MercadoLibre, Inc.
Q4 2016 Earnings Call Transcript

Published: 24 Feb 2017

[Operator:]

Good day, ladies and gentlemen and welcome to the MercadoLibre Fourth Quarter 2016 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, Federico Sander. Please go ahead.

[Federico Sander:]

Hello, everyone, and welcome to the MercadoLibre earnings conference call for the quarter ended December 31, 2016. I am Federico Sander, Head of Investor Relations for MercadoLibre. Our senior manager presenting today is Pedro Arnt, Chief Financial Officer. Additionally, Marcos Galperin, Chief Executive Officer, and Osvaldo Giménez, Executive VP of Payments will be available during today's Q&A session. This conference call is also being broadcasted over the Internet and is available through the Investor Relations section of our website. I remind you that management may make forward-looking statements relating to such matters as continued growth prospects for the company, industry trends and product and technology initiatives. These statements are based on currently available information and then our current assumptions, expectations and projections about future events. While we believe that our assumptions, expectations and projections are reasonable in view of the currently available information, you are cautioned not to place undue reliance on these forward-looking statements. Our actual results may differ materially from those discussed in this call for a variety of reasons, including those described in the forward-looking 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 these measures to the nearest comparable GAAP measure can be found in our fourth quarter 2016 press release available on our Investor Relations website. Now, let me turn the call over to Pedro.

[Pedro Arnt:]

Thanks, Federico. Hello to everyone and welcome to our fourth quarter conference call for 2016. Let me start with a few comments on the exceptional full year 2016 that ended recently. As a pioneer and leader in Latin America when it comes to e-commerce and digital payments, we have been around for 17 years now, and last year was one of the most significant in terms of the quality and tangible outcomes of the work and level of execution that the entire team at MercadoLibre delivered, and as a consequence, our ecosystem of complementary services is as vibrant as it has ever been, and our businesses, both in marketplaces and payments wrapped up the year with revenues at multi-year highs in terms of volume, growth rates and market share gains. Successful items accelerated to 41% year-over-year growth, reaching 181.2 million units sold for the year. Gross merchandise volume rose 65% on an FX neutral basis, reaching $8 billion approximately. Total payment volume grew 93% on an FX neutral basis, reaching $7.8 billion, and representing almost 96% of our gross merchandise volume for the year, while total payment volume in transactions reached 73% growth year-over-year to 138.7 million payments processed. Finally, registered users were up 20% year-on-year reaching 174.2 million, after adding 29.5 million incremental users during the year. Looking back at the changes that we've made over the past four quarters that drove these results, the level of control over the customer experience that we are now able to exert with the advances that have been made in payments through MercadoPago, and logistics through MercadoEnvíos, is something that would have been hard for us to anticipate five years ago. The end-to-end e-commerce transactions that we can now offer leaves us in an excellent position to deliver on our promise of a best-in-class user experience for buyers and sellers. The vision we had set out of an enhanced marketplace with all the traditional marketplace benefits of value and liquidity combined with great customer experience through a closed loop of payments, credit and logistics, is certainly coming to fruition. A case in point of this has been the evolution of our Brazil marketplace during this past year, leading into the very strong fourth quarter that just ended. In each of the past four quarters, GMV growth on an FX neutral basis has grown north of 50% year-on-year, while units sold grew over 45% year-on-year over the same timeframe, all this in a market that, according to eBit WebShoppers research grew 7% in volume and 0% in orders. Top line revenue has been growing nicely as well in Brazil as revenues on an FX neutral basis accelerated for the third consecutive quarter above 60% year-on-year. And additionally, unique buyer growth and units sold per unique buyer have also hit multi-year highs in our Brazilian market. This strength was not limited to our marketplace business, as MercadoPago also had a record year as adoption of payments on our marketplaces continues reaching the stated goal of full addressable penetration in countries beyond Brazil. And additionally, our off-platform merchant service business keeps delivering very strong results as well, with total payment volume and revenues growing for the second consecutive year at nearly 100% year-on-year on an FX neutral basis. On the logistics front, we also made significant progress over the course of 2016. Throughout the year, we continue to carry out critical technical and operational capabilities in the development and management of warehousing and transportation systems, added additional carriers across multiple geographies, and began to successfully promote free shipping alternatives, all of these significantly contributing to the positive results I just outlined. It is also worth noting the strides we have made in customer experience during 2016 as we continue to improve not only response times, but also effectiveness across multiple channels with which we interact with users. As a result, we continue to witness improvements in Net Promoter Scores from one year to the next. So, as we advance into 2017, we are confident in continuing, and even accelerating, our investments behind the key initiatives that drove the success we had last year

[Operator:]

Certainly. Our first question comes from the line of Irma Sgarz from Goldman Sachs. Your question, please.

[Irma Sgarz:]

Yes. Hi. Good afternoon and congratulations on the results. So, first of all, I wanted to ask about the update on logistics and shipping initiatives in Brazil and you made some helpful comments early on regarding Argentina and Mexico, but I was just curious in terms of where you are at this point in terms of rolling out your own sortation centers and cross-docking merchandise through such sorting centers. And in that same context with the impending end of the e-Sedex product in Brazil, how will you encourage us to think about the tradeoff between passing that higher cost through to your customers and maintaining profitability and on the other hand maintaining the value proposition for both your sellers and your buyers. And I think you mentioned early in the call that you're always looking at sort of the rollout of and right rollout of free shipping and subsidized shipping initiatives. So I was curious how you would think about dealing with this environment sort of how much you think you need to absorb into your own margins and how much you can pass on to your customers? So, I'll leave it at that point and maybe then I have another follow-up. Thanks.

[Pedro Arnt:]

Hi, Irma. So...

[Federico Sander:]

Some of you will get us in ...

[Pedro Arnt:]

Sorry, Hi, Irma. So on logistics and shipping in Brazil and more specifically on fulfillment done by us and cross-docking, those initiatives are very important for us this year, but most of that work is still being done in-house. So in Brazil, we have one sortation center, we plan to grow that number over the next few quarters. And we haven't yet started offering fulfillment services. In Mexico, we do offer fulfillment since last year and that business is scaling. And in Argentina, as we noted, our cross-docking efforts account for about 30% of our shipping units and it's the country where we've advanced the most in terms of sortation. So Brazil is something that we will be very focused on for the remainder of the year, but still is very, very early stage. In terms of e-Sedex, I think, in general, what we're trying to accomplish here is how can we manage our cost base as efficiently as possible so as to offer the lowest price shipping and wherever possible free shipping to our users. So I think ongoing changes in cost that we need to then offset with more scale and better negotiations will be a critical part of how we have to manage the business going forward beyond what might happen in Brazil around the specific removal or non-removal of e-Sedex.

[Irma Sgarz:]

Okay, great. And if I – if we think about maybe the – how is the initiatives that you're planning to roll out the investments that you're making and these important initiatives in Brazil this year, when we think about that, how it sort of goes through your P&L and your cash flow and how that could be impacting either your margins or your returns, how you – should we think that this could be a near-term source of pressure, but longer term obviously it's an important investment to support the market share and growth or do you think you'll be able to offset that with others which is of cost efficiencies already at the start-out?

[Pedro Arnt:]

I think what we've learned is that free shipping or low-cost shipping is a fantastic driver of volume and customer management. And so, it's one area where we're comfortable if we have to invest margin in the short-term, because we really believe that it generates long-term returns in terms of customer loyalty, customer engagement, and just more volume. And we are more focused right now in continuing to drive top-line and hopefully continue to gain market share as we had this year. So it wouldn't be something that concerns us in terms of managing the financial model if we did see loss of margin as a consequence of being able to offer very efficient from a price perspective shipping to our users.

[Irma Sgarz:]

Okay. Thanks.

[Operator:]

Thank you. Our next question comes from the line of Robert Ford from Bank of America Merrill Lynch. Your question, please.

[Robert E. Ford:]

Thank you and good day, everybody, and congratulations on a very impressive quarter. Yeah, I was hoping if you might expand perhaps on the Net Promoter Score improvements in Brazil, and the time lag between side improvements and the acceleration that you've seen in unique buyer and item growth. And as you roll out those enhancements to new markets, what are you doing, if anything, to speed the process and perhaps accelerate user recognition of those improvements?

[Pedro Arnt:]

Hi, Bob.

[Robert E. Ford:]

Hey.

[Pedro Arnt:]

So in terms of Net Promoter Scores and improvements, I think the way we've tried to characterize it is as the enhanced marketplace has grown in the different markets, we have seen consistent improvement in our consolidated Net Promoter Scores over time. And perhaps more importantly, when you break down those Net Promoter Scores by different levels of adoption of the enhanced marketplace, so users who aren't using payments or shipping or credit and then those that are using two of those and then those that are using all three consistently as more services are used, the Net Promoter Scores increased. As a matter of fact, when we look at the Net Promoter Scores of the full ecosystem, those become almost best-in-class when we benchmark those against competitors. So it makes sense that as we continue to drive the enhanced marketplace and we continue to focus on all the improvements we're talking about that hopefully we should continue to see that same kind of NPS improvement going forward. I don't have a specific answer for you what the timeline is, but again, the improvements in NPS have been consistent year-over-year for the last few years. In terms of the other markets, I would say that we moved as fast as we can. And that obviously as you replicate a lot of these new products or services in new markets, you come with the accumulated learning of having built the technology and the product elsewhere. So for example, when we look at the adoption of shipping in Colombia, it's been extremely fast. If we look at payments in Uruguay, that's been extremely fast. But I wouldn't necessarily say that there are specifics that we're working on to go faster, we always try to go as fast as we can. And we also recognize that sometimes these things take a little bit longer, we have to iterate on what gets initially rolled out. And we have confidence that over time, the results begin to follow, we've seen that in Brazil, we've seen that in Mexico and we should see it elsewhere.

[Robert E. Ford:]

That's very helpful. Thank you again.

[Operator:]

Thank you. Our next question comes from the line of Marcelo Santos from JPMorgan. Your question, please.

[Marcelo Santos:]

Hi, good evening. Thanks for taking the question. My first question is about mobile, so we're seeing very strong development in that front. I just wanted to get some color about the profile of the new users that are coming through mobile, if there is different behavior, purchasing behavior, different conversion, so just a little bit more color in there. And the second question would be about your R&D expenditure. So you say that you're prepared to make even more investments this year, so I just – if you could outline briefly what are the key areas of development and which initiatives are getting most of your engineers' time? No further questions.

[Pedro Arnt:]

Hi, Marcelo. So, in terms of mobile, we haven't really disclosed any significant differences between mobile and non-mobile cohorts. I think when you look at some countries where more than half of the traffic is already mobile, it really is more about the existing user base moving over to mobile by and large. And I think everything we've seen there is positive. In terms of R&D, just a couple of things. What we were trying to highlight is we have continued to very aggressively invest behind growing our engineering talent pool and the number of engineers, that's really where most of our R&D spend comes from. We grew that by 43% in terms of head count last year, and despite that we are able to scale the business in large part also aided by FX since a lot of our development centers are in Argentina. So it was one example of a confluence between positive cost out of Argentina and still being able to meet our growth and investment targets without losing scale. So I think going forward, the more important thing is to understand that we will continue to invest in more engineering, it continues to be a critical area for us, and then depending, I think, on what happens on a currency front and given the level of revenue growth that we've been delivering that might still scale just because the revenue growth has been very solid. In terms of areas, it's the things we have been talking about and highlighted in the script. It's a focus on shipping and logistics initiatives. It's a focus on payments and the different areas of FinTech and credit and payment processing and offline mobile POS solutions for our businesses, customer service, and then continuing to find new avenues of growth on the marketplace.

[Marcelo Santos:]

Okay. Thank you very much.

[Operator:]

Thank you. Our next question comes from the line of Stephen Ju from Credit Suisse. Your question, please.

[Unknown Speaker:]

Hi, guys. Congrats on the quarter. It's Chris Hum (38

[Pedro Arnt:]

Hi. So, when we look at many of the areas that we think are driving the improved user experience like payments or logistics, more so than the traditional marketplace business, those have significant tie-ins to local players. So for each country that you operate in, you need to be plugged into the existing financial services system for payment, different banks, different funding sources, different credit sources. When you look at logistics for each different market in the region, you need to find multiple logistics providers where it be warehouse providers or shipping companies and you need to integrate your marketplace with their systems. So there is a lot of building of pipelines with the different ecosystem players that comprise our overall service offering that we do believe become a competitive advantage over time. We always say Latin American is a huge market, but it's not a single market like Europe might be. And so you need to replicate this market-by-market and it's something that we've been doing over the last multiple years and any new entrant would have to build from scratch. So, yes, I do think it's a very relevant piece of the competitive mode that we're trying to build.

[Unknown Speaker:]

Okay. Thanks, guys.

[Operator:]

Thank you. Our next question comes from the line of Brad Erickson for Pacific Crest Securities. Your question, please.

[Brad Erickson:]

Yeah. Hi. Thanks for taking my questions. I guess, to start given what you're finding thus far with the free shipping in Mexico, how should we handicap the likelihood that, that could become a strategy at some point in either Brazil and/or Argentina, and I guess would competition be the biggest determinant of that strategy and how should we be thinking about that?

[Pedro Arnt:]

So, as you know, we don't offer guidance going forward, but I think we've been quite clear about the fact that we see very positive results out of offering either subsidized or free shipping and it's giving us very solid results in terms of Mexico. And so we will look to see how we can replicate that in other markets hopefully getting similar results to the ones we're seeing in Mexico. Like I said to the answering the first question, I think going forward for us, clearly shipping is a key component of the value proposition that we want to build and we will have to be able to find the right balance between managing cost and offering those service to our users. So, yes, you should expect that to get offered in more countries.

[Brad Erickson:]

Got it. And then second, you mentioned the pullback in brand marketing spending that led to some of the leverage during 2016, given where you are growth wise meaning very, very high levels obviously, how are you viewing sort of general ad spending that drive further growth or do you feel comfortable of where you're at that the growth is more sustainable amid, say, lower sales and marketing spending levels? Thanks.

[Pedro Arnt:]

So, historically, we've focused more and we believe there is more long-term value to create from focusing on product and user experience, which doesn't mean that we won't continue to invest behind the brand and at the rate that our revenues are growing even if you're investing similar levels as a percentage of revenue, that's a significant increase in the marketing budget from one year to the next. So, I think we're comfortable with the marketing budget we have in terms of user acquisition that might vary for some of the newer products we have and it's something that we look at in a fluid manner. But we don't have a sense that we're under-investing in marketing and we feel that there are many other areas where we can invest in that might have a more significant impact on our users.

[Brad Erickson:]

Got it. Great. Thanks.

[Operator:]

Thank you. Our next question comes from the line of Tom Champion from Cowen. Your question, please.

[Thomas Champion:]

Hi. Good afternoon. Relative to the marketplace business in Argentina, can you talk a little bit about the user and merchant experience improvements since moving to mandatory MercadoPago payments? And then, I'm curious if you could maybe just talk a little bit about the off-platform opportunity for Pago, and maybe your thoughts on the proliferation of POS devices as a driver? Thank you.

[Unknown Speaker:]

Hi. This is Osvaldo (44

[Pedro Arnt:]

Great. And then, in terms of mandatory adoption of payments in Argentina, as we highlighted, our Argentine business has slowed a little bit. There were other factors also that might have influenced that and we had some issues with the strike with some of our logistics providers last quarter. So no reassessment of the long-term importance of having compulsory Pago and I think we need to continue to focus to see how we can reignite growth in our Argentine business, but we actually think like I said before that just like in the other markets, integrating payments on all marketplace purchases is very good for the user experience and will generate improved velocity of trade over the long run.

[Thomas Champion:]

Thank you.

[Operator:]

Thank you. And our next question comes from the line of Richard Cathcart from Bradesco. Your question, please.

[Richard Cathcart:]

Hi, guys, good evening. I just wanted to pick up on the question that Irma made at the beginning of the call. And you said that you got one sortation center already up and running in Brazil and I was just wondering if you could give us a bit more information on the results of that and what you've learned so far, are you getting practical (46

[Pedro Arnt:]

Great. So, in terms of results, I think the one sortation center we have represents a small overall volume of our shipping in Brazil, low single-digits. More importantly, it's allowed us to focus that operation around building the TMS, the transportation management systems, and the warehouse management systems that we believe will be core assets and so we're building those in-house. Now that we have the transportation management system up and running, we're able to start deploying that across more sortation centers and eventually with the warehouse management systems finished, we can start the fulfillment offering as well. We haven't communicated or signaled any specific date as to when that will happen, but they are ongoing projects. And yes, the endgame of that is certainly that we should be able to deliver faster shipping and also over time cheaper shipping because it allows us to optimize different routes and to break up first mile long haul and last mile. So we believe that both fulfillment and sortation will be very strong complements to the existing drop shipping solution that we have in Brazil.

[Richard Cathcart:]

Okay. Thanks very much.

[Operator:]

Thank you. And this does conclude the question-and-answer session of today's program. I'd like to hand the program back over to Federico Sander for any further remarks.

[Pedro Arnt:]

Great. So, thanks everyone for listening in. For us, it's back to work, lots to do in 2017 and we look forward to updating you again next quarter. Thank you.

[Operator:]

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.