Good day, ladies and gentlemen, welcome to the MercadoLibre Q1 2018 earnings conference call. At this time, all participants are on a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. If you require operator assistance during the program, please press star then zero on your touchtone telephone. As a reminder, today's conference is being recorded. I would now like to introduce this conference call, Mr. Federico Sandler. You may begin, sir.
Hello, everyone, welcome to the MercadoLibre earnings conference call for the quarter ended March 31st, 2018. I am Federico Sandler, 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 Gimenez, 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, product and technology initiatives. These statements are based on currently available information and are 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 statement and risk factor sections of our 10-K and other filings with the Securities and Exchange Commission, which are available on our investor relations website. Finally, I would like to remind you that during 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 on our first quarter 2018 earnings press release, available on our investor relations website. Now, let me turn the call over to Pedro.
Thanks, Federico. Hello, everyone, welcome to our first quarter conference call for 2018. Let me get us started off today by laying out a three-point summary of the highlights from this quarter. First, most importantly, our key volume and operational metrics across businesses continue to deliver above-market performance, sustaining some of the fastest rates of growth we have seen in the last few years, despite having the Easter holiday season that took place in the first quarter this year versus having occurred during the second quarter last year. Hence, we continue to build our position as a preferred commerce and payments provider for Latin American consumers.
Second, our U.S. GAAP revenues, as reported under new revenue recognition standards that came into effect during the quarter, will show slower growth than the just-mentioned underlying business volume metrics as a consequence of free shipping investments being netted out of revenues rather than as costs of net revenues from this year onwards. Third, due to unplanned cost increases from shipping carrier partners in Brazil, our margin structure for this quarter, that is already the seasonally weakest quarter of the year, came in below our expectations. Despite accounting and cost structure modifications, we remain encouraged by the sustained pace of growth in business metrics, as I'll detail in a second, and are confident that we can optimize our pricing and cost structures to return our financial model to the appropriate profit level while continuing to solve primarily for our objective of share gains, volume growth, and scale competitiveness.
With that, let me now walk you through a detailed overview of the business metrics I've just alluded to, starting with marketplace key business trends by geography. Our Brazilian business grew units sold by 68% and GMV on an FX neutral basis by 71% year-on-year as our free shipping program, which has already reached 62% of total sales measured by volume, continues to drive the business, also complemented by incremental customer acquisition spend as we continue to observe improvements in customer lifetime values that encourage us to invest more aggressively in customer acquisition. It's important to highlight here that we have been able to sustain yet another quarter of historic market-leading growth rates despite increasingly tougher comps. Additionally, Brazil has delivered record buyer engagement in terms of items sold per unique buyer, accelerating for the fifth consecutive quarter.
Moving on to Argentina, where the business continues to recover both from a units sold and GMV perspective. On an FX neutral basis, gross merchandise volume grew above 50% for the second consecutive quarter, reaching 53% growth year-on-year. Items sold delivered equally solid performance, growing 44% year-on-year, one of the highest growth rates in five quarters. This was in part aided by easier year-on-year comps, but also due to the positive impact of the launch of our free shipping and loyalty program, Mercado Puntos. Mexico still yielded the second highest growth rate ever from a GMV perspective. Mexican GMV grew on an FX-neutral basis at 77% year-on-year, while units sold also did so at an even stronger 106% year-on-year. This is the third consecutive quarter of triple-digit growth in units sold for that geo.
We also saw record buyer engagement metrics in Mexico, even within the previously mentioned context of having lost an estimated six percentage points of GMV growth due to the Easter holiday that happened in March this year. We are also encouraged to see significant acceleration in countries like Chile and Colombia, which are beginning to take shape as complementary engines of growth for the company. Chile grew units sold at its fastest pace on record, accelerating to 83% year-on-year, while GMV on an FX-neutral basis accelerated to 58%, boosted by the combination of our free shipping and loyalty programs and increased marketing investments. Exiting the quarter, free shipping had already reached 77% of total merchandise volume sold. Colombia is following suit as well, delivering the fastest pace of gross merchandise volume growth in the past six years, which was, on an FX-neutral basis, 44.6%.
On the back of the success of free shipping and higher investments in customer acquisition. It is not a coincidence that within less than a year of launching in Colombia, our free shipping program already covers 50% of total gross merchandise volume sold. In line with that, units sold accelerated to an all-time high of 68% year-on-year for the first quarter of 2018. As a result of these solid results by segment, consolidated marketplace KPIs delivered yet another quarter of great performance across the board. During the first quarter of 2018, on a consolidated basis, units sold grew 51% to 80.1 million. Excluding Venezuela from last year's comp, now that we have deconsolidated that operation, would yield units sold growth of 66% year-on-year, the second highest growth rate in unit volumes over the past six years.
Gross merchandise volume surpassed the $3 billion mark, reaching $3.1 billion, growing 34% year-on-year in dollars, while on an FX-neutral basis, GMV growth was 43% year-on-year. Again, if we exclude Venezuela, GMV growth was 54% in dollars, and on an FX-neutral basis, would have been 64% year-on-year. Unique buyers on our platform grew by 28% during the quarter versus prior year quarter, also one of the highest growth rates in unique buyers over the last multi-year cycle. Excluding Venezuela from last year's comp, unique buyers would have grown by 38% versus the prior year. Units sold per unique buyer accelerated for the 16th consecutive quarter. This means an individual consumer is buying 50% more from us on a quarterly basis than they were just a few years back.
Finally, live listings, a measure of the depth of inventory on our platform, grew by 50% year-on-year during this quarter, reaching 127 million listings. That is also the fifth consecutive quarter of growth in this important KPI above 50%. Let me move on to payments. Mercado Pago has also kicked off 2018 on a very strong note. On-platform total payment volume grew by 62% year-on-year on an FX-neutral basis. Strong growth and adoption of Mercado Pago in our Brazilian and Mexican marketplaces, where penetration reached 100% of gross merchandise volume, as well as Argentina, where penetration continued to grow, reaching 98% of gross merchandise volume, were the most significant drivers of growth. In line with that, Chile and Colombia are also contributing as they are in marketplaces.
On platform, Mercado Pago penetration in Chile gained 35 percentage points versus last year, reaching 77% of GMV, while Colombia gained 20 percentage points to 79% of GMV now being paid for using Mercado Pago. We also continue to see growth and tremendous future potential in Mercado Pago away from our marketplace. We continue to engage both consumers and merchants as we grow our scale and generate more value for our growing base of payers and receivers. Many of these businesses are key additions that generate payment use cases that are attractive to millions of existing and future Pago consumers. Some important adds during the quarter were one of the largest telecom operators in Latin America in Movistar, leading camera equipment manufacturer Nikon, OfficeMax, and Groupon, just to name a few.
From a geographic standpoint, Mexico and Chile were highlights for the quarter, growing the merchant services off-marketplace total payment volume on an FX-neutral basis by 63% and 157% year-on-year, respectively. Argentina also contributed to this growth story as it maintained its momentum, growing merchant services total payment volume on an FX-neutral basis for the third consecutive quarter above 60% year-on-year. Our offline efforts are beginning to take off as well. Through the build-out of our mobile POS network and Mercado Pago wallet-enabled payment services, we are reaching more and more consumers in the offline world. Mobile POS total payment volume was an important contributor to the results of this off-marketplace segment. As we continue to witness strong acceleration in devices sold that yielded, on an FX-neutral basis, total payment growth in the mPOS segment of nearly 450% year-on-year in Brazil.
In Argentina, the trend was equally encouraging, as TPV for mobile devices grew on an FX-neutral basis north of 1,000% year-on-year, while sales of devices also grew above 1,000%, albeit both coming from a small base. We also continue to execute behind our efforts to build out our mobile wallet network. During the quarter, we significantly boosted these efforts by integrating payments functionalities into the Mercado Libre app, which now enables payments capabilities for the installed base beyond just Mercado Pago app users, creating an installed base that is roughly 14 times larger in terms of daily active users on the Mercado Libre app than on the Mercado Pago app. One more note on our fintech initiatives and their progress. During the first quarter, we surpassed the $100 million mark in our merchant credit portfolio for the first time.
Mercado Crédito is a strategic offering for our ecosystem, which will increasingly drive merchant sales growth, strengthen synergies with our marketplace, and ultimately build higher merchant loyalty and retention. As we dive deeper into how our merchant cohorts perform, we continue to observe that those merchants who adopt our credit solutions not only see an increase in their sales volume on our platforms, but they are also continuing to take on additional working capital loans to keep funding their growth on Mercado Libre. We will continue to invest behind these innovative credit offerings in order to provide financial solutions to our small and medium-sized sellers and help them scale their business faster.
Let's now get on to financials, where, as I briefly mentioned in the introduction, changes brought about by FASB ASC 606, Revenue from Contracts with Customers, apply to our shipping subsidies impact our numbers with regards to revenue recognition. I'd like to remind you that greater detail on this can be found in the accompanying presentation to these prepared remarks, as well as in our 10-Q filing with the SEC. When we began to offer free shipping services, either partially or fully subsidized by us, we determined that the amount we subsidized was a form of consideration, such as a sales incentive in the form of free shipping. This meant that we provided a consideration to the buyer, which consisted of a free service.
Consequently, in the past, we accounted for that cost to be characterized as an expense in the cost of net revenues, as opposed to netting it out of net revenues, given that it was recognized in the third-party shipper's income statement. Going forward, however, this interpretation will change as we adopt ASC 606. From now on, in the instances where MercadoLibre subsidizes the cost of shipping, we will account for those costs by netting them from revenues, as opposed to booking them directly as a cost line item under cost of net revenues, as in the past. As a result, and in accordance with ASC 606, shipping subsidies for the three-month period ended March 31st, 2018, amounted to $112.5 million versus $4.3 million for the same quarter a year earlier. The year-over-year increase in these shipping subsidies came about mainly as a result of two factors.
First of all, during the prior year quarter, free shipping had only been launched in pilot phase in Mexico, whereas this year, free shipping already covers 62% of GMV in Brazil, 77% in Mexico, 48% in Colombia, and 44% in Chile. This growth in coverage, maintaining all other variables constant, would have alone accounted for an incremental $102 million of subsidies for shipping costs. The second factor is that we've incurred additional costs due to an unanticipated price increase by our main shipping carrier in Brazil, Correios, that amounted to an incremental $11 million. This price increase was made retroactive to March 6th, while our price increases to pass on some of these increased costs to our buyers and merchants, and therefore partially offset the increase in price, occurred later on, only in mid to late March.
If we combine the price increase and the incremental adoption of Mercado Envios and subsidies to free shipping, we get to a total of $112.5 million of shipping subsidies during Q1. One final clarification on this respect, the adoption of the aforementioned new revenue recognition standards will not have a material impact on the company's consolidated balance sheets and statements of cash flows or net income. Moving on down our financials, as now reported on a full retrospective basis in accordance to FASB ASC 606, net revenues ascended to $321 million, a growth rate of 19% year-over-year in US dollars and 30.1% on an FX neutral basis. If we exclude the netting revenue effects in accordance with ASC 606 on free shipping costs, then these gross billings would have been $433.5 million, a growth rate of 58.2% year-over-year in dollars and 70.3% year-over-year on an FX neutral basis.
Please refer to an accompanied table in our 10-Q and earnings press release filed with the SEC in order to reconstruct these gross billing numbers. On a segment basis, first quarter revenue growth was as follows: 18.9% in Brazil, 79.6% for Argentina, 39.1% for Mexico, 35.5% in Colombia, -3% in Chile, and 90.6% in Uruguay. All of these expressed on an FX neutral basis. If we exclude the effects on net revenues in accordance with ASC 606 on a segment basis, monetization trends were strong in all countries. For the first quarter of 2018, gross billings growth would have been as follows: 78.5% for Brazil, 87% for Argentina, 77% for Mexico, 61% in Colombia, 47% in Chile, and 91% in Uruguay. All of these also expressed on an FX neutral basis.
Additionally, as a result of the implementation of ASC 606, we have changed how the information is presented for net revenues in the products and services we offer. As of January 1st this year, net revenues from shipping services will be included as part of our enhanced marketplace services and no longer accounted for in non-marketplace products. With that, from a product revenue stream perspective, as reported basis, enhanced marketplace revenues, which now include the shipping revenues and subsidies, decreased by 21% year-on-year in US dollars to $141 million. This year-on-year decrease was driven by the effect of adopting ASC 606 during the quarter, primarily. Non-marketplace revenues grew by 97% in dollars to $180.3 million. If we break down non-marketplace revenues, payment revenues, including all Mercado Pago non-marketplace revenue streams, grew on an FX neutral basis by 130% year-on-year to $145 million.
Other non-marketplace revenues, including classifieds and advertising, grew 31% in dollars year-on-year to $35 million. Looking at our cost structure for the quarter, the combination of a seasonally weaker margin quarter, aggressive planned-for investments in sales and marketing, and the unplanned changes in our shipping cost structure led to lower than anticipated EBIT and a quarterly loss. Gross profit extended to $163 million, representing 51% of revenue, versus 63% in the first quarter of last year. This deterioration in gross margin is primarily explained by the formulaic changes in revenue, meaning a lower revenue basis, and structurally from the following factors.
Added costs from the growth in our investments in delivering best-in-class customer service to our users, which resulted in 110 basis points of margin contraction, 177 basis points of year-on-year margin contraction that is attributable to investments in hosting as we deploy away from our private cloud to public clouds that give us greater agility and flexibility in developer ops, 411 basis points of margin contraction that came about from the collection fees due to incremental adoption of payment solutions, and rapid growth in our mobile POS businesses that led to 409 basis points of gross margin compression as the costs of selling hardware grow to support our quickly expanding merchant network in Brazil and Argentina. Operating expenses totaled $192.2 million, or 60% of revenues, versus 39% of revenues during the same period last year.
In addition to a same formulaic impact of a lower revenue base, the 20% margin contraction was driven primarily by the following factors. 833 basis points of incremental customer acquisition and branding investments as we continue to invest for sustained top-line growth and brand equity creation, as improved lifetime values bolster our confidence in the long-term returns behind these investments. 511 basis points of incremental spend on buyer protection, mainly as a result of late delivery credits granted to buyers as Mercado Envios grows adoption on our marketplace. 157 basis points of bad debt provisions, mainly from loss provisions on our average merchant and consumer credit portfolio that stand at roughly 4.66% loss ratio during the quarter, and 291 basis points in G&A increases, mainly driven by accruals on our long-term retention plan.
These combined effects yielded an operating loss of $29.4 million, or -9.2% of revenues versus 23.5% during the same period last year. Below operating loss, we benefited from $9.2 million of interest income, down 24.4% year-over-year as a result of lower interest rates in Brazil, as well as lower float in Argentina. In our Forex line, we saw a $5.6 million gain attributed for the most part to the devaluation of the Argentine peso and the Brazilian real over USD net asset positions, accounting for $3.1 million and $0.9 million respectively, and also a $1.7 million gain arising from the Mexican peso revaluation over the USD net liability position in Mexico.
We had $10.7 million of financial expenses, mostly corresponding to financial interest related to working capital funding for the payments business in Argentina, Uruguay, and Chile, also to interest accrual on our convertible bond issued in 2014. The aforementioned effects led to a net loss before taxes of $25.4 million for the first quarter of 2018. Income tax gain was $12.4 million, mainly as a consequence of higher pre-tax losses recorded in Mexico and Brazil, partially offset by a higher income tax expense in our Argentine subsidiaries during the first quarter of 2018 due to a higher pre-tax margin. All of this results in a net reported loss of $12.9 million and a basic net loss per share of $0.29. Purchases of property, plant, and equipment, intangible assets, and advances for fixed assets totaled $23 million during the quarter.
Cash, short-term investments, and long-term investments at the end of the quarter totaled $543.3 million. Before I end the call, I'd like to state that we're as excited as we have ever been about our growing business. We will continue to drive the success of the company through building on our market position as a leading innovator throughout Latin America and leveraging our regional breadth, trusted brand, and increasing installed base of engaged users. Going forward, executing on this business plan will continue to be our first-order priority. We will strive to maintain ourselves as a leading e-commerce and payments platform in the region, while delivering a sustainable financial model that finds the right balance between earnings and investing behind innovation to deliver benefits for our users. We have the conviction that as we follow this path, we will deliver long-term shareholder value through an increasingly attractive and growing ecosystem.
We're excited about the opportunity that lies ahead of us and look forward to updating you on our progress throughout the remainder of this year. Thank you. With that, we can now take your questions.
Ladies and gentlemen, if you have a question or a comment at this time, please press the star then the one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from Stephen Ju with Credit Suisse.
Yeah, thanks. Pedro, can you talk about your efforts in Brazil to decrease your dependence on Correios, given the price hikes and what you're going to be tweaking on a go-forward basis in terms of either, I guess, passing on some of the incremental costs to either the seller or the buyer? I know you guys have kind of rolled through some of those changes already, but interested what the strategy is going to be on a go-forward basis for the balance of this year. Thanks.
Hi, Stephen. Thank you. As you know, part of our strategy in terms of building out our logistics network is to complement our existing drop ship network with increased volumes out of our fulfillment centers and drop ship centers and build out an increasingly more robust network with multiple carriers. If there's a silver lining to the Correios price increase, is that to a certain extent, the increased cost on the drop ship network probably generates an added incentive for sellers to more quickly move over to the other alternatives, and I think primarily the fulfillment option, which is one we're quite enthused about. I think the plan remains the same as it's always been. The increase in cost hopefully adds slight tailwinds to that migration more and more towards fulfillment and other carriers that we will be onboarding on our network.
In terms of how we manage the financial model, I think what's already been done is what we can state. We don't guide other than that, but what we've already done in terms of pricing in Brazil is we have passed on some of those costs on to buyers and sellers. We continue to offer significant subsidies to try to drive the lowest cost of shipping possible on our platform.
We've also passed on some of those incremental costs as we also try to manage the financial model in a responsible and healthy way.
If I may follow up here, between, I guess the many different initiatives right now, like logistics, payments, et cetera, where are you focusing your engineering resources right now?
Probably I would say the two areas of great focus for us in terms of company priority and therefore where engineers are being distributed, are logistics and the build-out of the technology that operates our warehouses and that runs the intelligence for our drop ship network and all the other initiatives we have around logistics. The second area, which is one we continue to think has tremendous opportunity and we're seeing some very solid early-stage results from, is the entire payments business.
Okay, thanks.
Our next question comes from Franco Arevalo with Morgan Stanley.
Hi, Pedro. Thanks for taking the question. First question is on the GMV growth. How much of the slowdown in local currency GMV to 54% this quarter, is related to the changes in the free shipping incentives , that you implemented after the Correios price increase in Brazil? Considering that those adjustments were done only March this year, is it fair to assume further GMV slowdown in the second quarter? If not, what are the initiatives that Meli can take to avoid or minimize those impacts? That's the first question. Related to that, we couldn't see unique sellers metrics. How much did you grow your unique sellers base this quarter? Or maybe in a more qualitative approach, have you seen some of the sellers at Meli platform migrating to other marketplace platforms that have been very aggressive in Brazil on your competitors? Those are my questions.
Thank you.
Great. First of all, let me just recap some of the numbers from the prepared remarks. Brazilian gross merchandise volume on an FX neutral basis didn't decelerate. It's actually sustained the same level of growth from the prior quarter, and it grew 71% year-on-year in Brazil. Our Brazilian business continues to perform very strongly despite the price increases towards the end of the quarter. When we look at the supply side, which is obviously an important part of driving that continued very strong growth in merchandise volume, we disclose sellers and buyers on an annual basis, not on a quarterly basis. I think I gave a readout for live listings, which is probably a metric of depth of inventory on the platform. At the end of the day, I think consumers are interested in being able to find the products they want.
More sellers means you have a deeper inventory, but that's probably a more useful metric. Live listings in Brazil year-on-year grew by 52%. We continue to see very solid gains in terms of sellers. We haven't seen any material change in seller churn, so it's not something that's concerning us at this point, is sellers leaving MercadoLibre to go sell elsewhere and no longer sell on our platform. That's not something that is concerning us right now. Again, I think the most important part of the question is Brazil really had a very solid quarter in terms of unit and volume growth rates.
As a quick follow-up, so you don't expect impacts from the changes in shipping costs to the GMV growth in Brazil? Is this something that maybe the comparison base also getting harder in the second quarter is something that makes sense to expect only in a directionally way? Not asking for guidance here.
Again, we tend to not make any forward-looking statements. I don't think you've characterized what I said well. I think I said, look, Brazil had a very solid quarter. We continue to see a business that's performing incredibly well. There is elasticity, obviously, to total cost. When you pass cost on to consumers, that does generate some reverse elasticity. No, it's not that it doesn't have any impact, and clearly March was weaker than previous months. Overall, I think given the magnitude of the price increase, the site continues to perform very strongly.
Got it. Thanks.
Our next question comes from Irma Sgarz with Goldman Sachs.
Hi, good afternoon. Thanks for taking my question. Just when you sort of look across your different geographies and specifically in Brazil, it looks like, a significant amount of your growth, I guess less so in this quarter, but generally the growth has been coming across the different geographies from lower ticket items and unit growth or volume growth has been quite substantial, specifically in the markets where you've got earlier rollout of free shipping like in Chile and in Colombia. Even in Mexico, where it's already obviously in place for a longer period of time. I'm wondering, how do you think about the burden that this volume growth drives in the form of free shipping for your business and how do you look to continue?
Does that mean that it makes you more vulnerable in geographies where a lot of the growth has been coming from volumes and from lower ticket items and where you're seeing shipping rates going up?
Hi, Irma. Let's parse out your question because I think there's a few things in there. First of all, the dramatic increase in our cost basis on shipping is a Brazil-only phenomenon, right? If you look at Brazilian gross merchandise volume on an FX neutral basis, it actually grew more than units. Average selling prices in reais are slightly up in Brazil. I think you're accurate in saying that the price increases have a greater impact on lower ASP items from a volume perspective. From a cost perspective, because we tend to have less subsidies on cheaper items, it's the contrary. Yes, in the case of Brazil, I think the headwinds from the price increase impact lower ASPs more than higher ASPs, and that's part of the delta between volume growth and unit growth in the quarter.
I think the other geographies, we haven't seen significant changes in our cost structure. We continue to see robust growth. I think we've highlighted Chile and Colombia, that have been performing incredibly well, and that's primarily on the back of the growth and adoption of Mercado Envios and our free shipping initiatives. In other markets, we continue to see strong growth and no impact on lower or higher ASP items.
That's very clear. If you could just help us think philosophically about when you see elasticities being a little bit more negative for, let's say, for the lower ASP items in Brazil, for example, would you tend or would management tend to increase the subsidies to hold up the volume growth? Or would you say there's a point where you want to be preserving profitability, even if that means that the GMV growth on the back of low volume growth will be potentially slowing down more than you had maybe initially expected?
Irma, I think one thing we've always said about how we manage the cost structure on shipping is that there are many different levers, and I think it's a constant process of iteration. If you look at the lower ASP items since the Correos price increase, they've actually gone already through two variations in prices. Clearly as the data comes in, I think we're reassessing what's happening to volume, what's happening to profitability, and that's the way we intend to manage this going forward. I think we don't want to overreact and slow the business down too much. We've said all along we manage for long-term growth and scale. On the other hand, we do want to be cognizant of our financial model, and so we have passed on some of the incremental costs to consumers.
Like I said, we've only changed prices twice on lower ASP items. It's an ongoing process of iterating and trying to find the right equilibrium, and we'll continue to tweak the price structure as we go forward.
Helpful. Thank you.
Our next question comes from Deepak Mathivanan with Barclays.
Hey, guys, this is Aki on for Deepak. Thanks for taking my question. Two questions on Argentina. Firstly, I was wondering if you could talk about the financial impact from the currency volatility that we have seen recently. Secondly, on the free shipping adoption, anything you can share there in terms of what % of units are under the free shipping program or any other metrics you can share there on Argentina? Thank you.
I'll take the first one first because that's easy. Too early to tell. Obviously, there's a part of our business, which is the Mercado Crédito business for installment plans on Mercado Libre that have an underlying cost basis determined by the cost of borrow in Argentina. We've tweaked prices a little bit as rates have moved. This is the last few days, no read throughs that we can announce yet. When we announce the next quarter, we'll give you some more visibility. We don't really have any right now because we're right in the middle of everything. In terms of free shipping, Argentina continues to, I think, Mercado Envios grow penetration as a consequence of shipping and loyalty.
It's been a country that's always had lower penetration than the other markets, and that although it continues to be the case, the percentage of volume that is being bought with free shipping is already up to almost a third of total GMV. It's definitely moving in the right direction.
Thank you. Our next question comes from Ravi Jain with HSBC.
Hi, Pedro. A quick question here. I look at the cash flow basically from operations and CapEx, et cetera. It's probably a negative $50 million to -$60 million. A part of it is working capital. The question I have is within the non-marketplace revenue streams, which of them are you the most excited, which can accelerate rapidly and offset the investment that you're doing in free shipping and customer acquisition costs, et cetera? Do you have a target for free cash flow for the year or thoughts on that would be really helpful. The second question, just following up on an earlier question on fulfillment in Brazil. Just more a two, three-year horizon. Where do you see fulfillment as a percentage of GMV by MercadoLibre in two, three years from now? Do you see it going to 50%? Do you see it closer to 100% in three years?
Just some thoughts on that will help us. Thank you.
Great. In terms of non-marketplace businesses, I think there are two pieces to your question. I don't know if they're necessarily linear in the answer. In terms of the non-marketplace businesses, like we said before, the non-enhanced marketplaces, I think there's a lot of optimism within the company around the payments space and the payments opportunity. We think those could be significant contributors to revenues and margin. The cash flow on payments, because of the way we manage it, where we are generally selling receivables, selling coupons, and we've stated our goal to also sell the loan portfolio as we move forward, potentially is also positive. I think you need to think of that business as a financing business where cash flow calculation is slightly different. Longer term, it could be a cash generator.
Shorter term, as we accumulate the loan book, it's actually potentially a cash consumer. We don't disclose any annual cash flow targets or quarterly cash flow targets. I think the business continues to be an investment cycle, so it's probably not the moment for us to be focusing on cash generation. I think we're fortunate enough that most of our businesses are cash flow positive. We don't really have strong CapEx investments in our fulfillment operations because of the way we manage these for now are primarily lease agreements, long-term lease agreements, so they're more OpEx than CapEx for us, that also generates an asset-light and cash generative business profile, even as we get more and more into fulfillment and logistics. Segueing on to fulfillment and logistics, again, we don't disclose long-term goals.
I think we have said that we really believe, we're seeing that in net promoter scores and user data, that the user experience when items are being fulfilled by us is already delivering better results, faster times, higher NPSs. It's really important for us to move volume towards fulfillment at whatever pace we can. The faster, the better. Probably a little bit early for us to have a clear sense of where it'll be in three years. This is still very early stage. I think if you keep asking the question over the next few quarters, we have a little bit more history in both Brazil and Mexico, eventually launch Argentina, maybe we can give you a better answer of where we think we can be in a few years.
Fair enough. Thank you so much.
Our next question comes from Robert Ford with Bank of America Merrill Lynch.
Hey, thanks for taking my question. Pedro, I had three, if I may, please. In your comments, you mentioned confidence in terms of optimizing pricing and cost to return to profit. Can you touch on some of the specific adjustments that you may be considering? Second, the Brazilian Association of E-commerce was able to obtain an injunction on the Correios price hikes. That seems to be holding up so far. Can you talk a little bit about the difference in jurisprudence behind your earlier injunction and theirs and your ongoing efforts to obtain a similar rollback on the Correios pricing? Lastly, could you touch a little bit on how GMV is trending in Brazil in April and early May now that you've seen a more extended period of those higher shipping costs in the system? Thank you.
Great. Adjustments in profit, a few things, Bob. Or returning to profitability. Q1, by design, was already going to be a low-margin quarter. It has a lower revenue base. A lot of the salary adjustments and cost adjustments are already made. There's a natural tendency built into our initial projections of margin improvements as the year progressed. Obviously, we were already running at a low margin projection, and with the change in cost in Correios, plus some incremental costs from late deliveries from the fourth quarter where we were paying out the credits in Q1, I think pulled us below the profit level into the red. There's just natural scale as the business grows going forward.
We have passed on some of those price increases to both merchants and consumers that happened towards the very tail end of the quarter and delayed because if you recall, Correios was able to reverse the original stay retroactively. There's a delta of about three weeks, I think it is, between the effective price increase and our reaction by passing costs on to consumers. There's some incremental margin improvements from that. Going forward, as I said in my earlier remark, I think we continue to tweak the pricing on different routes, different weights, and different specificities. It's not a blanket price increase as the last one. Now we get more into fine-tuning the combination of those things. At this point in time, with the knowledge we have now, this gets us to profitable quarters going forward. Second question on the injunction.
I'm not a lawyer here, but the initial reversal of the stay on our process was reversed not on any technical merit, but simply because the presiding judge was not in attendance, and so it was reversed until his return to his seat. He is back. He has now began to hear the case. We don't know when he will eventually put forth his new ruling. On our end, there isn't any technical or jurisprudence that was used to reverse the stay. It was essentially, I'm an interim, and so I'm not going to rule on this. The final piece, I think, implied in your question is, under process law in Brazil, we can't be party to two rulings.
We've decided to not ask why or if we can use the other one, but rather to stick to our guns with the merit of our case, which we think is actually stronger. Now we just need to wait for the presiding judge to rule. The final piece on GMV, again, we don't comment on the existing quarter. I think we said that the tail end of March, there is some elasticity to price increases, and we can give you guys a full readout when we get to the next quarter.
Fair enough. Thank you.
Yeah.
Our next question comes from Brad Erickson with KeyBanc Capital Markets.
Hi, thanks. First, kind of a housekeeping question. Even with the new net revenue reporting, gross margins still came in pretty far below the pre-free shipping levels. Can you just highlight maybe what's driving that?
Great. I'll walk you through very quickly. You actually have, in the PowerPoint that accompanies the prepared remarks, a waterfall that breaks out the gross margin trajectory year-over-year. The biggest impact is obviously just the lower revenue base when compared to prior year. The reason for that is that there's significantly more free shipping subsidies in Q1 of 2018 than there were in Q1 of 2017. That's the biggest driver of gross margin compression. It used to happen at the COGS level under the new accounting for revenue norms.
It happens at the revenue level because it's the growth in GMV, the growth in units, the growth of most of the KPIs that drive a lot of the variable costs continued to be trend line where they were, but revenues obviously are growing at a much lower trend line because of the contra revenues that are included in the calculation. Incrementally, if you just want to see which costs have grown the most of the margin compression, so about 450 basis points, are concentrated in the sale of the mobile POS devices. That business is growing incredibly fast, but it does have a short-term gross margin impact because of the cost of the devices. Second, collection fees, mainly from payment processing, as Pago continues to grow very well.
The last two are some hosting costs as we move from private cloud to public cloud, and then customer service and user experience costs that, again, those grow primarily variably in line with units sold in TPV, whereas revenues are now growing at a lower trend line.
Got it. Thanks. Just in light of the Correios situation, have the intermediate targets for margins that you and the board target changed at all? Meaning, I'm sure the longer-term targets are unchanged, but is the board now willing to say incur maybe slightly larger costs during this period given how much of it is simply out of your control? Thanks.
Again, we don't disclose those targets. I think what I said in the previous answers is, this is a company that really is looking at the long term and is primarily focused on sustaining its top-line growth. Top line, I think we should look at it for this particular conversation until we comp out the year in terms of the gross billing metric that we now offer in the disclosures and GMV, right? How much is our gross merchandise volume growing? I think given that, the process now is one of tweaking and trying to not simply defend a specific margin or EBIT target, but rather make sure that we're looking at sustaining the growth of the business, our race to scale, but at the same time making sure that we're doing it in a way where we continue to manage the financial model responsibly.
We've always said those targets are artificial constraints that help us make that decision and allocate capital as we move forward.
Got it. Just one last one, if I could. Just any more color on the sales and marketing spending seems like that ticked up a lot. You mentioned it was some planned things, just any color on sort of what those things were would be great.
Okay. A couple of things here. I think, in terms of the underlying customer acquisition costs or investments, those have gone up. Obviously, revenues are also up. Margin contraction there isn't as significant, just the customer acquisition costs. What we called out in the prepared remarks. There's about maybe 700-ish, 800-ish basis points from customer acquisition costs of contraction. The majority of our marketing investments continue to be performance-based and online-based. It's 830 basis points there. There are another 510 basis points, which are the credits to buyers who receive their packages later than our delivery promise, and some of those were spillovers from Q4. There are another 160 basis points from bad debt. A lot of that is on the growing portfolio of consumer credit.
That still has a very attractive default rate given what the interest rates in Latin America are. It's around 4% default rate. It did add about 160 basis points of margin contraction at the bad debt level.
Perfect. Thanks.
Our next question comes from John Coffey with Susquehanna.
Hi, Pedro. This is a payments-related question. I was wondering, how should we think about the relative growth of Pago Mobile, Pago off-platform, and Pago when it's white labeled for third-party websites?
Hi, this is Osvaldo. In terms of the off-platform business, the three of them are growing very aggressively. When we look at total payments off-platform is growing at 111% year-on-year, that's in dollar terms, and 132% year-on-year in local currency. If we were to open that between the three different businesses we are in off-platform, both Wallets and mPOS are growing. In the case of mPOS, growing at almost 100% year-on-year, and as a wallet, over 300% year-on-year. Both growing faster than the pure online merchant side.
Okay, great. Thank you. Just one last follow-up. What do you find is the biggest hurdle when you're signing up a merchant to use Pago?
I think we face different challenges in each of the countries. We are not facing huge hurdles to a lot of merchants. I think we are entering three very different businesses. One is the Wallet, the other is the mPOS. Those are usually, most of them, long-tail customers, lots of them, but with very small volume per month. When it comes to larger merchants, they are mostly online, that's basically there's a switching cost and integration cost, it's usually a hurdle, processes are usually longer, but I don't see them as a huge hurdle.
All right. Thank you.
Our next question comes from Richard Cathcart with Bradesco.
Hi. Good evening. A couple of questions that I'd like to ask on shipping in Brazil. First of all, Pedro, you mentioned that the MercadoLibre fulfillment option, you're seeing kind of better user engagement metrics around that. One of the reasons, I think, because you're managing to get deliveries out more quickly. Could you just let us know how quickly you are managing to get those deliveries done through the fulfillment center and how that compares to the Correios deliveries? Secondly, just a kind of more medium or long-term question about logistics in Brazil. Given that e-commerce is growing so much, you're seeing a lot of volume growth at MercadoLibre and also other companies, and you're trying to kind of shift your reliance off the Correios onto third-party providers.
Is there any concern that there may be a capacity crunch at some point in the future amongst these third-party courier businesses? Thanks.
Let's see. The delivery times we don't disclose. I think suffice to say that the fulfillment times are significantly better in terms of total time when they go from our fulfillment centers to consumers versus Correios. I think that's a combination of both our fulfillment delivery average time in Brazil right now actually being quite good for the market, and that the Correios average, given that they also happen to do a lot of the more remote deliveries, is not that good. We don't disclose the delta, but certainly it's a material difference in terms of how long it takes us to get something between click to your doorstep if it's fulfilled by us versus the average of the Correios or drop ship network.
There are certain deliveries that on the Correios network, primarily the more dense and the more competitive routes where we actually use the faster option, Sedex. Those have competitive speeds. When we look at the average of the drop ship network, the difference is quite significant. In terms of capacity going forward long term, it's a good question. I think I don't know the answer to that. I do think that we clearly are very focused on that, on making sure that we're doing everything that's within our control to continue to onboard as many new merchants. When I mentioned at the beginning the build-out of our network design, what we're trying to accomplish is to make sure that we start building out an increasingly more complex network where we can start doing zone skipping, where we can start breaking out regional carriers for specific regions.
Again, we will have to figure out a way to find the necessary capacity to deliver for the growth of our business. That'll be a combination of adding more and more carriers and potentially figuring out other innovative ways to deliver goods.
Thanks. Just a quick follow-up on that second answer, if I may. Roughly how many third-party carriers do you use at the moment? I mean, is it kind of in the tens, teens or kind of does it go into the hundreds?
Not at all. I think currently, it's closer to single digits. I think as we grow that out, I don't know what the end game is. I don't think it'll be in the hundreds over the next few years, but certainly we will continue to onboard more and more carriers. I think another consequence of the significant price hike from Correios is that it's also obviously accelerated our appetite and our focus, and therefore the engineering that we're putting behind onboarding a growing number of carriers.
Excellent. That's clear. Thanks very much.
Our next question comes from Thomas Champion with Cowen.
Good afternoon, guys. Thank you for all the detail and transparency around the price hike. Not to belabor the point, but for those of us not located in Latin America, I'm just wondering if you could talk a little bit about how other carriers or logistics providers might be responding to Correios' moves. Are they looking at this situation opportunistically and trying to win your business? Maybe just a small housekeeping item. Going forward, will your reports resemble today's, where you provide the billings, shipping, and net revenue detail, or will it just be on a net revenue basis? Thanks very much for your comments.
I think the honest answer to the first question is, I don't know how the local Brazilian logistics carriers are reacting. I'm looking around the table, but I don't have anyone from the logistics organization here, so we'll get back to you on that one. I don't want to make anything up. In terms of our focuses, yes, we have signed agreements with a growing number of the well-known carriers and are working on onboarding them right now. How they've reacted from a price perspective or how aggressive they've been commercially, we'll get back to you on that one. Disclosure, sorry. I think at least for the 4-quarter transition period going forward, where we have the most marked differences because of the dramatic growth in our shipping subsidies, our plan is to continue to disclose gross billings.
I think beyond that, it'll just be a matter of seeing whether it continues to be as relevant in understanding the underlying trends in the business, or if once we've already normalized the rapid growth of shipping subsidies, they won't be necessary. We'll reassess sometime around next year. For the next few quarters, I think barring any unexpected situation, you can expect to continue to have that breakout because it really is fundamental in being able to understand how the business is performing.
Great. Thank you.
I'm not showing any further questions at this time. I'd like to turn the call back over to our host.
Great. Thank you. Lots of questions, so we appreciate the interest. Obviously, there's a lot going on. As always, we look forward to speaking with you again with the progress on second quarter of this year in a few months. Thank you very much.
Well, ladies and gentlemen, this concludes today's presentation. You may now disconnect, and have a wonderful day.