

So I don't think necessarily there's a tradeoff there.

Credit spreads in the region are very, very interesting and attractive.

And even with a very compelling value prop for our sellers, probably better for them than what they would get from traditional banks or financial institutions, so it drives their businesses and it still delivers a profitable high-margin revenue stream for us.

Then in terms of originations over the last 2 quarters, we have not increased the volume of originations in the overall aggregate merchant trade market.

But also, that is related to 2 things.

First one is during the first quarter this year in Brazil, we extended the number of people we are running through.

So our trade future last 12 months, with many of our targets we have reached in the first quarter and we have increased loans in the second and third quarter but not as many as we did in the third one.

The second factor has been the macro in Argentina.

In Argentina, given on the one hand, increase in interest rate; on the other hand, devaluation when you look at the amount of originations in U.S. dollars.

Those numbers have decreased over the last 2 quarters.

But it's something that we believe we've seen through given that rates have improved around 20 percentage points in the last quarter.

Ladies and gentlemen, thank you for participating in today's question-and-answer portion of the call.

I would now like to turn the call back over to Mr. Pedro Arnt for any closing remarks.

Great.

Thank you, everyone, for listening in.

We are fully focused on the Q4 quarter here.

Many of the countries have already started with their big commercial dates, Cyber Mondays and whatnot, so a lot of exciting work being done in the company that we will update you on in February.

Thanks a lot.

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

This does conclude the program.

You may all disconnect, and have a wonderful day.