Earnings Call: Q3 2015

Nov 4, 2015

Good day, ladies and gentlemen, and welcome to the MercadoLibre third quarter 2015 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 be given at that time. As a reminder, this conference is being recorded. I would now like to hand the meeting over to management. Please go ahead. Hello, everyone, and welcome to the MercadoLibre earnings conference call for the quarter ended September 30th, 2015. I am Martín de los Santos, Senior Vice President of Finance and Head of Investor Relations for MercadoLibre. Our senior manager presenting today is Pedro Arnt, Chief Financial Officer. Additionally, Osvaldo Gimenez, Executive Vice President of Payments, will be available during today's Q&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 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 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 might 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 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 third quarter 2015 earnings press release, available on our investor relations website. Now, let me turn the call over to Pedro. Thanks, Martín. Good afternoon, and welcome to our third quarter conference call for 2015. As we report our earnings results and exit this third quarter, I'd like to kick off the conference call by saying that we continue to be optimistic about the future opportunities that lie ahead of us going forward. Latin America offers a formidable growth market with solid business prospects and multiple factors, which make us feel confident about the direction and shape our business is taking. Complementing these external factors, our own internal strengths, being a larger company with increasingly diversified revenue streams, with better access to capital, and an ever more capable team of employees, will serve as powerful advantages in order to continue to effectively capitalize on and execute the forthcoming growth opportunities. We are fortunate to do business in an industry that continues to grow even in adverse economic scenarios, consequence of a still under-penetrated secular trend in e-commerce. MercadoLibre is at the epicenter of this trend, a leader and benchmark when it comes to regional coverage, market share, unique visitors, and brand recognition. Furthermore, our company has a proven business model functioning as the platform of choice for the region's growing e-commerce ecosystem. This platform approach serves as a growth catalyst that continuously generates incremental business opportunities while being financially sound and profitable. We believe this quarter's results are a testament to all this. Consequently, the cornerstone of our focus will continue to be centered on the execution of our platform-centered growth strategy and on scaling the business for the long term. We plan to achieve this by continuing to invest behind innovative and compelling e-commerce solutions for small and medium-sized businesses as well as individual sellers, while also continuing to expand our relationships with large retail brands. We envision MercadoLibre as the go-to partner in e-commerce solutions for all types of sellers, irrespective of their size and breadth. This is what drives our commitment behind our business lines: marketplaces, official stores, payments, financing, advertising, storefronts, and back-end e-commerce solutions. These are multiple fronts that will require investment, that are also highly synergistic amongst themselves and should thus allow for a methodical and efficient growth strategy going forward. Before I delve into greater detail on some of the specific advantages made in our main strategic initiatives across our platform during the quarter, let me walk you through the high-level operational results that we have delivered. Successful items grew 26%, reaching 34 million. Gross merchandise volume rose 77% in local currencies, reaching $1.84 billion. Total payment transactions grew 75% to 22 million. Total payment volume grew 95% in local currencies, reaching $1.4 billion and representing over 75% of our GMV for the quarter. Registered users were up 20% year-over-year, reaching 138.4 million after adding 6.1 million new users during this quarter. These operational highlights have led to solid revenue growth in local currencies of 68% year-over-year. Excluding our Venezuelan operations, revenue growth came in at an equally solid 54% year-over-year. Despite currency devaluations, revenues in dollars grew 14%. Excluding our Venezuelan operations, revenues in dollars grew 15%. These dollar growth rates are worth noting since they occur in a general context of strong currency devaluations across most of our markets. The BRL has weakened by 36%, the ARS by 10%, the MXN by 20%, and the VEF by 75% since the third quarter of 2014. Let's take a closer look at the key initiatives and results by business unit, starting with our marketplace BU. As I have noted, the business continues to demonstrate its resilience. Units sold, which exclude the effects of inflation and local currency devaluations, grew at a healthy 26% year-over-year on a consolidated level. Successful items growth performed particularly well in Argentina, growing at 60% year-over-year. Brazilian units grew at 20%. With regards to gross merchandise volume, during the third quarter, we reverted the negative growth trend in US dollars and grew at 9%, while in constant currencies, GMV grew 77% for total MELI and 41% if we exclude our Venezuelan operations. Brazilian gross merchandise volume in constant currency grew at 30% during the quarter. These are strong figures given the overall environment across the region. Our continued efforts directed at the expansion of our enhanced marketplace, combined with our focus on customer service, have resulted in improved buyer engagement metrics. Unique buyers as well as repeat buyers continue to show growth rates across all our markets, growing at double digits when compared to the same period of 2014 on a consolidated basis. Additionally, the continuous growth in successful items per buyer also indicates that we are executing well on our initiatives to stimulate and maintain demand and vibrancy throughout our marketplaces. On the pricing front, we have made some strategic adjustments during the third quarter, which are mainly aimed at reducing friction in listing products, deepening our SKU count, continuing to capture long-tail customers, providing more vibrancy to our marketplace, and improving overall customer experience and conversions while growing our gross merchandise volume. During this quarter, we migrated to a final value fee-only model in our Brazilian marketplace. By eliminating placement fees, we now have a much simpler payment structure of 3 listing combos: a premium combo at 16%, which includes installment payments, a classic combo at 10% final value fee, and newer free listings. This free strategy consists of extending free listing durations from 7 to 60 days while giving these listings the ability to add our Mercado Envios shipping services, financing options, and payment overlays, thus offering a substantially better value proposition for buyers and sellers, while at the same time giving us venues to monetize and generate incremental revenue from these free listings through the offering of these value-added services. We are confident that such pricing changes will entice sellers to publish more listings on our marketplace as they no longer have to assume the risk of paying fees in advance for products that might not sell as well. Combined with our freemium strategy, this should serve as powerful igniters to continue deepening our SKU count and creating greater content for buyers on our platforms. As I will cover shortly, for those sellers that do wish to replace the payment fees we have discontinued with new formats to highlight their listings, we have launched ad formats in search results that link back to existing listings on our marketplace. We have already seen the positive results of these changes as we continue to see selection and SKU count expanding at very healthy rates as the number of live listings being offered on MELI's Brazilian marketplace grew by 92% year-over-year during the quarter. As our enhanced marketplace is rolled out into other markets, we also plan to roll out this new pricing structure to these additional markets. Argentina, Mexico, Colombia, and Venezuela will soon follow. Our official stores initiatives have also impacted positively on our marketplace results, albeit to a lesser degree, given that they still represent single digits of our total GMV. During the third quarter, we added 300 new official stores totaling over 1,250 as we continue to onboard well-known brands into our ecosystem, such as Columbia, Timberland, Fiat, 3M, and Swatch, amongst others. On the mobile front, our investments behind this initiative continue to pay off very well as conversion rates, mobile GMV growth, and new mobile registrations continue to deliver improving and promising results. Moving on to our payments platform, Mercado Pago continues to be the prime payment solution for facilitating transactions within our ecosystem and shows signs of an improving value proposition for merchants as both approval rates continue to increase while merchant churn rates continue to decline as a consequence of an improved product offering and innovation that continues to differentiate us from our regional competitors. Our payment solution has also continued to show rapid growth outside our marketplace, expanding its footprint through our merchant services business, setting record numbers in terms of countries covered and payments volume processed. During the third quarter, we continued to witness compelling growth in total payment volume as a consequence of all this, despite a general context of currency devaluations and tough comps in 2014 that arose from the launch of our interest-free financing initiative in Brazil. During the third quarter of 2015, total payment volume on our platform measured in local currencies grew 95%, while in US dollar, total payment volume on our platform grew at a healthy 42%. Another important milestone was reached this quarter as penetration of Mercado Pago on our platform reached the highest GMV ever, 58% versus 46% during the same period of 2014. These gains have been primarily driven by implementation of settlement of payments exclusively through Mercado Pago in Mexico for all listings where interest-free financing is offered, improvements in approval rates of Mercado Pago across all geographies, and the continued adoption of our zero-cost installment plan in Brazil. By quarter's end, 55% of all GMV in Brazil was being done at zero cost credit plans, while approximately three-quarters of all Brazilian GMV had a financing overlay on them, confirming the importance of credit as a catalyst for consumption in that country. Additionally, adoption of our payment solution in Chile, launched during the second quarter of 2015, has shown very encouraging advances in penetration on our platform, growing at a very fast clip, albeit from a very low base, due to the fact that full implementation of the solution remains fairly recent. Complementing the strength of our on-platform MercadoLibre payments performance during the quarter was our merchant service business, which enables Mercado Pago solutions on merchants' websites and apps. This continues to be an extremely exciting prospect for us as we believe the opportunity to capitalize payment volume off of our marketplace is multiple times larger than on our marketplace. We believe that such initiative will not only serve as an igniter to allow us to cross-sell other value-added services such as shipping and financing to merchants off our marketplace, but also bring in significant incremental revenues. It is also important to highlight that all the countries where we offer our merchant service solutions have shown triple-digit revenue growth rates when looked at in local currencies, a clear sign that we are executing well on this front. This continued strength of the merchant service business is mainly driven from the success of our commercial teams in onboarding larger clients and new clients in key open platform integrations, as well as cross-border payments in Brazil and Mexico, which are growing strongly and becoming a relevant percentage of our payment volume mix. On the mobile payments front, there have also been very encouraging early-stage advances demonstrated by the steady adoption and usage growth of some of the innovations we have recently launched, such as our mobile POS systems and peer-to-peer transfer product. Our shipping initiatives have also played an important role in growing our marketplace engagement metrics as they continue to perform well with over 60% of units shipped in Brazil and over 45% on a consolidated basis being done through Mercado Envios. This latter metric is particularly relevant, underscoring the growing adoption of our shipping solution across the board, and particularly in Mexico, where just nine months after launch of the solution penetration is nearly 20% of all units sold on our Mexican marketplace. Additionally, adoption of our shipping solution in Colombia, launched during the second quarter of 2015, has also shown encouraging advances in penetration and adoption. We remain confident that the rollout of our shipping solution will continue to contribute synergies to our enhanced marketplace, which is already a compelling value proposition, and will also serve as a tool in sustaining growth rates for our business going forward while helping us to continue to bridge the gap with first-party retailers. In conjunction with what we had mentioned during prior quarters, we not only aspire to drive the penetration of our Mercado Envios shipping solution on our marketplace to levels similar to what Mercado Pago has shown, but we have also began to offer our shipping solution to off-platform merchants during the third quarter of 2015 in both Argentina and Mexico. We have also made important advances in regards to our cross-docking initiatives in an effort to increase our shipping offers and shorten delivery times, provide the best prices, and maximize value to our customers. On this front, we continue to grow the percentage of items shipped that pass through MercadoLibre-controlled sortation centers and have added additional carriers in Brazil beyond our master agreement with Correios. In Argentina, we have started our systems integration with additional carriers and expect to begin trial runs of cross-docking shipments at select sortation centers by the end of the fourth quarter of this year. Moving on, we are pleased with the results of our advertising business as well. The success and continuous innovation of our product ad solution has continued growth acceleration in local currency revenues of 176% year-over-year. In line with this, we have also launched a new product ad placements within search results. This incremental source of revenue could effectively serve as a substitute to the insertion fees we discontinued as a result of the rollout of our new pricing structure in Brazil, as merchants continue to be enticed to purchase our advertising solution in order to redirect traffic to their own listings within MELI. This initiative is currently being deployed in Brazil. We expect to launch it in Argentina and Mexico as well in the near future. With that, we have covered the key initiatives behind our vision of an enhanced marketplace, including marketplaces, payments, financing, official stores, and shipping, as well as some highlights in other business lines. We believe that these strong business results and initiatives show the resiliency of our business model as it continues to perform strongly regardless of FX and macro headwinds. Our vision of having more touchpoints with the transaction continues to confirm our belief that the buyer experience is greatly improved and friction between buyers and sellers significantly reduced as we roll out our enhanced marketplace. This fact is confirmed not only by the strength of the operating metrics that I just covered, but also on how these metrics are flowing through to our financials and by the sustained improvement in customer satisfaction net promoter scores. During the third quarter of 2015, we saw the ninth consecutive quarter of increases in NPS, which grew by another seven percentage points sequentially over the previous quarter. We'd now like to review how these operational highlights have impacted our financials. As always, growths are year-over-year unless I specify otherwise. Net revenues came in at $168.6 million, a 14% growth in US dollars and 68% FX-adjusted. Excluding Venezuela, net revenues grew by 54% in constant currencies. Income from operations was $45.3 million, decreasing by 4% in dollars, but growing by 33% in constant currencies and 32% in constant currencies excluding Venezuela. Net income before income and asset tax expenses was $47.6 million, decreasing 8% in dollars and growing 31% in constant currencies, 31.5% in constant currencies if we exclude Venezuela. Net income came in at $45.6 million, growing 35% in dollars and 72% in local currencies, or 91% in local currencies excluding Venezuela, all resulting in earnings per share of $1.03. Let me start by breaking down revenue growth for you. Marketplace revenues grew 56% in local currencies, driven by solid unit growth year-over-year, especially in Argentina, where units sold accelerated to its highest level in many years. I'd like to note an ongoing trend. As our enhanced marketplace strategy penetrates our gross merchandise volume, our core take rate increasingly shifts to and spreads through non-marketplace revenue streams. In other words, as financing and shipping grow, they are taking on incremental take rate at the expense of marketplace take rate. All in, we continue to monetize more per user, but the segment breakdown favors non-marketplace over marketplace revenues. Hence, marketplace revenues as a percentage of GMV dropped 41 basis points year-over-year, and non-marketplace revenues, that include financing and shipping revenues, gained 77 basis points year-over-year. With that introduction, let me now give you some color on these non-marketplace revenue growth. Non-marketplace revenues experienced notable local currency growth of 89% in the third quarter. In order of relevance, this growth was mainly driven by payments in which merchant services grew north of 100% in local currencies, thanks to the increased adoption of Mercado Pago throughout the region, and financing revenues, which grew 81% in local currency, mostly propelled by the adoption of our interest-free listing type, widely adopted in Brazil and more recently growing nicely in Mexico and Chile. Shipping revenues continue to grow at a fast pace, reaching over 6% of net consolidated revenues during the third quarter. Advertising continued to accelerate its revenue growth, consolidating as one of the fastest-growing components of our top line. Finally, Classifieds revenues, which are also growing, pushed by the professional seller segment. The slight deceleration we experienced in non-marketplace revenues is primarily explained by the tough comps from a year ago, since our most thriving initiatives, free financing and shipping, were already fully in place by this quarter one year ago. When looked at by country operation, top-line growth in local currencies in our largest markets broke down as following: 47% in Brazilian reais in Brazil, 83% in Argentine pesos in Argentina, 26% in Mexican pesos in Mexico, and 281% in Venezuelan currencies in Venezuela. Before moving on, I'd like to briefly comment on three noteworthy impacts on our P&L in terms of costs during this quarter. First, the company was granted a tax holiday under the new software development law in Argentina that expires in 2019, as we disclosed earlier in September. This holiday allows us to have a relief in income tax and payroll taxes related to software development activities, which are located in Argentina, retroactive to September of 2014. Therefore, this quarter, we booked a one-time income tax gain of $10.4 million and a payroll tax cost gain of $3.1 million for the retroactive benefit, as well as a total of $6.7 million under both concepts for the current period's business, less $1.4 million of audit fees related to the allowance of the tax holiday. Second issue is that we partially reduced the yearly accrual on our long-term retention plan this quarter due to the lower stock price levels at which MELI traded, positively affecting margins by 309 basis points. Finally, foreign exchange headwinds continue to be relevant for understanding the margin compression during the quarter as our largest operations continue to weaken their currencies against the U.S. dollar. In general, to give you a sense of the FX impact, had currencies remained constant over the past 12 months, EBIT margin contraction would have been minimal, as foreign exchange accounts for 491 basis points of our overall margin declines. Moving on. Gross profit grew 7% year-over-year during the third quarter to $111.8 million. Gross profit margin was 66.3% of revenues versus 70.7% in the third quarter of 2014 and 67.4% in the second quarter of 2015. As Mercado Pago and shipping keep gaining share of our revenues, there is an incremental impact of payment processing fees and sales taxes over revenues, which account for most of our gross margin contraction. These effects were somewhat offset by scale in customer support. Additionally, of the 435 basis points of total gross margin compression, foreign exchange fluctuations explain 171 basis points. Operating expenses grew 16% year-over-year, reaching $66.5 million and representing 39.5% of revenues, versus 38.8% in the same quarter last year and 44.9% during the second quarter. Let me break all this down for you. Sales and marketing grew 6% year-over-year to $31.1 million or 18.5% of revenues versus 19.9% for the same period last year and 18.9% last quarter. The 142 basis points of scale are mainly driven by improvement in bad debt and scale in marketing expenses, partially offset by higher fraud prevention expenses which are associated with the growth of payments and shipping solutions. Here as well, to give you a notion of Forex impact, excluding Forex fluctuations, sales and marketing would have scaled 62 additional basis points. Product development expenses grew 26% to $17 million, representing 10.1% of revenue in the third quarter versus 9.2% in the same period last year and 12.7% in the second quarter of 2015. Growth in compensation costs from continuing investments in our engineering talent pool, which grew almost 70% versus last year in headcount, as well as incremental investments in software licensing and consulting costs drove this de-leveraging. These cost increases were partially offset by scale obtained by the software development law and long-term retention plan. Forex fluctuations impacted margin negatively by 196 basis points since most of our IT count is located in Argentina, the operation with the smallest currency weakening year-over-year against the U.S. dollar. General and administrative expenses increased 28% year-over-year to $18.4 million, representing 10.9% of revenues versus 9.7% a year ago and 13.4% during the second quarter of 2015. This 116 basis points of contraction is mainly explained by a one-time reversal of tax credits during the third quarter of last year, which affect comps, and to a lesser degree, by higher compensation costs. This contraction was partially offset by a reduction in the long-term retention plan accrual. Foreign exchange fluctuations in the case of G&A explained 61 basis points of this margin contraction. As a result of all this, operating income for the quarter was $45.3 million or 26.8% of revenues versus 31.9% in the third quarter of 2014. Of the 502 basis points of contraction in EBIT, 491 basis points can be explained by FX fluctuations, meaning if currency exchange rates had remained constant versus last year, margins would have been almost flat. Please bear in mind that as I mentioned before, our operation margins were aided by two large effects this quarter: the software development law relief in labor tax and the long-term retention plan accrual. Below operating income, we saw $6 million in financial expenses, mostly corresponding to interest accrual on our convertible bond issued last year. Interest income was $5.8 million, up 32% year-on-year due to higher interest rates and larger invested amounts compared to the third quarter of 2014, mainly explained by Mercado Pago's growth and the consequent float and cash balance increases that it causes versus the last year. Our Forex line is positive $2.6 million in the quarter due to the appreciation of U.S. dollar balances held by our subsidiaries, mostly explained by our Brazilian and Argentinian holdings, and partially offset by U.S. dollar-denominated liabilities in some other markets. Net income before taxes totaled $47.6 million, down 8% year-over-year and representing 28.2% of revenues versus 35% during the third quarter of last year. Income tax expense was $2 million in the third quarter, a blended tax rate of 4.2%. This line item saw the highest positive impact of the software development law, a total of $16 million, $10.4 million corresponding to prior period adjustments. Excluding non-recurring impact of these tax adjustments, the blended tax rate for the period would have been 27.2% down from 34.9% in the same quarter of last year and 41.9% during the previous quarter. Net income came in at $45.6 million or 27.1% of revenues versus 22.8% in the third quarter of 2014. Excluding one-offs, net income was $33.1 million or 19.6% of revenues. This resulted in a basic net income per common share of $1.03. $0.75 excluding from prior period adjustments versus $0.76 in the third quarter of 2014, a fair apples-to-apples comparison eliminating one-off impacts. Purchases of property, equipment, intangible assets, and advances for property and equipment net of financial liabilities during the quarter totaled $8.2 million. For the period ended September 2015, free cash flow defined as cash from operating activities, less payments for the acquisition of property equipment, intangible assets, advances for property and equipment, net of financial liabilities, was $6.3 million versus $42.1 million in the same period last year. Cash, short-term investments, and long-term investments at the end of the quarter totaled $526.8 million. Wrapping up, we declared our quarterly dividend of $4.5 million, or $0.103 per share, payable on January 15th, 2016 to shareholders of record as of the close of business on December 31st, 2015. This concludes my review of the business for the third quarter. Summarizing what we've seen, we'd like to reiterate that we envision the opportunity to be capitalized in e-commerce as large as we have ever seen it, given the infancy of the industry, combined with our unique regional leadership. Not only are we just beginning to scratch the surface in what respects to e-commerce, payments, and logistics, but having successfully sorted many competitive and technological challenges over the past years gives us more assurance that we have the ability and capability to successfully execute all our initiatives going forward. This is reflected by the performance of our business units across the board as they continued to show strong traction, while also confirming that our business model is not only innovative, but also financially sound and resilient, and performs in both positive and negative macroeconomic conditions. We remain excited about our business and future prospects and will continue to focus relentlessly on innovation and execution of our strategic initiatives, which we believe will lead the way for us to continue to be the de facto e-commerce platform throughout Latin America for many years to come. We can now take your questions. Thank you. Ladies and gentlemen, if you have a question at this time, please press star followed by the number one key on your touchtone telephone. If your question has been answered or if you'd like to remove your line from the queue, you may press the pound key. Again, if you do have a question, please press star and then one at this time. Our first question comes from the line of Ross Sandler from Deutsche Bank. Hi, thanks for taking my question. This is Aki on behalf of Ross. A couple of quick questions. We know you don't provide guidance looking forward, given the environment, could you give us a sense of what should be the EBITDA margin we should assume long-term and medium-term? I just have a quick follow-up on that. Thank you. Yeah. Hi. As you mentioned, we don't give guidance. I think what we've tried to do as an indicator of what's happening with the business is to give you very specific call-outs of how much of the margin contraction has been foreign exchange related, and how much of it has actually been the operational cadence of investing behind our business. I think going forward, what you should see, and of course, stripping currency, is what we said at the beginning of the year. We feel extremely positive about some of the initiatives that we've been rolling out on the shipping and logistics front, on the payments front, on the off-platform payments front, in customer service, and we feel that this is the right moment to invest behind these initiatives to continue to consolidate our top-line growth and grow at what probably are above-market rates in most of our markets. Okay, great. Just a quick one. Could you give us a sense of what is the penetration of free installments in Argentina and maybe the other countries you operate in? Sorry, can you repeat that? Yeah. Just wondering if you could give us a sense of the penetration of free installments in Argentina and the other countries you operate in. Sure. Absolutely. Let me give you the total financed volume for the different markets, which is a combination of free financing and not free financing, but it's the overall flow of credit, and over time should migrate towards free installments. In Argentina, it's in the mid-30s. Brazil is about 75%. Mexico is in the low 20s, and then it's very recent launch in Chile. Great. Thank you so much. Thank you. Our next question comes from the line of Gene Munster from Piper Jaffray. Hey, good afternoon and congratulations. Pedro, you just mentioned that you believe that you can grow at or above overall e-commerce rates in most of your geographies. Would Brazil be considered one of those countries that you believe you can grow at or above? Second, in terms of the impact of what's happening in Argentina and the broader view about a potential devaluation. How should investors map out that potential impact over the next several quarters? Thanks. Great. Hi, Gene. Thank you. What we saw this quarter, let me just give you some of the call-outs again. Brazil grew revenues in BRL at 46%, grew GMV in BRL at 30%. We believe, and we'll have to wait and see some more reported numbers from others, but all the data that we've seen out of Brazil showed significantly weaker numbers in terms of e-commerce growth for this quarter. Our sense is that certainly our marketplace at this point in time is growing at above the rate of e-commerce in Brazil. With regards to Argentina, I think we've had some overall market-friendly news on the political side with the first round of elections. There's still a second round of elections to come, and I think we should probably wait to see what the outcome is. At that point, it might make more sense to give some color on what we see going forward in terms of the prospects for Argentina. Just, I guess, one final question. You talked about the impact of shipping and finance on making more money from existing users. I assume that's a trend that you would expect to continue. Is there any reason why that trend may pause temporarily? Sure. I think when we look at our monetization rates, we continue to see our shipping initiatives and our financing initiatives as businesses that are both important drivers of a better user experience for anyone buying or selling on MELI. Additionally, they also generate incremental volume for us in terms of revenues. If you look at what the evolution in the different geographies is right now we have Brazil very well penetrated with both of those services and the other markets a few steps behind and growing. Long term, we expect to see levels of penetration across the board in our different geographies, reaching Brazilian levels, and that should be very incremental to revenues. Short term, if you look at sequential monetization, you might see it flatlining a little bit. It actually did this quarter sequentially, simply because the catch-up from the smaller markets towards Brazilian levels isn't happening overnight. There's a mixed shift away from Brazil in terms of revenue to other countries that are still lower in terms of take rate. The answer is long term, we continue to see improved monetization and take rate from shipping and from finance. There might be some smooth line quarters sequentially. Great. Thank you. Thank you. Our next question comes the line of Stephen Ju from Credit Suisse. Okay, hi. Pedro, anything you can share in terms of the uptake rate among your sellers on the new search ad unit? How do you think your sellers are going to be balancing this product versus the use of interest-free payments as a means for incremental lead generation on your platform? Thanks. Stephen, can you just repeat, sorry about that, the second half of the question? I got the first half. Yeah. They could either use the ads and the search results, or they can use interest-free financing as a means of lead generation. Your sellers have multiple channels for generating leads. How do you think they'll balance the use of one versus the other? Great. Let me just start with search products. What we're doing, just to make sure, because I think there are different flavors in different marketplaces globally, is we have began in Brazil to inject within search results, sponsored ads that look a lot like the core listings. If you click on them, they redirect back to a MELI listing. It does have a legend that says that it's a sponsored insertion. It's not that we're actually charging CPC on the core search results, but every X core search result listings, whether on mobile or desktop, we will inject a paid advertising. We think there's tremendous potential there in terms of incremental inventory. It keeps the user within our website or mobile experience by redirecting back to a listing on MELI. The initial uptick is actually quite positive. I think we're optimistic about that product rolling forward. It's only been rolled out to 50% of the Brazilian volume as we speak and to no other markets, we need to continue monitoring that going forward. In terms of the choice between installments as a way to get preferred search results or opting for the advertising product, we're seeing a bit of both. Depending on the seller profile, the ASP side, is it an item that credit will really drive more volume or is it perhaps a lower ASP item where placement is more relevant? Sellers are choosing. I don't think it's one or the other. We have done away with placement fees in Brazil, many of the sellers that used to pay up for the placement fees are opting for the search advertising. At this point, I think there's no conclusive data that says that it's one over the other. It's very driven by seller profile and by product profile. Thank you. Thank you. Our next question comes from the line of Marcelo Santos from J.P. Morgan. Good evening. Thank you for taking the question. My question is about GMV growth in Brazil. You mentioned the figure of 30%, and looking to your regulatory filings, it looks like this figure was more close to mid-teens in the first half of the year. Maybe I'm not reading that correctly, but that's what I get from the filings. Was there actually a real acceleration in GMV in the country? This is the first question. Yeah, Marcelo, hi, how are you? When we look at GMV and BRL in Brazil, you're correct. It grew 11% Q1, 15% Q2, and 30% Q3. Definitely we've seen very strong improvement in our business in Brazil. I would say it's a combination of, first of all, the continued penetration of payments, of financing, and of shipping, which make for an improving user experience. Also, if you recall, one of the things we called out is that as we aggressively pushed the enhanced marketplace, to a certain extent, certain transaction profiles that didn't want to use the incremental services were by design, being left out of the marketplace. We're now at the point where we're beginning to lap over the part of last year where we did away with that transaction profile. This is genuine growth on what we believe is a much better transaction profile in terms of the user experience, and also that we monetize better. Remember that in Brazil, we are already doing roughly 95% of all marketplace transactions through Mercado Pago. 75% of those have a credit overlay, and over 60% are being done using envíos. Really, very strong deployment of the enhanced marketplace there, driving that growth. Okay. The second question, more or less related is, with the new way of pricing that you have, what was the impact on take rate, specifically on the marketplace? Excluding that take rate increase that spills over to no marketplace. Yeah. There are a couple of things to bear in mind. As you anticipate there, the new pricing, two things happen. First of all is it shifts revenues away from placement fees that we used to have towards either financing fees, because one way to get the preferred placement is to offer the listing through Parcelado Sem Juros, and also to a lesser degree, referring back to Stephen's question, those placement revenues are also moving towards advertising, which are both non-marketplace segments. One thing you will see in Brazil is a dislocation from marketplace take rate to non-marketplace take rate. Okay? The second piece is it is probably too early to draw any definitive conclusions. It is only been live for a part of the third quarter. Going forward, we can give you more detail. At the margin, there is a slight decrease in core marketplace take rate as a consequence of this revenue shift and of the incremental revenue not necessarily covering for the placement fees that we used to charge. Okay. Thank you very much. Sorry. Just one final clarification. All in, on a sequential basis, Brazilian take rate is just to give you an order of magnitude, it's 10 basis points. It's essentially flat Q1, Q consolidated Brazilian take rate. Year-on-year, obviously, it's up significantly. All right. Thank you. Thank you. Our next question comes from the line of Steve Weinstein from ITG. Great. Thank you for taking my questions. I have two questions. The first one I think you may have just partially answered, but in looking at the new pricing structure in Brazil, do you think from a seller's perspective it's a price increase, neutral, or decrease? From their point of view. Second, without having the placement fees, the incentive is obviously to list a lot more items, and there's probably less discretion coming from the seller's standpoint. I'm wondering what you have done from either a technology, a search algorithm standpoint or how you're choosing to display the inventory to make sure that buyers are seeing the best items and the most relevant items when they visit the site. Yep. Let me just start with the second question first, because I think that's really what drove the decision. When you look at what we've done with pricing, clearly what we were trying to accomplish here was not a price increase or a price decrease. It was, A, by removing placement fees, which were not success-driven, to make it more enticing for sellers to list large and larger inventories with us. Also, as we work more and more with large retailers and branded retailers, what they want to be able to do is to put inventory up and not have to worry about duration dates for that inventory. For a retailer, inventory basically is live until you run out of units. Placement fees had 30 or 60-day durations. We were adding complexity that branded retailers typically don't want to deal with. By no longer having the placement fees, we can have inventory that is live on the site until there no longer are any SKUs left, which is going to be instrumental in helping us continue to push more aggressively with large retailers and branded retailers on the official store initiative. Obviously, we're doing this because we're confident that our search and our sorting capabilities can handle this without hurting discovery or search or relevance for buyers. It's not something that concerns us. We think we've come a long way, and we can handle that. The first question, is it a price increase or is it a price decrease? We've tried to manage this in as price neutral a way as possible. You can't always predict the elasticity. That's an ongoing process. By and large, I think our calculations have been pretty accurate. As I said before, sequential take rate in Brazil has been pretty much in line with where it was the previous quarter. So far, all the data we've seen, we've been able to switch pricing from a still placement fee model to a fully back-loaded variable model without affecting monetization, which was our goal coming into this. Sounds great. Thank you. Thank you. I have no additional questions at this time. I would like to turn the conference back over to management for any additional comments. Great. No additional comments. Thanks, everyone, for listening. As always, we look forward to updating you again with full year results next quarter and giving you some idea as to what our plans are for 2016. Thank you very much. Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a good day.