Good day, ladies and gentlemen, and welcome to the MercadoLibre First Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, this conference is being recorded. Would like to introduce your host for today's conference, Mr.
Martin De Los Santos. Sir, you may begin.
Hello, everyone, and welcome to the MercadoLibre Earnings Conference Call for the quarter ended March 31, 2016. I am Martin Dello Santos, Senior Vice President of Finance and Head of Investor Relations for Mercado de Iure. Our Senior Manager presenting today is Pedro Arndt, Chief Financial Officer. Additionally, Marcos Halperin, Chief Executive Officer and Oswaldo Jimenez, Executive Vice President of Payment, will be available during today's Q and A session. This conference call is also being broadcast over the Internet and is available through the Investor Relations section of our website.
I remind you that management may make forward looking statements related to such matters as continued growth prospects for the company, industry trends and product and technology initiatives. These statements are based on currently available information and our current assumptions, expectations and projections about future events. While we believe that our assumptions, expectations and projections are reasonable in view of the currently available information, you are cautioned not to place a new 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 ks 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 might discuss some non GAAP measures.
A reconciliation of those measures to the nearest comparable GAAP measures can be found in our Q1 2016 earnings press release available on our Investor Relations website. Now let me turn the call over to Pedro.
Thanks, Martin, and welcome everyone to our Q1 conference call for 2016. Let's get started by summing up our performance during this past quarter. The year has gotten off to a great start with sustained momentum of key operational metrics coming off of an already strong ending of 2015. We are very pleased to see our business outperform market growth rates, while we continue to improve the quality and number of value added services we offer in the areas of marketplace, payments, logistics, classifieds, credit and advertising. We believe these results are clear indicators that MercadoLibre is driving value to its users, while scaling the business appropriately for the long term.
With that in mind, let's take a quick look at some key indicators that highlight our solid operational results. For the Q1, successful items accelerated to 39% growth year over year, reaching 38,300,000 units sold and recording the highest growth of the last 4 years. Gross merchandise volume reached $1,800,000,000 and excluding our Venezuelan operations grew 58% on an FX neutral basis. Total payment transactions grew 86% to $27,500,000 Total payment volume grew 108% on an FX neutral basis, reaching $1,400,000,000 and representing over 75% of our GMV for the quarter. And finally, registered users were up 19.6% year on year, reaching 151,500,000 after we added 6,900,000 new users during the quarter.
As units sold in GMV point out, our marketplace business had a great quarter and we're encouraged to see this strength is evenly spread across multiple geographies. Our Brazilian and Argentine businesses performed extremely well, while Mexico and Colombia delivered promising results. Let me give you some specifics. Brazilian units sold grew 46%, up from 22% during the Q4 of 2015. When looking at gross merchandise volume, the results were equally impressive, accelerating on an FX neutral basis to a robust 61% versus 33% growth in the last quarter of 2015.
Argentina is also off to a solid start for the year. Successful items grew 53%, the 4th consecutive quarter where that metric is growing north of 50%. GMV growth in local currency was 77%. Units sold grew 21% in Colombia during the 1st 3 months of 2016 17% in Mexico, accelerating from 10% and 15% last quarter. If we look at revenue growth in both these countries, the results are also very reassuring.
In the case of Mexico, revenues grew in local currencies 42% and in Colombia 32%. As we begin to see the pickup of our enhanced marketplace and subsequent take rate improvements from shipping, credit and payment processing revenues that come along with it. Product selection also expanded nicely as the number of live listings being offered on MercadoLibre's marketplace grew by almost 70% during the quarter, reaching 55,000,000 listings. This growth in listings is attributed to the simplified pricing structure we launched last year and to our freemium strategy that has also been very successful at capturing incremental inventory, particularly for used goods. Key user engagement metrics are also moving in the right direction.
We have been able to successfully accelerate demand, providing vibrancy across our marketplaces. As a result, unique buyers displayed strong growth across all geographies with the consolidated number of unique buyers growing at 23% year over year. So all in all, we are very pleased with the performance and execution of our marketplace BU. MercadoPago continues to affirm itself as one of the key facilitators and drivers of in Latin America. Total payment volume on our platform on an FX neutral basis grew 104% year over year.
This growth is attributed to both on MercadoLibre penetration of our payment system as well as our off MercadoLibre merchant service business. With regards to on platform, on a country by country basis, Brazil continues to lead the way with 94% penetration, while penetration gains across all other countries has driven overall adoption of MercadoPago to 65% of our GMV exiting the quarter. Another highlight was our merchant service The strength of this business is the result of continuous enhancements in user experience and functionalities. Great execution on the commercial front in signing new merchants and gaining share from existing ones and executing well on key initiatives such as open platform integrations, cross border payments and prepaid cards, just to name a few. Off platform payments processing has consolidated itself into one of the fastest growing segments within MercadoLibre, reaffirming our thesis that the opportunity away from our marketplace could be multiple times larger than on our marketplace.
Exiting the quarter, off platform payment revenues grew on a consolidated basis at 128% year on year on an FX neutral basis, the 4th consecutive quarter of triple digit growth in this segment. On the mobile payments front, adoption of mobile POS systems by merchants in Brazil is gaining traction. Within just 10 months of launch, transactions done through these devices already represent double digit percentage of our platform total payment volume in that country. This opportunity is still in an early seed stage, which shows the potential that exists in the FinTech space from MercadoPago across the region and complements other efforts in peer to peer payments, consumer credit and merchant credit that we are also seeding as part of our transactional ecosystem. Shipping continues to do very well overall as it gains adoption on our platform with items shipped growing at a solid 114% year on year to 17,200,000 units.
This is very good performance as it underscores the growing adoption in markets beyond Brazil, where 70% of units are already using our shipping solution. Consequently, on a consolidated basis, 45% of all items sold on MercadoLibre were shipped through MercadoEnvios. We are very confident that the rollout of this value added service will significantly contribute to an improved user experience to users in the countries where we are offering the service. Our advertising segment maintained the momentum from last year as performance advertising revenues keep gaining share of total advertising revenues over our display formats. Propelled by the success of our new product ads on search result formats.
In local currencies, advertising revenues grew by 136 percent year on year, while in U. S. Dollars revenues grew an equally healthy 49%. As our performance along key indicators continues to deliver strong results, as I've just outlined, we are increasingly confident in the way we have been managing our financial model and allocating capital. We believe that all our business lines present large opportunities, are highly synergistic among themselves and will benefit from scale advantages over the long term.
Consequently, the right time to invest behind these opportunities continues to be now, so as to seed future growth and continue to gain market share in our already scaled business lines. Within that context, let me walk you through the financial highlights of the past quarter. We saw strong marketplace revenue growth, mainly driven by the pickup of our unit volume. On an FX neutral basis, excluding Venezuela, marketplace revenues grew by a robust 48% year on year. In U.
S. Dollars, marketplace revenues remained flat as a result of strong FX headwinds across all our geographies. Non marketplace revenues also experienced strong growth rates. In local currencies, non marketplace revenues grew 74% and in U. S.
Dollars 19% year on year. The main contributors to this growth in order of relevance came from the following items. MercadoPago processing revenues accelerated to 128% year on year in local currencies, driven by the growth of payment volume on and off platform. Financing fees growing in local currencies 52% year on year were aided by the adoption of interest free listings in Brazil, Argentina and also Mexico. Classifieds revenues accelerated to 49% on an FX neutral basis, driven by continued momentum in our Argentine business.
Shipping revenues grew 69% on an FX neutral basis. And despite this being strong growth is a deceleration due to contra revenues of approximately $2,000,000 stemming from an increase in external fraud carried out with shipping labels that were not used for Mercado and Veo shipments, but were billed to our accounts. We estimate that these contra revenues had a negative impact on our margins of nearly 1.5 percentage points. More importantly, we have worked with our shipping partners to stop the usage of these fraudulent shipping labels and have been seen shipping fraud rates return to normal levels as of April. And finally, advertising, which continues to consolidate as fast growth segment growing in local currencies at 136% also contributed to the strong non marketplace revenue performance.
Combining marketplace and non marketplace revenue effects resulted in net revenue of $157,500,000 a growth of 75% year over year on an FX neutral basis and FEV at 57% excluding Venezuela. Total revenue growth in local currencies for each country were as follows: 54% for Brazil, 71% for Argentina, 42% for Mexico and 2 49% for Venezuela. Gross profit was $102,200,000 Gross profit margin was 64.8 percent of revenues versus 69.8 percent in the Q1 of 2015 and 65.1% during the Q4. A 100 basis points of margin contraction are attributable to investments centered in providing best in class customer service to our users and the remaining 400 basis points as MercadoPago and MercadoEnvios continue to gain share of revenues. Operating expenses totaled $71,700,000 down 8% from last year's Q1, a 705 basis points margin improvement on an as reported basis.
If I break down our OpEx lines, sales and marketing grew 25% year on year to $32,700,000 or 20.7 percent of revenues with the most significant expense item having been an increase in online marketing expenses and in our buyer protection program. Product development expenses grew 27% to $21,900,000 representing 13.9 percent of revenues. This continues to be a key area of investment for us and one where we do not plan to manage to leverage in the near future. General and administrative expenses totaled $17,100,000 a 6% decrease versus last year as the business continues to scale in these areas. Consequently, on an as reported basis, operating income for the quarter was $30,500,000 up 19 percent versus last year.
Excluding the impact of Venezuelan write offs that occurred in the Q1 of 2015, operating income decreased 27%, representing 19.3% of revenues versus 28.2 percent a year ago and 18.6% during the Q4 of 2015. One final comment on our margin structure. During the past few quarters, these margins have been negatively impacted by currency devaluations. For the Q1 of 2016, on an FX neutral basis, gross profit margin would have been 67.4% and operating margin would have been 24.4%. Below operating income, we saw $5,700,000 in financial expenses, mostly corresponding to interest accrual on the convertible bond issued in 2014.
Further down, interest income was 7 $300,000 up 68% year on year, explained by an increase in interest rates in many of the countries where we operate that improved yields on our locally invested cash position. Our ForEx line was positive $100,000 during the quarter due to an appreciation of U. S. Dollar denominated balances held by our subsidiaries, mainly in Argentina, where there was a strong devaluation of the peso during the quarter. Income tax expense was $7,000,000 during the quarter.
The blended tax rate for the period was 18.7%. The improved tax rate can be explained by a higher concentration of pre tax profits in Argentina, where we are beneficiaries of the software tax holiday by lower pre tax profit and by tax loss carry forwards stemming from our Venezuelan operations. As a result of all this, net income came in at $30,200,000 or 19.2 percent of revenues. This resulted in a basic net income per common share of $0.68 Purchase of property and equipment, intangible assets, advances for fixed assets and payments for businesses acquired, net of cash acquired totaled $17,300,000 during the quarter. For the period ended on March 31, free cash flow was negative $29,100,000 The decrease and negative cash flow is primarily explained by working capital variations that occurred in the MercadoPago business during this quarter.
Cash, short term investments and long term investments at the end of the quarter totaled $528,300,000 Wrapping up, we declared our quarterly dividend of $6,600,000 or $0.15 per share payable on April 15, 2016 to shareholders of record as of the close of business on March 31, 2016. Concluding our review of the business, I'd like to say that we're satisfied with the operational and financial results we've delivered during the quarter. The strategic initiatives we've been pursuing have allowed us to continue growing our business, not only by complementing our vision of an enhanced marketplace, by also allowing us to deliver world class technology solutions to our increasing user base. We look forward to continuing to report back to you on the advances we make throughout the remainder of the year during our next call. And with that, we can take your questions now.
Thank you very much.
Thank you. Our first question comes from the line of Robert Ford of Bank of America. Your line is now open.
Thank you and congratulations on the quarter. I was hoping you could touch a little bit on the acceleration in Mexican revenue growth and maybe some
of the accompanying investments you appear to be making at their place? Hi, Bob. Thanks. So as we mentioned in the remarks, what we're seeing in Mexico is the growth in the enhanced marketplace. We're seeing incremental take rate and incremental revenues coming from cargo growth, credit growth, shipping as well.
And that's what's generating that revenue growth that's so robust and is even stronger than the growth we're seeing in GMV. The investments are a combination as is always the case with our financial model. Those businesses generate a lower gross margin profile. We're also investing in marketing there as we feel increasingly better with the service and the platform we have. And Mexico has been looking increasingly better for us over the last few quarters.
So let's hope we can continue to deliver on the improvements on the user experience and that will continue to drive the business.
Okay. Thank you very much. And then in the press release, you mentioned some of the enhancements that you're making to payments in terms of the user experience and functionality off platform. And I was wondering if you or Oswaldo could expand on that a little bit, please.
Hi, Bob. This is Eduardo. Mostly what has happened in terms of Oftahi Home growth, particularly in Brazil, is a big migration from our users from our regular checkout to their open platform checkout, which means it is developed by them and connected to us through our APIs or SDKs. And that has driven big part of the growth in Brazil particularly. With regards to the Spanish speaking countries, I think that most of the gains have come mostly from improving our flood prevention efforts outside of Argentina where we were already at a very good level.
And that has improved our conversion rates and helped us gain share in most of the Spanish speaking countries.
That's very helpful. Thank you very much.
Thank you. Our next question comes from Ross Sandler of Deutsche Bank. Your line is now open.
Hey, guys. Congrats on the quarter. Pedro, maybe just a little bit of color on the massive acceleration in unit growth despite the macro? Just any more help? I know it's the enhanced marketplace, but the buyer growth was a little bit faster than the previous cadence.
So any more color there? And I guess it's related to that question, but is the relationship between buyer growth, which I think you said was 23% and unit growth, is that the same right now as it has been over the last couple of years? Like I think in 2015 you had 7% buyer growth and mid-20s unit growth. Is frequency going up or down as you kind of get bigger and as you get more selection on the platform? Thank you.
Sure, Russ.
So we've consistently said over the years that macro is not really a strong driver of our business given how early stage Internet continues to be. And I think to a large degree that thesis has been playing out over the last few quarters. It's more about innovating on behalf of customers and just improving the user experience as a whole. And that's really what we're seeing now. The more penetration we've driven, of the different services, the business has really began to accelerate and I think there's a bit of a positive domino effect there.
Just one other side note is if you look at the Q1 comp in Brazil, it was low growth last year. So that also helps a little bit. But more than anything, as we've been saying over the last few quarters, it's really about growing the ecosystem and delivering a better user experience. And then on user engagement and new buyers, what we've been seeing over time is increased user engagement metrics. So if we look at units purchased per buyer, that's been consistently going up.
We've also seen growth in new buyers this quarter. So when you combine better engagement metrics from the repeat cohorts with the growth in new buyers is part of the reason why we get this very, very strong acceleration in units sold over the quarter.
Thank you. Our next question comes from the line of Tom Champion of Cowen. Your line is now open.
Thank you for taking the question and congratulations. A similar line of questioning. Just if you could elaborate anything more on the strength you're seeing in Brazil. I guess, it seems like Brazil has been an area where you've innovated 1st in developing some of your newer buying policies. And I'm wondering if you're seeing benefits from those changes that were made last year and whether you're going to see maybe a similar type improvement as you roll those changes out in other geographies.
And then just second, the tax rate was a little bit lower than we were modeling. I'm curious if 1Q is kind of a guide for what we should think about for the rest of the year. Thanks very
much.
Sure. So I think it was really covered in the previous answer. We strongly believe in the power of the combined ecosystem of greater selection, a better user experience, easier to pay, more credit accessible, reliable and predictable shipping at ever increasingly lower prices as the secret to driving growth. And as you mentioned, Brazil was the 1st country where we've seen high penetration rates of that combined ecosystem. And I think we're seeing the results of that now.
When I answered the Mexico question earlier, we attribute a very strong part of the pickup in Mexico from the same thing. We have shipping penetration that's now at about a third of all units sold. We're seeing cargo grow consistently towards about half of all GMV. And that really generates a much, much better both buying and selling experience. So I think our anticipation is that, yes, as we roll out the full ecosystem in all our markets over time, that should help our business overall.
And that's been the strategic vision we outlined about 3 years ago and have been executing diligently on over time. On the tax rate, so the tax rate in the quarter was lower in part driven by the Argentine software law that we've become that we are a part of and benefits our tax rate in Argentina. We also had lower overall pretax income this quarter, which helped a little bit. And then finally, there also are some Venezuelan loss carry forwards that lowered the rate, the blended rate during the quarter. So it's not necessarily a rate that will be sustained every quarter of the year.
We typically encourage you to look at the tax rates on an annual basis to get a sense. And I think what we've been saying is somewhere in the high 20s is probably where it should come in for the full year.
Thank you.
Thank you. Our next question comes from Michael Moran of Morgan Stanley. Your line is now open.
Thank you. So Pedro, I was wondering if you could share with us the growth rates for marketplace and non market place by country. I think you gave Brazil in the release, but it'd be great to see, especially for Mexico, given the acceleration there. And then I just wanted to come back to Mexico and your comment about how you're benefiting from the enhanced marketplace and tying that in also with macro, because I think on macro, you've said, you just repeated that you haven't really been seeing an impact. I think your competitors have been seeing an impact in Brazil from macro.
So the question there is now that you're getting to very elevated levels of penetration for shipping and for on platform in Brazil, is there a reason to worry that the growth there could start to slow as you no longer get the incremental benefits from that enhanced marketplace? Or has it become a kind of self sustaining virtuous circle, if you will? Thank you.
Great. Hi, Michelle. So let me start with the second one and then I'll get back and we don't comment on our competitors. I think we try to remain focused on our business and how we're doing in our innovation. However, I think your question regarding is there a comp issue here and what happens in the larger markets when you already begin to comp the rollout of the full ecosystem.
And just a little bit of data behind that, predicting future performance is not something we do. But if you look at the last year Q1, Pago was already penetrated in the high 80s in Brazil. So it's not like we're comping against a quarter where the ecosystem was still underpenetrated on the payments front. And if we look at shipping, it was slightly below 50% Q1 of last year. So I think that shows that obviously when you have a tougher comp because of the full ecosystem having rolled out that could play a part in what are your growth rates look like.
But they definitely don't seem to be what explains the strength of the Brazilian business because we're already comping against a year where the ecosystem in Brazil was fairly developed. On the growth rates, let me give you some call outs here. So Argentina core grew at these are all FX neutral at 66% and non marketplace at 91. Mexico core at 11 and non marketplace 107. And Brazil grew at core 46, non core 66.
Those are the growth in the major geographies.
Perfect. Thank you very much, Pedro.
Thank you. Our next question comes from Stephen Ju of Credit Suisse. Your line is now open.
Hey, guys. So I guess the volume questions have been addressed to some degree. So I'll ask the churlish monetization question. So I know the take rate is an output metric for you guys, but can you go through some of the puts and takes in terms of insertion fee decreases or offsets in advertising? And I'm wondering if you can tell us what percent of overall revenue is your PLA ad unit?
Okay, thanks.
Great. So the first question on take rates, just directionally, if we look at total MELI Q on Q, it was practically flat, very, very slightly down. When you break that down to understand what's happening on a geographic level, really all country take rates are up with the exception of Brazil. Brazil is down by nearly 1 percentage point sequentially Q on Q. That's driven primarily by a slowdown in the take rate from 2 non marketplace businesses.
Our financing business where spreads have tightened somewhat and we haven't passed those on to sellers. So we've made a lower take rate on financing in Brazil. And also shipping, as I mentioned, had some contra revs this quarter that we've corrected and shouldn't be an issue going forward the remainder of the year, but that also lowered some of the Brazilian non core marketplace take rates. And then when we look at core marketplace take rate in Brazil, it's actually been flat Q on Q sequentially. So we continue to be able to manage that transition away from placement fees towards final value fees fairly efficiently as we had intended.
So really the oscillations intake rate have been primarily Brazil non marketplace. Then the second part of your question, the advertising business represents roughly it's in the range of 5%. Let me give you the exact number. It's slightly below 5 percent and the new PLAs are about half of that. So growing very well along with the whole advertising business, but still not moving the needle in terms of the consolidated numbers.
Got you. And it looks like you've stepped up some of your marketing activity this quarter, presumably that's more on the direct response side. So is there something going on in terms of ROI benefits that you might be
So
So in general, when you look at the marketing spend, an important driver of the margin change is actually buyer protection. So when we pay out in the case of seller buyers receiving items different than described or even in the cases of shipping, we reimburse shipping costs if there's delayed on the shipment. So we think that's a good investment in essentially paying users when the user experience is not what we wanted to be. We have growing confidence in our ability to deliver a good user experience and when it doesn't happen, we're increasingly willing to pay for that. So there's margin contraction on the marketing line that comes from buyer protection.
And then in terms of actual customer acquisition, what we're seeing is some ramp up year on year, about 70 bps that are coming from that, but it's not significant. And that's just as we're more comfortable with customer lifetime values and we see the improvement in the overall engagement metrics, we're willing to put more money behind customer acquisition.
Thank you.
Thank you. Our next question comes from Gene Munster of Piper Jaffray. Your line is now open.
Good afternoon and my congratulations. A question looking at the unit growth, is there just a rough idea of what e commerce is growing at and maybe Argentina and Brazil, so we can get a sense of what market share gains are? And separately Pedro, you talked a little bit about investing. I think some investors have been critical about year level of investments suggesting that you should invest more. It looks like those investments are paying off that you are doing.
But how do you think over the next year or 2 about the potential for maybe a more significant increase in investment in different than many opportunities that you have and just to give investors some sense about how you're thinking about capital allocation? Thank you.
Great. So Brazil is probably the market where you have the most public companies and you have the largest data set to attempt to measure what the e commerce market is growing at. Most of the reputable sources we've seen peg market growth anywhere between high single digits and mid teens, the most optimistic case. So definitely market share gains in Brazil this quarter have been phenomenal. It's something that
Remind me, Pedro, what was Brazil unit growth again?
Sure. So Brazil unit growth was 46% this quarter. And FX neutral, so growth in GMV and reais was 61%. So really very, very strong and significant outpacing where most analysts have pegged the market. Argentina is harder.
It's a smaller data set, no other public companies. But if you look at our Argentine growth rates, 77% GMV in pesos, 53% in units, we're quite confident that we continue to gain share in Argentina as well. In terms of capital allocation, again, as always, when we look at the margin structure, remind you that the most significant contraction in EBIT is actually coming from gross margin contraction. We continue to have these great businesses that are synergistic that we think have huge opportunities beyond the marketplace like payments processing, like credits. They just happen to be lower gross margin business.
They're accretive to gross profit. And so it's not something that worries us too much from a margin perspective. In terms of the actual OpEx expenditures, if you look at total expenses, total expenses have been affected by FX as well. So there's been significant margin compression year over year. But when we think going forward, capital allocation, it's going to continue being more engineers that we need to build out all of these opportunities.
We'll need incremental headcount to manage these businesses. And on the CapEx front for the foreseeable future, no significant change. The only area that we could potentially get interested in is in the logistics space. But if we were to do that, we'll make sure to communicate in advance and it will be because we're confident that it makes sense for the long term. So I think you've kind of seen the trends in the financial model that you should expect going forward in terms of what happens with gross margin, at least for the foreseeable future as we continue to grow payments and all the different business lines that are emerging from it, and we continue to penetrate shipping.
And then in OpEx, I think our ramp up is, as we've said, should be similar, somewhere in the few 100 basis points of investment for this year.
Okay. Thank you.
Thank you. And at this time, I'm showing there are no further participants in the queue. I'd like to turn the call over to management for any closing remarks.
Great. So thank you, everyone. As we said in the prepared remarks, very strong quarter. We're very pleased with the way the year started out and we look forward to reporting back to you as we advance in 2016. Thank you.
Ladies and gentlemen, thank you for your participation on today's conference. This concludes your program. You may now