美卡多 (MELI) 2018 Q4 法說會逐字稿

Hello, everyone, and welcome to the MercadoLibre Earnings Conference Call for the quarter ended December 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 to the Investor Relations section of our website.

I'll remind you that management may make forward-looking statements relating to such matters as continuous 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 statements and Risk Factors sections of our 10-K and other filings with the Securities and Exchange Commission, which are available in our Investor Relations website.

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

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

Now let me turn the call over to Pedro.

Thanks, Federico.

Let's kick off today's call by doing a quick high-level recap of the year that has just ended.

We've closed out a challenging year that has combined a few significant challenges with transformative positive initiatives.

On the more challenging front, changes in our logistics cost structure in Brazil forced us to claw back our free shipping initiatives and to introduce a flat fee structure that negatively impacted vibrancy on our marketplace.

These changes in free shipping, combined with year-on-year comps that already lapped the launch of free shipping during the prior year, led to deceleration in our Marketplace business as the year progressed, despite 2-year average growth rates that have remained fairly stable and still above market.

On the flip side, 2018 was also a year of significant positive developments that set us up extremely well for the long run.

During last year, we launched and have begun to scale our own logistics network that will in time allow us to deliver better service levels at lower cost in both Mexico and Brazil.

We've expanded our installed base of mPoS devices in Brazil and Argentina with strong results in terms of devices sold and Total Payment Volume, while in Mexico, we are beginning to gain traction.

We also successfully launched our wallet and QR initiatives in Argentina and are already replicating those initiatives in Brazil and Mexico.

And finally, we redesigned our pricing and incentive programs by meaningfully optimizing investments so as to consistently improve EBITDA and accelerate constant currency's net revenue growth during the 4 quarters of the prior year.

It's with this positive second half momentum that we move into the first quarter of 2019 and beyond.

Our efforts going forward will continue to be centered on capitalizing on the adoption of e-commerce in the region as millions of consumers move their purchasing share of wallet online and increasingly pay through digital and mobile means.

The trend is clear for us.

As we improve the online shopping and payments experience, customer trust, confidence, engagement and retention go up, which ultimately drive further adoption of our ecosystem and positively flow through into our financials.

Let me now delve into the fourth quarter results.

Perhaps most importantly, meaningful advances were made on the logistics front.

On a consolidated basis, mean delivery times improved 30% on a year-over-year basis, allowing us to deliver 50% of our shipments in 3 days or less.

Specifically in Brazil, over the last year, we have been able to improve by 10 percentage points, the amount of packages being delivered in 48 hours or less, while we also reduced median delivery times by 2 days.

This is not only a consequence of improved service levels of our main shipping partner in Brazil, but also the result of the advances we have made in moving volume onto our managed logistics network.

On a consolidated basis, over 20% of all shipments were already done through our network of fulfillment and cross-docking centers.

Penetration of these managed network reached 17% in Brazil, 15% in Mexico and 55% in Argentina during the fourth quarter of 2018.

Overall adoption of the MercadoEnvíos solution in Brazil, Mexico and Argentina are also worth calling out.

Brazil gained 11 percentage points to 91% of all packages being delivered on our managed network, Argentina gained 16 percentage points to 49% and Mexico gained 14 percentage points to 94%.

Depths of inventory and selection, another key area for our Marketplace business, also remains robust.

During the quarter, we improved product discovery and deepened breadths and depths of selection.

In Brazil, for example, live listings grew for the fourth consecutive quarter above 50% year-on-year, to 57%, reflecting MercadoLibre is still the marketplace of choice when it comes to assortment and depth of selection in that country.

Our Official Stores initiatives also delivered positive results, further improving the quality and discovery of inventory on our marketplace.

Driven by special days and the shopping season, Official Stores gross merchandise volume penetration was solid in main countries: Mexico at 14%, up from 7% last year; Brazil at 13%, up from 9% last year; and Argentina also at 13%, up from 10% last year.

The growth in Official Stores penetration is attributed not only to solid hunting commercial efforts in on-boarding well-known brands, but also driven by the rollout of a more complete Intellectual Property Protection program, which is giving brands better tools to increase their comfort level to sell on MercadoLibre.

During the fourth quarter, we on-boarded the likes of Estée Lauder cosmetics, MAC, the GAP, to name a few.

As a result, GMV, on an FX-neutral basis, excluding Venezuela that has been deconsolidated, grew by 31% year-on-year.

Keep in mind, this is on the back of the toughest comp from 2017, where GMV grew 67% year-on-year.

The combination of both years yielded 2-year average yearly growth rate that nearly hits 50%.

For a regional overview, let me start in Brazil.

During the fourth quarter of 2018, on a local currency basis, GMV grew 24.4% year-on-year, tougher comparisons versus last year where Brazil grew at 71% year-on-year as well as pricing adjustments we implemented to improve the unit economics in low-ticket items and allow us to rebalance our growth and profitability explain, for the most part, the year-on-year deceleration.

In Mexico, we continue to have a position of strength when we look at share of purchases and GMV.

Additionally, during the fourth quarter of 2018, on a local currency basis, GMV sustained solid momentum, growing at 56% year-on-year.

Just like in Brazil, tougher comps over the same period of last year explained, for the most part, the lower growth rates delivered during the quarter.

Staying on Mexico and the results of having greater control over user experience by pushing for greater mandatory adoption of MercadoPago and more recently, of MercadoEnvíos, we've observed an 11 percentage point improvement in our Net Promoter Scores over the previous year.

This is a clear indicator that we can drive greater customer satisfaction as we become more and more involved with the end-to-end buying experience.

Finally, Argentina continues to demonstrate resilience in spite of strong macroeconomic headwinds and the rollout of caps to limit the number of free listings per seller that we allow.

GMV, on a local currency basis, grew by 48% year-on-year during the fourth quarter.

Let's now move on to our FinTech and payments progress report for the quarter, another area of strategic importance for us.

We believe that not only are we facilitating payments and credit on MercadoLibre's marketplaces through MercadoPago and Mercado Crédito, but we continue to deploy our online-based payment solution off of MercadoLibre.

Given the size of this structural opportunity, we've been accelerating the distribution of our online-to-offline products and services as we envision MercadoPago as a powerful disruptive provider of inclusive financial technology solutions, in particular, for those segments of the population who have been historically underserved and which, in many instances, operate in the informal or partially formal economies of the region.

As a result of the aforementioned push into offering O2O services away from our Marketplace, Total Payment Volume surpassed the $2 billion mark for the quarter for the first time ever, reaching $2.1 billion during Q4 '18.

Within those online-to-offline solutions, mobile POSs are still the most relevant.

mPoS TPV continued growing at triple digits, both in dollars and local currencies, and continued to gain incremental share of our Total Payment Volume.

On a consolidated basis, mPoS TPV grew by 365% year-on-year on an FX neutral basis, driven by sustained growth of our installed base and devices in Brazil and Argentina where TPV, on an FX neutral basis, grew north of 300% and 500% year-on-year, respectively.

During the quarter, we also made inroads into the build-out of our alternative payments network through our mobile wallet initiative.

For the 3 months ended on December 2018, our digital mobile wallet was used by millions of active payers, reaching an active base that was 4x larger than it was a year ago.

Mobile wallet TPV transactions also delivered solid results, growing north of 450% year-on-year.

One of the several payment usage cases we are focusing on to scale our mobile wallet is QR payments in stores.

On the latter, we have begun to see encouraging results in Argentina since it was the first country where we were able to offer our full line of online-to-offline payments solutions.

We've been successfully on-boarding both lighthouse merchants that bring brand equity and ubiquity to our wallet as well as smaller stores.

A case in point, within less than 2 months of launching, McDonald's has become the #1 ranked QR in-store payments in terms of TPV on our network.

It's also important to highlight that QR in-store payments already represent more than 40% of total wallet TPV for Argentina.

We continue making progress in expanding our innovative products in order to align the right incentives for our users to begin to fund their digital wallets with cash as opposed to credit or debit cards.

As such, in December, we launched our asset management solution in Brazil for individuals and merchants.

Results have been encouraging so far, as the amount of money invested as a percentage of MercadoPago stored balances in Brazil is already higher than what it is in Argentina within only 1 month of launch.

In Argentina, the asset management product continues to gain traction, as within only 6 months of launch, invested funds already represent 40% of MercadoPago stored balances.

Our merchant and consumer credit products are also scaling nicely, further strengthening the portfolio of financial services we are able to offer our users.

Loan originations reaccelerated again, growing by 31% during the fourth quarter to a total loan book of roughly $96 million.

We've also expanded financing sources for the loan products, raising third-party funding in Brazil and Argentina as our merchant credit business continues to gain traction.

During the quarter, we were able to raise over $31 million from the Inter-American Development Bank, while in Argentina, we issued our second public trust, which successfully gained us access to capital markets to off-loan the loan book.

Finally, our Merchant Services business has reaccelerated growth during the quarter.

Successful execution in Argentina through our gateway solution, complemented by fast growth in Brazil, Colombia, Uruguay and Peru, explained the solid results in this business during the quarter.

Now that I've covered the key operational highlights for the quarter, let's move on to our financial progress report.

The steps we've taken over the past year to recalibrate our growth and profitability has made significant strides as we deliver the second consecutive quarter of positive EBITDA.

Our improvement in profitability is, in large part, a consequence of our better understanding of how to optimize, leverage and distribute shipping subsidies to maximize sales and conversion rates.

Going forward, we'll continue to make adjustments to our shipping subsidies and prices as we see fit in order to fully achieve this goal.

Let's move down the P&L, starting with gross billings.

We delivered the 19th consecutive quarter of consolidated gross billings growth above 60% year-on-year on an FX-neutral basis.

The robust growth we delivered during the quarter was driven in part by improved monetization on our marketplaces as well as continued pace of execution in our off-platform revenue streams, particularly in payments.

On a by-country basis, gross billings delivered positive results throughout the most important regions.

Mexico accelerated to 88% year-on-year, Argentina to 93% and Brazil reached 60% year-on-year growth.

Moving down the P&L.

Net revenues also continue to grow at a healthy clip, with an FX-neutral growth rate of 62% year-on-year.

Gross profit remained stable versus last year, ascending to $205 million, representing 48% of revenues during the quarter.

Warehousing and shipping costs, net realizable value discounts on mPoS devices and increasing costs of deploying our infrastructure on public clouds explain the gross margin compression over last year.

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

As-reported operating expenses ascended to $206 million or 48% of revenues versus 75% of revenues last year due to the Venezuelan deconsolidation charges.

If we exclude the cost of deconsolidation, operating expenses would have been $182.2 million or 50.9% of net revenues the prior year, resulting in a year-on-year OpEx scale of about 285 basis points.

The main drivers of this OpEx scale during the fourth quarter of '18 can mainly be attributed to sales and marketing, product development and G&A.

For comparative purposes, if we exclude the Venezuelan deconsolidation, OpEx, as a percentage of gross billings, was 38.3% this quarter versus 41.7% the same quarter a year ago, a 335 basis point leverage in operational expenses.

As a result, operating losses contracted by 98.8% versus last quarter despite higher shipping discounts on a sequential basis as we better optimize the availability of our shipping program.

Below operating income, we saw $16.4 million in financial expenses attributed, for the most part, to interest accrual on the new convertible note we issued last quarter due 2028, and also working capital facilities we took out in Argentina, Uruguay and Chile.

Interest income increased by 61% year-on-year to $14.3 million, mainly attributable to the stability of the Argentine peso and rising interest rates in that country, increased invested volume in Brazil as well as the proceeds of the convertible note issued in August 2018, which also generated more investment returns.

Our ForEx line was negative $4 million, attributed, for the most part, as a result of the $4.7 million loss from the U.S. dollar revaluation over our Argentine peso net asset position in Argentina, which was partially offset by a $0.9 million gain arising from the appreciation of the Mexican peso over our U.S. dollar net liability position in Mexico.

As a result of all these, net loss, as reported for the fourth quarter, was also lower versus the previous quarter at $2.3 million, resulting in a basic net loss per share of $0.05.

That concludes our review of the fourth quarter of 2018.

I'd like to end the call by saying that we remain as confident as ever of the improving value proposition we are offering our users across the region.

With this validation of our product and market fit, execution will be, as always, our main focus going forward.

We must remain laser-focused on leveraging the scalable platform businesses we've built in retail, marketing, logistics and FinTech to differentiate ourselves in an ever-more competitive market as we push forward with the democratization of commerce and money throughout Latin America.

Thank you.

And with that, we can take your questions now.

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

You reported kind of an interesting set of metrics in Q4, with accelerating revenue growth, profitability was better, but then decelerating GMV growth.

And it seems like some or all this impact on GMV was self-inflicted.

But just going forward, should we expect GMV and revenue growth to kind of more closely align with each other or continue to diverge?

And then a second question I had is just on the competitive environment.

There's obviously been some media chatter in the past couple of months of some larger e-commerce players potentially getting more aggressive in Brazil.

I'm just wondering if you see anything on your end.

Mike, so there is a balancing act between growth and profitability, and that's the balancing act that we've been carrying out throughout the back half of last year after the changes in our pricing structure in shipping in Brazil.

And part of that is just the underlying business nature of finding the right level of incentives to find the right equilibrium between growth and profitability.

The other piece is just an accounting manner that sends a significant portion of our shipping subsidies through the P&L that's come from revenue.

As we optimize those, it's natural to see an acceleration in net revenues.

I think, going forward, certainly, the comps will get progressively easier as we move into '19 on the GMV front, and that's probably the key trajectory we're comfortable commenting on in terms of forward-looking statements.

Competitively, I think we've already said, we look at all our competitors, we try to understand what others are doing.

Brazil has always been a very competitive market.

We continue to deliver above-market growth this quarter.

If you look at the 2-year stock, I would say, significantly above-market growth to account for the tough comp from last year.

I think there are quarters where certain smaller players potentially grow more than us.

But if we look over a longer terms, our trend in terms of market share has been very solid and continues to be encouraging.

And we need to continue focusing on our users.

We need to continue building out our logistics network, growing out our ecosystem of payments, and that will give us what we believe is the most robust platform play to continue to grow both our retailing and FinTech initiatives for the long run.

Our next question comes from Edward Yruma from KeyBanc Capital Markets.

A couple of quick questions on the proprietary logistics network.

Obviously, you're seeing some strong results to date.

Help us understand the capacity outlook.

And how much slack do you have in as usage of this grows?

And how should we think about your build-out capabilities as we think about '19?

Great.

So I think the way that we're approaching future mid- and long-term capacity is by ensuring that this network that we're building has multiple sources of delivery capacity, whether that is first mile, last mile, long-haul, whatever.

So it's a combination of large established carriers of smaller regional carriers, and even of more mobilized small and mid-sized businesses that can do delivery for us as well as independent truck drivers.

And we're trying to stitch this all together through our technology so that, that ensures that we are able to scale that logistic demand that we will have from multiple sources.

So it's not unlike what we're seeing being built by certain large e-commerce players in the U.S., where the volume is not entirely done by the large-scale carriers, but it's a combination of multiple sources.

So, so far, we haven't really hit capacity constraints, and I think we continue to build out these different sources of future delivery capacity so as to avoid capacity constraints.

This is one of the reasons we've always said that we believe that building out a logistics network off balance sheet through TPLs is what makes the most sense, is that allows us to scale quickly and guarantees long-term capacity.

Got it.

And one other follow-up, if I may.

It seems like the mPoS market is getting increasingly competitive.

I guess, how do you think about pricing on the devices and kind of the current competitive environment, and how that may change this adoption rate?

Edward, this is Osvaldo.

It is getting more competitive, but so far, most of the competition we're seeing in Brazil have been related to Dubai prices.

We have been able to limit the discount we gave recently and continue to grow the number of devices we are selling.

And we have not yet seen competition on the [NDR] front when the fees (inaudible) merchants.

So I think, so far, we are very confident and we'll be able to continue delivering growth in this investment.

Our next question comes from Irma Sgarz from Goldman Sachs.

First, I think, if I looked at the numbers correctly, the confirmed user growth, actually, on the margin accelerated a little bit.

So I was wondering if you could -- impressively consistent growth over the last decade or so, and with growth rates in the mid-20s.

So I wanted to just understand the margin, like what are you seeing and what are the big sources of growth, whether it's geographies or customer cohorts?

And then, the second question, just in terms of the growth that you've seen.

On the one hand side, it seems to be 2 different trends between GMV growth, on the one hand side being really driven by the ASP or the average ticket, whereas in TPV, we see some different trends where it's really mostly the number of transactions or entirely the number of transactions that's been growing -- that's been driving the growth.

So if you could just sort of parse out, specifically on the TPV front, what we should be expecting going forward, and whether that's just basically a reflection of the multiple initiatives that you have, specifically, in the off-platform space?

Irma, so let me start with the Marketplace and payments units versus volume question.

So on the marketplace, as you know, we've launched a series of initiatives recently that have affected the units sold of low-ticket items.

We've introduced the flat fee and we've also capped the possibility to sell very cheap items on the website so as to weed out a lot of the stuff that really wasn't worth being sold on the platform.

And that's generated an increase in average tickets and a significant deceleration entirely focused on these very low average-selling price units on the marketplace.

So that's the explanation for marketplace.

On payments, it's a very different story.

As your question, I think, posted market payments right now has multiple use cases that are being attacked, both online-to-offline and also online, with very different average ticket prices, something like a cell phone top-up, obviously, will have a lower ASP than in-store QR.

Utility and service payments will have high ASPs.

And so in payments, I think, growth should be robust on both fronts.

And the number of transactions we process as we go after more and more use cases, both offline, through our wallet and QR initiatives and mPOS, and also online as we continue to grow the merchant service business.

So I think they have underlying growth trends that are very different, and that's why I think, in payments, you can see both TPV and TPN growing very nicely.

And in Marketplace, we've seen a deceleration in units sold.

In terms of user growth, although there is an acceleration in confirmed registered users, I think, really, what we've seen is buyers is a metric, that I would say, in the quarter is not necessarily one on that we are particularly pleased with, and I think there's a lot of focus on we're accelerating buyer or new buyer growth, as we also disclosed.

Obviously, we're still in the early stages of the Internet.

There are still millions and millions of users who don't use our services and who we continue to focus on attracting and bringing onto the marketplace.

So I think we should continue to see solid growth from new users.

But also, more importantly, with the large existing base of users we have and whose engagement has continued to trend positively, then we look at GMV per user or orders per user, that should also be a significant driver of growth, just the higher engagement of existing users.

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

Pedro, you haven't spoken about merchants loads in a while.

Now that you're reaccelerating, can you talk a little bit about your comfort levels in terms of pricing and sizing risk across different risk cohorts, and how you see that business scaling both on and offline?

Yes.

So we took a pause in the middle of last year as we were allowing models to get fair and recalibrate some of the loan-loss provisions.

What we've seen is the reacceleration in originations because we've also seen improvements in loan-loss provisions and the margin and profitability profile in the credit books have improved.

And so I continue to think that we're managing in the right way, which is when we're comfortable with the loan-loss provisions and the margins that we're getting out of the credit business, we will step on the gas a little bit more.

And when, for whatever reason, we're a little bit more skittish, we will slow down originations.

So prudent management of that.

The opportunity continues to be extremely large.

And I think, over time, continuing in this cautious manner, we should see the size of the book and the amount we originate continue to grow into the foreseeable future.

This is a business that we continue to be very, very encouraged and excited about.

And your deployment of your capital so far, have they been across wide spectrums of riskiness?

Or have you -- are you going gradual incrementally into cohorts that are incrementally more risky?

So I think, again, this is so early stage, but it's not just about growth from riskier cohorts.

As our FinTech ecosystem grows, we begin to have more and more channels of customer acquisition that we can cross-sell the loan portfolio.

So it's not that we're necessarily moving only into riskier cohorts on the marketplace.

We're now extending around mPoS users.

Eventually, we can move into wallet users, QR, in-store users.

So there is still plenty, plenty of room to grow the loan book within user cohorts that are still attractive and who we feel comfortable managing the risk on.

And then, there's also geographical growth.

Our next question comes from James Friedman from Susquehanna.

It's Jamie at Susquehanna, great results here.

Pedro, I was just going to ask a couple on the payments, and then one on the marketplace.

So I wanted to talk about on the dynamic between off-platform and on-platform TPV.

It looked like it was about $7 billion in the off-platform.

I guess, when could we anticipate off-platform potentially eclipsing on-platform?

And I know you don't like to make forward projections, but if that's too specific a question, just what is the some of the dynamics there as off-platform gets so much traction now?

Yes, sorry about that.

I'll answer now with the mute button turned off.

So the growth opportunity in off-platform is obviously significantly larger than on-platform.

To your question, last quarter was the first quarter that, in terms of transactions, we've already begun to see in TPN, for the first time in our history, off-platform away from the marketplace being larger than on-marketplace.

And when we look at growth, obviously, on-platform will continue to grow, driven by the growth of our Marketplace business.

But when we look at everything we're doing off-platform, there are significantly more markets that we're attacking and opportunity for growth.

So I think in the not-too-distant future, we will see TPV also being larger off-platform than on-platform.

And as we've always said, we still aspire for that to be multiple times larger than on marketplace.

And we can see that with the divergent growth rates already between payments and GMV.

And also, if you were to look at off-platform and on-platform TPV, off-platform TPV is growing significantly faster.

Got it.

And if can could just switch gears -- so where are we in the asset-light versus asset-heavy journey on the logistics side?

How should we be thinking that?

Because your previous answer seemed like it was emphasizing asset-light, but then we know you've described the warehouse buildout strategy in North and South, et cetera.

Yes.

just in general, like, where -- how should we be thinking about that process over time?

Okay.

So I think -- and this happens a lot in these industry that evolved.

I'm not so sure how useful asset-light or non-asset-light is becoming within retail, if you look at the way e-commerce logistics are evolving.

So when you look -- when we talk about warehouses, if we talk about last mile, first mile, long haul, airfreight, none of those vehicles, airplanes or warehouses are on our balance sheet.

And in that sense, it's asset-light.

Now if you were to look at the level of operational control and operational design that we exert over those third-party logistics operators, it's continuously increasing as we try to inject more and more efficiency in the operations, improve service levels and lower costs.

So, obviously, we are way beyond, I would say, waist deep in logistics capabilities within the company, hiring out logistics people and having significant oversight over the design and quality of our logistics network, but we don't necessarily own most of those assets for now.

And I think, for the short term, we haven't signaled any change in that design.

And as always, longer term, we will do what gets us the best results for our users in terms of if it makes sense, moving those things away from OpEx to CapEx and bringing them on balance sheet.

But I think that's more of a longer-term decision.

Right now, we're focused on continuing to build out the logistics in the different countries, primarily by using 3PLs.

Our next question comes from Marcelo Santos from JPMorgan.

Actually, the first is, Pedro, could you consensually break down the profitability of your various business?

I mean, I'm not asking for a specific number, but what is above wallet?

And then, what kind of level -- like you have the mPoS business, you have the wallets business, you have the credits business.

So how could we think about the components of the profitability right now?

That is the first question.

And on the second question, more specific to the wallet.

What are the plan to bring features, like money, indirectly from accounts, users being able to receive salaries to do bank transfers?

What is the outlook for this kind of services to be incorporated into the wallet in the several countries?

Because these could potentially make the wallet a competitor to more traditional banking services.

Okay.

So always remember that we don't want to unnecessarily hand over competitive information.

And so, therefore, I'll give you a general sense of how we think about the different businesses right now, but we don't disclose specific margin structures.

So right now, obviously, our Marketplace business is a business that is both one that we were investing aggressively behind in the short term in terms of shipping subsidy, build-out at the logistics.

And it's also a tremendous distribution platform for everything else we do.

And so we're running that one at a positive margin but a low margin.

I think of that business, longer term, given the scalability it has, simply from top line growth and OpEx scale, it's a business that we firmly believe, over the long term, will deliver improving margins that have gained leverage.

And then with payments, it's a combination of things.

The point business, now that the installed base has gotten to a nice scale, is a business that begins to deliver positive EBIT and contribute more and more EBIT if there aren't significant changes to pricing or cost.

Credit is also a business that we see as a generator of high margin that we can reinvest.

Obviously, the wallet, QR and in-store business are ones that we are investing aggressively in right now as we build out this alternative payment network.

So I would say, for the foreseeable future, we continue to be more in growth and investment mode, but all of these businesses are businesses that, at the right scale, obviously, have leverage and margin gains that we will be able to deliver once we build out the right scale size behind these businesses.

With regards to the second part, regarding -- with regards to the second point, with regards to the wallet and the money in salaries and bank transfers, I think there are several things that are [great at same time].

The (inaudible) on the regulatory front were, last year, both in Argentina and Brazil, it became legal to pay salaries into virtual accounts in the past year.

If not legal, you have to pay through a bank account.

And so now that it's legal, we need to make it easier to fund transactions from a back account.

That is already happening in Argentina.

I think it's the one country where we are the front hub because now it's very -- it's regulated by the Central Bank, but it should be straightforward in terms of money, the money back accounts into virtual accounts starting to happen.

Not all banks have made the big ride yet, but it's starting to happen because it's being regulated by the Central Bank.

We expect to see similar to happening in Brazil and Mexico, but I'd say we're several steps behind there because, still, there is not a central system where you can do those transfers without signing them taking online.

Eventually, this is something that has happened in many of our places, but is not available in Latin America.

But if the rate is to be able to fully fund other the bank accounts, this is something that has been mandated in Europe with (inaudible) directed to, and it's something that has been in conversation in some countries, but is not in many countries in Latin America, and yet -- and that could be a big difference.

Beyond salaries, the other thing that is starting to happen where we need to develop our product growth impact, starting to make it easier to pay salaries because even if it was possible even in the (inaudible).

The second one is to be able to pay supplier.

It's starting to happen, but it's not scalable yet because, originally, our product is more comped as it load to collect [funds] and to payout funds.

And in the meanwhile, what we have done is create the active management functionality in Argentina and Brazil, so as to encourage users to keep money in their wallet, so that it's more likely for to make payments out of that wallet than withdrawing into a bank and make bank payments.

So this is totally on our road map this year, and we expect to see much progress in several other countries during the year.

Our next question comes from Deepak Mathivanan from Barclays.

This is Mario Lu on for Deepak.

I have a couple of questions.

On the payments business, now that you see multiple cohorts on the consumer wallet and have 4x more mobile users than last year, any user trends you can call out in terms of stickiness, usage, spending levels compared to traditional credit cards?

And secondly, Correios has increased shipping rates multiple times over the past few years.

Can you just give us an update whether you expect to see any this year?

So with regards to the wallet, we are starting to see a cohort, with a little more updating.

But keep in mind that, slowly, Argentina, which was the first country where we launched e-store payments, we launched that end of May last year, so we only have seen pretty much half a year of results.

What we're seeing is increased use of multiple wallets, so it people who sometimes start by popping up their mobile phone, they start paying utilities, and they're using QR code payments.

So we are seeing the increase in the number of people who use in multiple use cases.

I think, still, the majority of growth is coming from new research just because it's a new product and we've added recently and we're growing 4x year-on-year.

And so when you look at our results, the total number of use cases per user is still fairly flat, and that is mostly related to the gross number of users and we will (inaudible) for how they'll continue to use it now.

So in terms of Correios, I think we do expect increases in price, much more in line with what had occurred in other years, unlike last year where, really, the change in pricing was absolutely unforecast and we believe something that we really were not expecting.

That's not that's going to happen this year, I think we have a good sense of what the increase will be.

And as we continue to move volume away from Correios and optimize our subsidies and free shipping initiatives, we don't even think that we necessarily will have to pass the full cost of the price increase on to users but only a portion of that.

So this should be a fairly manageable price increase, given all the conversations we've had.

Our next question comes from Ravi Jain from HSBC.

I have a couple of quick questions.

One is on the selection -- on the product selection and how you're going to broaden that out, especially on the competitive environment in Brazil and perhaps, in Mexico as well?

Could you give us some color on maybe your thoughts and initiatives for consumer packaged goods or the cost from the e-commerce?

And the second question is on the payments.

I mean, the Mexican Central Bank is now pushing the banks to adopt their payment system code.

Does that mean you need to accelerate the rollout of the asset management ecosystem in Mexico?

Do you see Mexico as getting more attractive a payments country?

Let me start with the second one, regarding Code in Mexico.

So I think our first impression, we took a look at it and we did not come out very impressed with the products.

But so far, the Bank of Mexico is mandating this for bank-regulated institutions.

At this point, we are not a regulated institution yet, so we would not be able to participate in it.

However, as I was saying, we were not very encouraged by the results in that what we had in Argentina is significantly better than that, so we're uncomfortable in sticking to our plan.

Also, it remains to be seen how willing are the bank to encourage this QR Code network because it would cannibalize the debit card piece, so we will continue with our plans to duplicate what we are doing in Argentina.

Great.

And on consumer packaged goods and cross-border trade, so just to put in perspective, first of all.

I think, combined, those 2 Marketplace lines still represent less than 5% of GMV, between 3% and 5%.

So glass half full is that there's significant room for product mix shift as we grow into those categories, but they're still small.

Most of our efforts over the last few quarters there had been around product, features that are tailored for those 2 different products, improving the logistics of international titles for sellers that are sourcing from the U.S. or from China in our cross-border offerings and, more recently, allowing sellers to send bulk inventory that we manage from them in our fulfillment centers for cross-border trade, and in CPG, stocking app on SKUs and SKU count.

I think we've crossed the 5,000 SKU count.

The next objective is it to get the roughly 10,000 SKUs, but that also shows that it's relatively early on in our CPG efforts.

And this year will be an important year for us as we continue to focus on making both those businesses a more meaningful overall portion of our GMV.

And I think both really have a lot of upside potential for us.

Our next question comes from Marvin Fong from BTIG.

Just a quick one on -- I was very impressed with the QR payment reaching 40% of digital wallet TPV in Argentina.

Curious on your thoughts on what's driven that rapid rate of adoption?

And if you think Brazil might follow a similar trajectory, or is there something structural about countries that might have a different adoption rate?

And then, just as a follow-up, could you disclose what the payments revenue in the quarter was?

So let me start with the first, and I'll leave the financial question to Pedro.

And we are very excited with our optional QR Code payment in Argentina.

We have been able to bring in many large merchants, such as McDonald's, Burger King, the Meijer Gas Station and coffee shops in the country and a huge drive to adopt QR Code payments, and that has been a huge driver of growth now that we have big payers.

And I'd say that the 4%, all from third-parties is one of the most popular use cases in the country.

Now I think we are still in the early days.

Integrations are a little more complex in Brazil because we need to integrate with the ERP with point of sale, and that's why it would take us a little longer to bring in larger merchants.

We have started with Shell through, the Meijer Gas Station and -- but it's still very early days and we cannot give comment on numbers.

So we expect to have more information in the coming quarters.

Our next question comes from Richard Cathcart from Bradesco.

Just a quick question on the proprietary shipping in Brazil.

I think you mentioned that 17% of GMV was actually in Brazil, and I think that's pretty big increase from where we were previously.

So a couple of questions on that.

First of all, are you beginning to see a kind of better buy-in from the sellers?

Are they more enthusiastic about the advantages of working through the proprietary shipping solution?

And then the second question, just on cost.

Given that you're now at 17%, it's beginning to scale, are you beginning to see some improvements in unit costs of products that are being shipped through the proprietary solutions?

Okay.

So let me start with the second piece, which is a runaround view on economics.

The first thing is that I think we've always said that our primary focus is on building out the logistics network first and ensuring that we have a network that allows us to deliver best-in-class delivery time or each competitive with what anyone might build because that's really the competitive advantage that we need to make sure we don't hand over to someone else.

And that eventually, over time, would scale.

And as the network heads more complex, driving down unit cost would be something we could be able to do.

So having said that, what we see now is, from an overall network perspective, items that are fulfilled by us obviously do have a lower cost because they eliminate first mile altogether.

Our cross-docking efforts don't necessarily lower cost.

They do allow for better service on many routes and give us greater control over the shipping experience.

Remember that when you look at our DropShip network in Correios, they are, by far, the largest player in Brazil and, therefore, are cost competitive given their scale in size.

So yes.

Fulfillment is cheaper, cross-docking is not.

We're certainly confident that, over time, once we're able to build out the full network with its scale and ability to determine who we send volume to, driving down unit cost will be something that we'll be able to achieve.

And then in terms of sellers, I would say, it's still early.

Obviously, conversions are better when we pool the items because we give it preference in search ranking orders and we drive greater volume to those listings because they have a better user experience.

But I think, before we can give you feedback on overall sort of what seller feedback is on that, we need more data and more time.

Net Promoter Scores on items that go through MercadoEnvíos and that are fulfilled are better than those that don't, and that's something that, over time, should continue to improve.

Our next question comes from Kunal Madhukar from Deutsche Bank.

With regard to a certain multinational e-commerce provider that's just about stepped up investment in Brazil, how much of the...

Kunal, can you try to speak a little bit louder?

We can barely hear you.

I'm sorry.

Is this better?

Yes.

Okay.

Great.

With regard to a certain multinational that just entered Brazil -- or just had been stepped-up investment Brazil, in terms of their focus market, the markets that they are targeting with like (inaudible) and what have you, how much of your GMV is in those markets?

(inaudible) Upper-income demographic kind of lives in those areas?

Sorry.

We're having a little bit of trouble getting -- it's somewhat cut off.

Can you run that by us again?

Sure.

So for the e-commerce provider that just enter -- just stepped up investment in Brazil.

In terms of the footprint that they are targeting -- the active footprint that they are targeting, how much of that GMV or retail sales in Brazil is in those areas?

And how much is the upper income demographic?

What proportion of Brazil's upper-income demographic lives in those areas?

So I don't want to comment on potentially what competitors are targeting because I might misspeak regarding their strategy.

I think one of the attractive things about Brazil and e-commerce and what is the reason we think it's such a relevant market going forward is that it's a market where we've seen, more than in any of the other markets in the region, e-commerce permeate beyond the higher income demographic portions of the population.

Consequently, Brazil that has the highest penetration of e-commerce as a percentage of overall retail.

So I think the winning proposition in Brazil is not if you try to focus only on high-income individuals.

It's a market that should have much greater e-commerce penetration as smartphones grow significantly their installed base.

And most Brazilians will be or are being equipped with a combination of a smartphone and descent broadband connectivity.

I think that's what we remain focused on and should give us tailwinds and growth from that secular trend for lots of quarters going forward.

Our next question comes from Gustavo Oliveira from UBS.

I want to understand a little bit.

At the beginning of the call, you mentioned that the GMV in Brazil decelerated, perhaps, by self-inflicted adjustments you've made in the platform.

But when you look forward, when do you think it matters most?

It seems to be meet that you're talking about the subsidies you're having in logistics buildup, you're gaining efficiency and so on.

Does it allow you to remove some of your shipping subsidies to invest in other levers of your platform such as credit to consumers to sellers or investments into Official Stores?

What -- I know there is no thing for bullet, but what are -- how do you reallocate your resources in 2019 and 2020 versus from your allocation 2017, 2018, which was primarily focused on shipping subsidies and logistics?

Gustavo.

So a few thought on that.

First of all, a lot of the reallocation is actually within the shipping subsidies.

So I think we're moving from subsidizing very-low ticket items that had challenging unit economics for us.

And they were right for that moment, we were generating a vibrancy on the platform, users were associating our brand with free or cheap shipping.

But I think, from a P&L perspective, it was challenging because the cost of shipping an item, obviously, doesn't decrease linearly as the ASP goes down.

So most of the capital reallocation is actually within the shipping program, where we now are fleeing up more subsidies for higher ticket items, for routes that we have shut down, like the North and Northeast, and we can more intelligently now start offering subsidies to start targeting those consumers as well.

We do look at our P&L as a whole.

So, and so far, we're freeing up some profit that might help us reinvest across other business lines.

But I would say, in general, we are in full-out investment mode.

When you look at our revenue number and our projected revenue number and the fact that we continue to target a profitable but relatively low margin profile for 2019, I think that gives you a sense of how aggressively we're investing across the board, and we feel comfortable with that level of investment to help us carry out the strategic plan we have.

So we're investing everywhere we think it makes sense to invest and we're optimizing how we allocate the shipping subsidies to just make it more intelligent.

And that does conclude our question-and-answer session for today's conference.

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

Great.

So thank you, everyone, for the questions.

I think those were lots of questions and good questions.

I hope we've given you a clear answer.

I think the answer around payments revenue got lost along the way.

We'll make sure to reach out to give you the number.

Thank you, and we look forward to updating you on Q1, which is the beginning of 2019 and the year where we have lots of things in store.

So thank you.

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

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

Everyone, have a wonderful day.