MercadoLibre Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2023

There are 21 speakers on the call.

Operator

Hello, everyone, and welcome to the MercadoLibre earnings conference call for the quarter ended September 30, 2023. Thank you for joining us. I'm Richard Cathcart, Investor Relations Officer at MercadoLibre. Today, we will share our quarterly highlights on video, After which, we will begin our live Q and A session with our CEO, Marcos Galperin Chief Financial Officer, Martin De Los Santos Fintech President Oswald Guimenez and Commerce EVP, Aliel Sharfstein. Before we go on to discuss Thus, our results for the Q3 of 2023.

Operator

I remind you that management may make and this presentation may contain Forward looking statements. So please refer to the disclaimer on screen, which will also be available in our earnings materials on our Investor Relations website. With that, let's begin with a summary of our results.

Speaker 1

Hello, everyone. I'm Martin De Los Santos, MercadoLibre's CFO. For those of you who haven't met me, I have been at Medi since 2007, 1st as a board member and since 2012 as part of the management team. For the past 7 years, I have led the credit business until last August when I took the position of CFO. I look forward to meeting as many of you as possible in due course.

Speaker 1

I'm pleased to report a strong set of results in my Q1 as CFO. With a strong Q3 across geographies, 2023 continues to show an attractive combination of growth and profitability with a record in income from operations. With strong momentum across geographies in both Commerce and Fintech, MELI's revenues growth accelerated. Mexico was particularly Strong with revenues growing above 60% year on year, while Brazil also posted a greater performance with Around 40% growth. These two countries have again increased their contribution to our total revenues.

Speaker 1

This strong business growth combined with cost discipline led to OpEx and SG and A dilution as the business continues to scale. Income from operation more than doubled year on year for the 4th consecutive quarter with margins expanding once Yes. Brazil was the largest contributor to our profit growth, representing a significant portion of it. During Q3, In the commerce business, we saw acceleration in GMV and item sold growth in the 3 main geographies where we operate We hired items for Raya. This higher user engagement come from continued experience improvements, especially on the where we reached 48% of equipment penetration and offer better delivery promises, improving conversions And part of the development of categories through technology.

Speaker 1

As a result, we have a record of 50,000,000 buyers and market share gains, especially in Brazil and At Mercado Pago, off platform TPB accelerated in all main countries. We saw an increased number of users and higher engagement metrics As we position Mercado Pago as a comprehensive financial service provider, on the digital account, we are particularly excited about the engagement, With more people using the remunerated account and other asset management solutions in Brazil and Argentina And better NPS in Mexico from UX Improvements. In payments, the highlight for Q3 has been online payment solutions that presented strong growth across the region. The credit business continues to perform Within our expectations, we're very healthy spread levels. As we saw NPLs improving in particular in Brazil, We have accelerated originations in all of our products.

Speaker 1

During Q3, we issued over 1,000,000 credit cards and surpassed $1,000,000,000 in TPV for the first time. As our underwriting models continue to improve, we can tap into new opportunities Such as offering larger credit lines with longer durations to the best covers of consumers. Overall, in Q3, we achieved a combination of rapid growth, Scale gains and margin improvements showing the strength of our economic model. To deliver these results, we have invested in technology that provides It's a world class user experience and enables us to be more efficient in terms of our cost structure. These results give us confidence To continue investing in future growth opportunities.

Speaker 1

And now let me get back to Rachel with business news.

Operator

During Q3, MercadoLibre relaunched our loyalty program as Melimas, an important step to enhance our loyalty value proposition with a simpler structure, more compelling shipping benefits, and premium video and audio content. With MeliMass, We now have a brand in which we can invest to raise awareness and increase engagement with MELI's ecosystem. MELI MASS Gives users access to a world class content bundle, free shipping above R29 and 12 months with free music from Deezer, amongst other perks. Our content bundle for many Mass users includes Disney plus and Star plus and special discounts to Subscribe to HBO Max, Paramount Plus and Lionsgate Plus. Through Deezer, users are able to access a complete library of audio content and music, A service that we think users will be able to enjoy on a day to day basis.

Operator

Users see the MELIMAS offering throughout our apps and website, where the value proposition becomes clear as they shop with us. With the MeleMask logo clearly highlighted, building the brand of the loyalty program. The shipping benefits a key to the program. Melimas users get free shipping on millions of items above R29. This is the Standard free shipping threshold of R79 if the product is in one of our fulfilment centers and chosen for delivery on the user's Meli delivery today.

Operator

As consumers look for products on MercadoLibre, they will see the Melimas logo on the products that are eligible And they can filter their search for Melimas items. As a new delivery option, loyalty users can choose a specific day of the week to receive all of their packages. This solution enables us to sell and deliver lower value items with the great experience that MELI is known for, whilst maintaining cost discipline in our P and L. Users still have the option for same and next day delivery if they want their item delivered Quickly, if they are willing to pay for shipping on items below the free shipping threshold or for free for items above the threshold. Sol.

Operator

To access all of these benefits, users can subscribe or earn their way in organically by engaging with MELI's ecosystem. Subscribing is quick and easy, and users can choose between a credit card, automatic charge from their MercadoLibre account, or a monthly invoice. So the subscription is accessible for different types of users. We're able to offer buyers the full benefits bundle for just the equivalent of 2 to 3 paid shipping For users who earn points by shopping with Mercado Libre to get the MediMask membership, our credit card offers double Enabling users to reach the loyalty status more quickly. In August, we launched a big marketing campaign to raise awareness of the program And initial results give us confidence that Menimass complements our value proposition, bringing extensive benefits to even more MercadoLib users.

Operator

We're confident in the program's long term potential because, as always at MercadoLibre, the best is yet to come.

Speaker 2

Thank you. At this time, we will conduct a question and answer session. And our first question this evening comes From Andrew Rubin from Morgan Stanley. Andrew, your line is open. Please go ahead.

Speaker 3

Hi. Thanks very much for the question and welcome again, Martine.

Speaker 4

Perhaps, Marcos,

Speaker 3

taking advantage of your joining today, it's been a period of strength for the business. We've seen a lot of the past year's investments flowing through to results.

Speaker 5

So as you look from here, say over

Speaker 3

the next 3 or 5 years, I'd be curious to hear what the opportunities you see for MELI that you're personally most excited about still? Thank you.

Speaker 6

Hey, Andrew. How are you? It's good to be here. Yes. We are really happy the way the business has been evolving the last 24 months at least, really growing very nicely, gaining market share And lately also gaining scale and increasing margins.

Speaker 6

As you know, we don't guide, but there are many exciting things going on, Particularly, obviously AI that hopefully will enable us to provide our users a better experience, Enable us to launch innovative ideas and also scale and gain efficiencies, whether it is in customer service Or whether it is in fraud prevention or whether it is in the way our developers, 15,000 developers Go about developing and performing quality control, etcetera. So obviously, Looking forward for the next 3 years, I think that's a key thing to look into.

Speaker 2

Hello. Hi. Our next question comes from Irma

Speaker 7

Mark is also taking advantage of you joining the call. If you're looking at the KPIs that determine compensation across The exec team or the leadership team, how do you think these will evolve from here, again, thinking maybe over a multiple year basis? And asking this same question maybe in a slightly different way. Are there any incrementally new KPIs to watch for as you go into this next

Speaker 6

So obviously, we try to compensate our myself and the key employees, basing long term Results, not in quarterly or even yearly. Actually, our long term retention program is a 6 year program. And obviously, we are in a very dynamic environment and a very dynamic business. If you look at Marconi, 6 years ago, Both in terms of scale, but also in the scope of things that we do and where we are today, Extremely different companies and I expect that to be the case in the next 6 years, whether it is in Fintech that we are moving into Insurance that is already a business that has gained relevance and scale, whether it is assets under management that is growing So strongly across all of our geographies, whether it's our credit card business that didn't exist a few years ago and it's a very sizable business or Our overall credits business, so obviously and there are new businesses that are coming along and that we expect them To gain scale and scope and as they do, obviously, they will have an impact in our results And in our compensation and in the KPIs, whether it is Mercado Play, which is our advertising supported streaming Operation or whether it's CLIFS, which is our short videos launch, which both of which are Really gaining really nice traction.

Speaker 6

So obviously, there are many things that we're doing. And as they gain scale, they become important in terms of KPIs and also in terms of results and compensation. I don't know if that answers your question, Irma.

Speaker 7

Yes, I think that partly answered it. Thank you.

Speaker 6

Thank you.

Speaker 2

Stand by for our next question. And our next question comes from Marcelo Santos with JPMorgan. Marcello, your line is open. Please go ahead.

Speaker 8

Hi, good evening. Thanks for taking my question. I wanted to discuss a bit the

Speaker 9

profitability and margins. It was a very

Speaker 8

strong print that you had. Stability in margins, it was a very strong print that you had this quarter above the previous one. And in the previous one, you were indicating that you might give some back To reinvest in growth, but actually things improved from the previous quarter. So I wanted to understand what happened so that the improvement came and how do you This trade off going forward, there's something new element that allowed the trade off not to happen and you to grow and have margin at the same time. Just wanted to

Speaker 10

Thank you, Marcelo. It's Martin here. Yes. In fact, we did have a great quarter in terms of profitability, reaching 18% EBITDA margin coming from last quarter of 2016. I would say that most of the businesses and countries performed extremely well during the quarter, particularly the 3P marketplace That was the biggest contributor to margin improvements.

Speaker 10

Also the acquiring business, the credit business as well as the advertising business In that particular order also contributed to margin improvement. If we look at by country by country, most of the improvement come from Brazil, Where we improved 12 percentage points year on year and Mexico 6 percentage points year on year. And also we are gaining scale by growing as we did. We gained significant scale and we were able to dilute part of our costs, which we obviously managed with a lot of discipline. Having said that, we have been investing behind our business, which is the main goal.

Speaker 10

We think that we are in a we operate in an industry where we have a lot of There's an opportunity that we need to make sure that we continue to look at the long term prospects of the business. So we continue to invest in logistics Where we increased 6 percentage points of fulfillment penetration, we also in this particular quarter as we launched Meli Mice, We invested behind the brand to promote the new loyalty program. We continue to invest in the smaller countries like Chile and Colombia. We have a team of 15,000 developers that continue to build our product that we're investing on our own product. So again, we are managing the business not to a particular target, margin target, but we're managing for the long term.

Speaker 10

So this quarter was a very good quarter, Not only because we improved the margins, but also because we grew with gaining market share, in particular in Brazil and Mexico.

Speaker 8

Thank you very much.

Speaker 2

Standby for our next question. And the next question comes from Maria Clara Infantosi with Itau BBA. Maria Clara, your line is open. Please go ahead.

Speaker 11

Hello, everyone. Thanks for taking my question. I'd like to talk a bit About the credit business in Brazil, you mentioned that you just accelerated the penetration in a longer duration Consumer products here. Can you please elaborate on that? Should we expect a shift in LA's credit concession strategy in Brazil?

Speaker 11

And so far, how have you been perceiving the evolution of the credit quality of those new cohorts, please? Thank you.

Speaker 12

Hi, Maria. Yes, as we mentioned, We saw an increase in the spreads we're seeing in Brazil and therefore felt confident to increase the pace of Origination in our consumer business there. And we are so far, we're happy with the results we have seen. We're continuing to accelerate the And we have also increased the pace of issuing credit cards in Brazil for the same reason. We are encouraged by the results we are seeing And how every time we create a symbol, we have better credit scoring and better solutions.

Speaker 11

Perfect. Thank you so much.

Speaker 2

Stand by for our next question. And it comes from Kyle Pratow With U. S. UBS. Kyle, your line is open.

Speaker 2

Please go ahead.

Speaker 5

Hello, everyone. Good evening. Thank you for taking my questions. My question is also on the Fintech business, please. You mentioned during the presentation the importance of the credit card strategy to be the main financial provider of choice Of your user, so in light of this, my question is, out of your almost 50,000,000 unique Fintech users, How many clients see Ricardo Fargo as a principal digital account nowadays?

Speaker 5

If you have some percentage of principalities that you can share And how much do you think you can achieve in the future, please? Thank you.

Speaker 12

Thiago, we have not disclosed in the past by Principality. What we have disclosed and this continues to be the case When we look at all of our users in a given country, particularly in Brazil, which is the one country where we have more of our credit portfolio And on more of our credit cards launch, what we're seeing is a continuous increase in the amount of products our users are using And in the availability, not only of consumer grades, but also of credit cards and these 2 together with asset under management, which Growing near triple digits in Brazil and Mexico and over triple digits in Argentina are, I'd say, A key component of a user becoming principal. So all of the metrics are going in the right direction. The other one is TPV generated both by a credit card and a debit card, but we have never disclosed the principal liability measure.

Speaker 5

Okay. Thank you very much. And just to follow-up, my last question is still on the credit card business. How are you seeing the discussion about the change in the framework of credit cards in Brazil nowadays? And what could be the impact on your side, not only in terms of potential P and L impact, but also in terms of your appetite

Speaker 12

Sure, Caio. So I think that This is not the first time that this is discussed in Brazil. I think the jury is still out. There are many things that have been discussed. One of them is having a potential cap on interest rates.

Speaker 12

Other one is probably limiting to some degree free interest rates. And the third one is probably putting a cap on the interchange. Each of those would affect us in different ways still very early. Until we have the details, we are not able to tell. We believe that Parcelainos in euros is a key driver for consumption in Brazil and probably that

Speaker 2

Please standby. Our next question comes from Scott Debit with Wedbush. Scott, your line is open. Please go ahead.

Speaker 4

Hi, thanks. I had two questions. Maybe a different spin on the first question, which is, Marcos, back in 2019, this was like a little over $2,000,000,000 revenue business doing like $1,100,000,000 in gross profit. And you're approaching like 7 times those levels now. So, the growth through the pandemic and comping the comps and everything else, it's Almost unprecedented and yet you're growing at rates that are similar to where you were growing back in 2019.

Speaker 4

So I'm curious, As you think about like what's transpired over the last 4 years, if you can kind of frame how you think about The mainstream in the e commerce, because of the pandemic and how that may have benefited a market like Latin America uniquely relative to other markets versus drivers of the business that were more company specific like improvements in the e commerce experience because of faster shipping times And things like that or the benefits of having a broader ecosystem with payments, just how you think of the components or the build of how this business has gotten So big, so fast and just keeps growing at this pace. That's kind of the first question. And then the second one, if you could just talk a bit more about the advertising Business in the quarter, I didn't I may have missed it. I didn't see the absolute amount. But if you can just talk about how that's

Speaker 6

Okay. Thank you, Scott. So, yes, obviously, COVID was in general around the world very good for e commerce companies The same thing happened in Latin America. We basically doubled during COVID, during those 2 years, 2021 But unlike what happened in other parts of the world, we Continue to grow at a very healthy rate once life resumed to normal. We're very happy about that.

Speaker 6

We think that we had done prior to 2019 a lot of things. We had invested a lot of Money and efforts and mostly technology. So COVID caught us at the right time in the right place. We were able to benefit, I think, more than other players in the region when that happened. And since then, when we Grew in scale, obviously, the power of the ecosystem is very strong and We continue to add features and functionalities and products to this ecosystem, advertising being one of them, Financing and the credit cards being another one, insurance being another one.

Speaker 6

And more recently, all the content plays, whether it's our partnership With Disney and other great content providers that we are distributing through Melemies or whether it's Mercado Play Whether it's our clips. So we continue to add features and functionalities and products and brands. And I think We have created something that is pretty unique in the region and around the world and each part strengthens the other. And we have a lot of scale. As you mentioned, we are 7 times the size we had a few years back.

Speaker 6

And more importantly, our growth rate is still very healthy. And we have a very strong balance sheet and we intend to continue Innovating, continue investing and continue focusing in the next 5 to 10 years and not in the next 3 to 4 quarters. And then Ariel can give you more background on advertising.

Speaker 13

Hey, Scott. Ariel here. So ads continue to grow well. We grew about 70% in revenue this quarter for the 6th consecutive quarter. With no major changes in strategy, we continue improving our product with feedback from advertising and promoting our solutions to different segments Of sellers and brands, product ads continues to be the main driver of growth, specifically the self-service But we are seeing more and more traction from other segments as well.

Speaker 13

Overall, We had a quarter with 1.7 percent of penetration of ads as a percentage of GMV, but I think it's worth highlighting the case of Argentina. So structurally, given market dynamics, Argentina has a lower ad penetration. And if you were to factor in there the fact that Inflation makes it even harder for advertisers to follow-up our GMV growth and also the effect of having A bit lower demand from advertising in Argentina because of structural context of more out of stocks and some other effects. It's worth saying that if you were to take out Argentina of the equation, penetration of advertising in our GMB would be roughly Close to 2%.

Speaker 4

Thank you both. Great quarter.

Speaker 2

Our next question comes from Melissa Bune with Bank of America. Melissa, your line is open. Go ahead.

Speaker 14

It may actually be Bob Ford, but good evening everybody. Congratulations on the quarter and thank you for taking my questions. How much of the Brazilian GMV growth is coming from markets where you now have a distribution center and faster Shipping within Brazil where before you were sending that from Sao Paulo or a more distant location. And then what percent of GMV is now being delivered On a MELI delivery day, and where do you expect that to stabilize as we move forward? And then lastly, can you discuss your use of AI in search

Speaker 13

Hey, Bob. This is Ariel. Thanks for your questions. I think we don't typically disclose demand data based on geographic segmentations or even logistics methods. But I would say more and more, we are trying to grow on both of the segments that you I've highlighted in your first two questions.

Speaker 13

So we are being proactive in trying to gain traction and market share in some of the regions Where our market share today is underrepresented, that means that we do see increased demand coming from areas that are more far away From our fulfillment center, still the main capitals and cities of Brazil do concentrate a big share Of our demand. Kind of same thing happens with Maili Delivery Day. It's still super early days, so not many Data or not much data to be shared on that regard, but I do want to say that It's slowly gaining traction, of course, aided by the launch of MELI MICE in Brazil and in Mexico. So more and more, We are seeing consumers actively choosing their mail delivery day as a way to receive their packages. Last question in terms of AI and search, we are working on that.

Speaker 13

I mean, we are putting a lot of effort into Building solutions around AI, I think we don't have much to disclose as of now, but Search, reviews, questions and answers, buy box and products, CX, as Marcos was saying, copilot for our developer. We're looking at the broad range of AI uses for MercadoLibre to boost consumer demand and efficiency and we're happy with the progress that we had So far, but not much to be

Speaker 12

said yet. And building on that, we have been using AI for a long time now for many, many years, Both in terms of fraud prevention and credit scoring, both doing instances, they are pretty much use cases which are ideal for AI Because we have, in the case of fraud prevention, millions of transactions every day and with a clear outcome, either fraud or not fraud. So with the right variables, we can build a very strong model that helps us predict and have really best in class flood prevention. And with that With the knowledge and given the experience we have been building on grades, we have also been our build our credit scoring models leveraging the AI.

Speaker 14

Makes a lot of sense. So it's followed. And it seems like with the larger data lakes, faster processing speeds, more sophisticated LLMs, It just gets better. And then, Ariel, just to follow-up, can you comment a little bit in terms of where you do have consumers choosing a delivery day, Are you seeing materially improvements or materially improved densities and improvements in terms of average shipping costs? Or is it still literally

Speaker 13

to discuss? Yes. So I think it is early to discuss. We are seeing some efficiencies in our operations driven by the fact that we can consolidate shipment and take advantage of some of Our idleness, when we operate, I think scale in or density in distribution, I believe it's too early. So again, I'm sorry for this, but not many details to be shared.

Speaker 13

I would say The variables are moving in the directions that we expect, but too early to share numbers behind that.

Speaker 14

Understood. Thank you very much.

Speaker 2

Thank you. And our next Question comes from Martin Fong with BTIG. Martin, your line is open. Please go ahead.

Speaker 15

Good evening. Thanks for taking my questions and congratulations on the great quarter. I'd like to ask Maybe a 2 part question on cross border. So in Mexico, I think your shareholder letter cited you grew very strongly there, which is interesting because I think Timu only recently entered the country and is also seeing some strong adoption. So could you just kind of discuss How you see the cross border market in Mexico evolving?

Speaker 15

Is it that Tmoo's entry is actually growing the pie for everybody. And the second part of the question is, how might this inform your strategy in Brazil, As I understand, your cross border penetrate or the mix relative to your GMV is very low, but that presents an opportunity for you. And then I have one other question.

Speaker 13

Thanks, Marvin. So I'd say before going into the details first and foremost, over the last 24 years, we've been always competing with players From all over the world. So in a sense, we are used to having new entrants, trying to get a buy of Latin America. We've seen Temu get into Mexico in particular in May more or less. We've seen them making progress in app downloads and monthly active users.

Speaker 13

They seem to be spending a lot of money on marketing on social media, directed consumers In trying to download their app, we are obviously monitoring that closely, but our data suggests that There is a bigger overlap between their business and the one with other cross border platforms. Our business in the meantime continues to perform really well as shown by the acceleration of items sold to 38%. Unit growth has been strong across the board, including Categories where some of those players are focusing on and all ASP ranges. And our competitive advantages remain untouched, I would say particularly logistics, which enables us to deliver fast shipping and payments, which allow us To provide attractive financing to our users. So in the end, our playbook remains the same.

Speaker 13

We continue strengthening Our business with more sellers, more brands, more assortment, more financing, faster delivery, while we also continue investing in improving our own Cross border trade capabilities and also through Melimas, we think we are Also now offering free shipping on lower ticket items, which was not the case in Mercado Libre up until 2 months ago. Moving into the second part of the question, which is Brazil. I think REMSACONFORME is Still too new. So it's hard to say. We have applied to the program.

Speaker 13

We got accepted just a few weeks back. So not so much To share, but we remain confident, as I was saying, for Mexico that the combination of fast deliveries, local payments and financing, The strong brand buyer trust will continue to differentiate MercadoLibre versus our other companies. And simultaneously, if the new regulation Alauso, we will continue building capabilities as to be able to compete in cross border in Brazil as we are doing it today In Mexico, in Chile and Colombia.

Speaker 15

Terrific. And just my follow-up, bigger picture question, I think it was a Strong quarter in terms of acquiring more FinTech active users. And I was just curious, Beyond what you wrote in the shareholder letter, could you elaborate on what's driving that? Was it more internal initiatives? Or do you I think it was some components just from the broader economy and whatnot.

Speaker 15

So just would love some color there. Thank you very much.

Speaker 12

So I think there are There are factors contributing to that. One of those is our remunerated account, Conta Remunerada, both in Argentina and in Brazil, Which is doing very well. What we pay our users depends on what the risk free rate is in each of the countries. In Brazil, it's around 13%, in Mexico, around 10%, and Argentina, given recent spike in inflation and interest rate, it has been close to 100%. So this gives users a huge incentive to move out of banks with savings account, which many times pay 0 or only pay after 30 days I moved their money into Mercado Paulo.

Speaker 12

I think that has been part of the driver. Another part of the driver, I think, has been, as we were saying, the The increased availability and offering of credits that we're giving, in that case, I would say it's mostly in the case of In Brazil and in Mexico, not so in Argentina, where we have been cautious given this rate environment.

Speaker 15

Thank you very much. Appreciate your color.

Speaker 2

And our next question comes from Trevor Young with Barclays. Trevor, go ahead.

Speaker 15

Great. Thanks. On the MeleMy subscription plans, is there any color that

Speaker 16

you can share on initial subscriber counts here in the first four 2 or 3 months, excuse me. Is that ramping as you expected? And then second question, can you give us an update on where we are in terms of logistics monetization? Realize you've indicated it will be gradual over a number of years, but just any update over the last few quarters would be helpful. Thank you.

Speaker 10

Thanks, Rob, for your questions. Martin here. I think it's too early to tell us. As Harry mentioned before, we launched this program a few months ago. We're seeing good engagement with the program as well as with the Medi Delivery Day, It's too early to share numbers in terms of adoption.

Speaker 10

I think in the coming quarters, we'll be sharing more information. But we're excited about the program.

Speaker 13

Harry? Yes, Trevor. So on monetizing shipping, I think our Q3 results and our year to date results So it showed that we have been able to pull levers to offset some of the headwinds that we have in shipping from higher inflation rates in the logistics environment And higher fulfillment penetration, that has helped us keep our total net shipping cost over GMV broadly stable In 2023, I mean, we still think that we have plenty of opportunities to improve our net shipping costs by focusing On productivity, efficiency, scale benefits, etcetera. But we also want to incentivize more sellers to use Our fulfillment solutions, particularly in Brazil. So in all, there is potential to monetize fulfillment, specifically in the future if we decide To do so, but as we have always said, we are not in a rush to do that.

Speaker 13

We are always mindful of what monetization Might imply for consumer prices and competition, and we are happy with the way we are managing our P and L in general.

Speaker 16

That's helpful. Thank you both.

Speaker 2

Thank you. And our next question comes from Jeffrey Elliot with Autonomous. Jeffrey, your line is open. Please go ahead.

Speaker 17

Hi, Laura. Thanks very much for taking the question. I wanted to Touch on the offline POS business in Brazil. It looks like FinTech Services take rates We're down a little bit. We saw that you rolled out some pricing there that is Cheaper for the merchant, but clearly less beneficial For you, it looks in terms of the MDRs that you're charging and the publicly traded competitors.

Speaker 17

Obviously, the stock prices are A fraction of what they were a couple of years ago. Can you just remind us how does that offline POS business fit With the rest of Meli, what is the synergy there? And then if you're thinking out 5 years, 10 years. How is that going to fit into the rest of what you're doing? Does it still really make sense for that business to be Focus or is it something that could become smaller over time or maybe doesn't make sense to keep over time?

Speaker 17

Thank you.

Speaker 12

Hi, Geoffrey. We see the BOS business, the in store business As a big part of our FinTech offering, we allow merchants to with Mercado Payo online offline. Some are very small merchants, some are SMBs and even some are larger merchants. We have been able to provide this solution in a, I'd say, in a very profitable way and we continue to do so. The profitability behind our POS business has been very good throughout the quarter.

Speaker 12

We have seen some have to make some changes As we move up market, some of that is related to what we saw in terms of changing that go to market strategy. As we attract larger merchants, In some cases, what we do is we offer lower processing fees, but we get on the other hand, it's better for the merchant because they get lower As you said, but it's good for us too, but because what we see is higher activation rate and higher TPV per device. So not necessarily We're getting a lower margin in terms of margin on top of TPV, but we're getting a larger margin third party buys sold. And so I think that this continues to be very good for us. I would say I'll add to that on the POS front in this quarter.

Speaker 12

We have been changing making some changes beyond pricing in terms of our go to market strategy, And we are very encouraged by the results we're seeing, again, in terms of activation and TPV Pro Device.

Speaker 17

And the synergy with The rest of the business with this POS machine operation, where is that?

Speaker 12

So we are offering, I would say, on two sides. On the one hand is many merchants, They sell online, they sell offline, they're through to MercadoLibre, they sell through their POS. So there's a synergy there and having Pretty much all of their sales coming through Mercado Pago to them. And on the other hand, many of these Merchants, in some cases, are individuals, and we are able to cross sell different products to them and offering more banking products to them, So we offer them it's not only the device we're giving them and the proceeds we're giving them, we're offering them a credit They invest in Cuentra de Monerada. We have started to offer them a credit card to individuals based on the business they run.

Speaker 12

And so Really, it's part of our banking solution, and there are many products we're offering to them. There's a good synergy between all of the rest of the banking products we offer.

Speaker 17

Great. Thanks very much.

Speaker 2

Thank you. And our next question comes from Neha Agarwala with HSBC. Neha, your line is open. Please go ahead.

Speaker 18

Thank you so much and congratulations on the strong quarter. Just two quick questions. First on the OneP business, we talked earlier in the year about some acceleration, gradual acceleration in the OneP business. How is that going? And what is the vision going forward?

Speaker 18

And my second question is on the credit quality. There was a little bit of an uptick For the early delinquencies, could you explain to us where is that coming from despite some pickup in the loan growth? Maybe Mexico is not doing as well. So specifically if you could talk a little bit about the early day increases and about how the portfolio in Mexico is performing, That would be very helpful. Thank you so much.

Speaker 13

Hey, Neha. This is Ariel. So, 1P grew 58 percent year over year on a consolidated basis, if you were to look at this by country, Brazil actually grew Considerably more than these. So the way we think about it is that 1P remains a strategic priority for us. We see this as a key lever to compete and gain market share in certain categories, consumer electronics being one of the Clearest probably examples of that.

Speaker 13

We are very happy with the transformation of our 1P business over the last 12 months. We've had major improvements In our ability to manage pricing, promotions, stocks with the help of technology. We have also seen significant improvements In the way we connect and relate with suppliers and the way we negotiate with them, we think that all these progress are structural gains That will put the business on strong footing for long term growth and market share gains. So we remain optimistic and keep investing behind that business.

Speaker 12

Neha, and with regards to NPLs in Mexico, Let me split that in 2. On the merchant side, NPLs have remained very flat and the spreads are very healthy. So those are very good results And we have been able to increase origination. And then on the consumer side, actually, they have increased a little bit, but by design, what happened is Our spreads are very healthy, so we decided to take a little bit more risk and to increase the amount of origination and that usually comes with Slightly higher NPLs, but those have been priced in, in the rates we are offering. So spreads continue to be super healthy in Mexico, And that was part of the strategy to grow faster even though NPS may increase, it's priced in already.

Speaker 18

Perfect. If I can follow-up on the 1P, could you give us some numbers regarding the penetration as percentage of GMV Where it was at the end of last year where it is now currently just to get an understanding of the pace of growth? Thank you so much.

Speaker 13

Yes. So penetration keeps improving, increasing, particularly in Brazil. We're in the low Our mid single digits around 3% or 4% penetration. Again, we are extremely with the progress that we've made so far and we'll keep investing in growing the business, while we continue also improving our profitability, Which has been the case this quarter.

Speaker 2

Stand by for our next question. And it comes from Joao Suarez With Citi, Joao, your line is open. Please go ahead.

Speaker 19

Thank you. Hey, everybody. I have two questions here. 1, The first one, I just want to hear a little bit about Black Friday preparations. We've been hearing a lot of news, How excited the company is?

Speaker 19

And maybe talk a little bit about any expectation in terms of the winning categories here? So In granularity in terms

Speaker 9

of your

Speaker 19

expectations. And the second question is talking a little bit about the 1P. Just to follow-up on that, With regards to profitability, how that you talked about in the press release about improving profitability. So I just wanted to hear a little about Where we are right now and where do you think we could be? I know the company doesn't guide, but any qualitative message on this would be appreciated.

Speaker 19

Thank you.

Speaker 13

Yes. Thanks Joao. This is Ariel. So Black Friday penetration Keeps us busy for sure. We are extremely excited with the way our company has been performing and we think and are expecting To have a great big season, all of our teams, commercial, marketing, shipping, they are all preparing They work as to continue with the inertia that we had this quarter and this year and having a great event Both in Black Friday, Christmas, etcetera, we know this is a relevant moment for our consumers and we want to be there to satisfy Regarding profitability, as I was mentioning before, we see very strong profitability improvements, particularly in Brazil.

Speaker 13

I I think we are getting smarter in the way we buy, so having better negotiations which give us better terms. We're getting better at managing inventory. So our days of stock are getting better and hence our working capital as well. We're getting also smarter in the way we price the items we sell. And we're also working a lot In taxation efficiency, which is key to compete in Brazil.

Speaker 13

So again, we are moving and pulling all the levers as to make This strategic and profitable business for the company, we are yet not there, but we will continue To be working in that direction.

Speaker 19

Perfect, Daniel. Thanks.

Speaker 2

Please standby for our next question. It comes from Deepak Mathivanan from Wolfe Research. Deepak, your line is open. Please go ahead.

Speaker 9

Great. Thank you so much. Hey, guys. Couple of questions. So first, can Can you give some additional color on the improved loyalty program?

Speaker 9

What are you seeing in the early days in terms of frequency, average spend compared to a non member from the I know it's in early stages, but any color there would be great. And then the second one, the Central Bank interest rate is coming down in Brazil consistently. We just saw another cut today. Can you remind us the implications of this to your business on profitability? I guess, I mean, We can wait for the queue to see the financing revenues, but wondering if there is a way you can help us the benefits to Ebix from this dynamic in the last few months.

Speaker 9

Thanks so much.

Speaker 13

Hey, Deepak. Ariel here. So we don't disclose specific data on MeliMIS yet, but I would say, on the one hand, Our old loyalty program L6 already generated an increase in frequency and GMV per buyer Whenever they decided to subscribe to our program, we are seeing the same or an even better trend With the new subscribers who are joining our Melemies program and also with the existing subscribers We are getting used to the new benefits and the new value proposition of our program. So general terms, We are excited with the engagement that we see in the platform. Again, too early to be seen.

Speaker 13

Communications has just Our product keeps evolving, so we have many, many things to continue working on as to make Customers even more aware of all the benefits and the way they can interact with that program. So excited, but I don't know, Hopefully, we'll be able to share more details in the next call.

Speaker 12

And with regards to Interest rates coming down in Brazil, it tends to be good for us, I'd say for several reasons, mostly on the marketplace Where interest rates are lower, we tend to see more transactions on those transactions where we charge an interest rate. And then for what we offer as parcel hours in euros, Then the price tends to be the cost tends to be lower for us, so profitability improves. And then on the FinTech side, I would say it's also positive, but closer to neutral because many times what happens is Competitive pressures makes that we have to pass those savings to merchants. That has been the case when rates increased and will probably be the case So overall, it's positive for us.

Speaker 2

Okay. We have Thank

Speaker 9

you so

Speaker 2

much. Our last question comes from William Tang With Susquehanna International. William, your line is open. Please go ahead.

Speaker 20

Hi, guys. Thanks so much for squeezing me in here at the last minute. I just wanted to quickly ask on credit. So last quarter, I think there were comments about expanding lending into Mid risk segments, no higher risk segments just yet. So just wanted to ask what were you seeing there?

Speaker 20

Were there any surprises or adjustments that you encountered? Thank you.

Speaker 12

Exactly what we're doing, we have been increasing originations in Brazil, both on the consumer credit side and on the credit card side. On the consumer credit, probably what's happening is, to some degree, we are remember, up until a year ago, we were issuing more credit, then we became more restrictive. So You don't yet see this impact in terms of the total portfolio, but originations are up. And we are expanding, as you said, into the mid risk segment. And also on the credit card front, we have been able to expand our offering and that's why we are issuing more cards Also by addressing this mid risk segment and incorporating more information from third parties into our models.

Speaker 2

And this concludes the question and answer session. I would like to turn it back now to Martin De Los Santos,

Speaker 10

Thanks everybody for your questions. I'm looking forward to

Speaker 2

Thank you for your participation in today's conference. This does conclude the program and you may now disconnect.

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Key Takeaways

  • MercadoLibre delivered a strong Q3 performance with revenues accelerating over 60% in Mexico and around 40% in Brazil, resulting in record operating income that more than doubled year-on-year and expanded margins.
  • Commerce momentum rose as GMV and items sold accelerated across major markets, aided by 48% fulfillment penetration and faster delivery promises, helping achieve a record 50 million buyers and market-share gains in Brazil and Mexico.
  • The Fintech arm saw rapid adoption of the digital and remunerated accounts—especially in Brazil and Argentina—issuing over 1 million credit cards in Q3, surpassing $1 billion in TPV and showing improving NPL levels.
  • MercadoLibre relaunched its loyalty program Melimas with a simpler structure, free shipping on lower-value items, premium content bundles (Disney+, Deezer, etc.) and a new “Meli Delivery Day” option to drive engagement.
  • Continued investments in technology and AI are enhancing user experience and operational efficiency—powering fraud prevention, customer service automation and scalability gains in pricing, inventory and developer productivity.
AI Generated. May Contain Errors.
Earnings Conference Call
MercadoLibre Q3 2023
00:00 / 00:00