Good day, ladies and gentlemen, and welcome to the MercadoLibre Third Quarter 2014 Earnings Call. Call. As a reminder, this conference call is being recorded. I would now like to turn the call over to your host, Martin De Los Santos, Vice President of Finance.
Hello, everyone, and welcome to MercadoLibre Earnings Conference Call for the Quarter Ended September 30, 2014. I am Martindo Los Santos, VP of Finance and Head of Investor Relations for MercadoLibre. Our senior managing presenting today is Pedro Arndt, Chief Financial Officer. Additionally, Marcos Kalperin, Chief Executive Officer and Oswaldo Jimenez, Executive Vice President of Payments, 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 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, we are cautioned not to place undue reliance on these forward looking statements. Our actual results may differ materially from those discussed in this call for a variety of reasons, including those described in the forward looking statements and risk factors sections of our 10 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 the nearest comparable GAAP measures can be found in the Q3 2014 earnings press release available on our Investor Relations website.
Now let me turn the call over to Pedro. Thanks, Martin. Good afternoon, and welcome, everyone, to MercadoLibre's Q3 2014 earnings call. As we approach the end of year shopping season, we are as enthused as ever for the work that lies ahead of us and the opportunities to build upon our recent success. As most of you know, we recently hosted our 2nd Investor Day and shared with the market our long term vision for MercadoLibre and its strategic initiatives.
As we highlighted then, e commerce remains below 3% of total retail commerce could double by 2018 and MercadoLibre finds itself at the center of this trend a leading market share and a clear game plan ahead. And while Latin America has a unique set of challenges, we feel that our domain expertise, region specific experience and commitment to continuous innovation allow us to maintain our leadership role. We are believers that these unique advantages will allow us to not only partake in the region's fast growing market, but actually to impact the rate at which that market grows. Our best effort at doing this is through our ecosystem approach, building key service offerings and technological solutions for our platforms and spreading these benefits to as many users as possible even beyond our own marketplaces. We are pleased with the results of this approach judging by the success we are having at penetrating and promoting our commerce solutions.
The results we are seeing so far are strong indicators that our strategic initiatives are driving value for all involved that MercadoLibre offers a more enhanced platform than it did a year ago and that the business is reflecting these benefits in its financial health. With that in mind, let's get started with my review of a positive third quarter, by and large a continuation of our successful efforts in the first half of twenty fourteen, both from an operational and from a financial perspective. During the quarter versus the same prior year period, registered users were up 21% now at 115,200,000 adding 5,600,000 new users in the period. Successful items grew 22 percent reaching 26,900,000 items sold. Gross merchandise volume grew 79% in local currencies reaching $1,700,000,000 Total payment transactions grew 49 percent to $12,500,000 Total payment volume grew 99% in local currencies to $975,000,000 Revenue growth in local currencies came in at 89% year over year.
Excluding our Venezuelan operations, revenue growth in local currencies came in at 59% year over year. Despite currency valuations, revenues in U. S. Dollars grew 20% year on year and excluding our Venezuelan operations revenues in U. S.
Dollars grew 39% year on year. On this last point, it is particularly pleasing to see such solid growth even in U. S. Dollars despite raining foreign exchange headwinds, which included the 1st full quarter impact of our transition to the CCAD II rate for Venezuela reporting purposes. What allowed us to accelerate revenues to this level was notable acceleration across each of the volume metrics that I called out as our volume and monetization favored by the strong cross usage of new formats and services that we are offering.
In the Q3, mobile sales also continued to penetrate GMV in each of our country operations. Mercado and Vios, our suite of shopping solutions surpassed 30% of total items sold in Brazil. Our mall initiative continued in full gear as we onboarded 138 new brands as official stores in Brazil, Argentina and Mexico and by the end of the Q3 had 364 official stores active in our marketplace. And finally, non consumer electronics vertical categories kept gaining share of total volume. Here is a more detailed quarterly update of what has been happening around some of these strategic initiatives.
Let's start with our payments and shipping solutions, which keep proving effective facilitators for e commerce. They are visibly eliminating friction by offering a shopping experience that is uniform and consistently trustworthy, which explains the leap in penetration both of these services have experienced over the past year. Brazil, our largest market has proven the template to follow as payments reached more than 70% of its marketplace transactions during the Q3, a record gain of 27 percentage points year on year. Brazil's on platform payments also penetrated 14 percentage points quarter on quarter aided by our newest interest fee credit offerings in Brazil. These new listings offer 0 interest installment to buyers.
The financing charge is covered by a higher marketplace fee paid for by the seller, but which is amply justified by the additional sales these listings generate. Free installments have obviously proven an incentive for buyers adopt MercadoPago in the process. Good for buyers, good for sellers, good for the marketplace and good for MercadoPago. Our shipping solution, which is offered exclusively through MercadoPago is obviously also boosting the success of payments. As I mentioned earlier, more than 30% of Brazil's sold units were shipped through MercadoEnvios during the Q3, more than we could have imagined a year ago.
Our payments and shipping methods are definitely becoming the norm in Brazil's marketplace and we intend to spread this dynamic gradually across other countries. Argentina, the runner-up on this trend also made strong gains in both payments and shipping penetration this quarter. Penetration of payments on our consolidated marketplace or the percentage of total gross merchandise volume paid through Mercado Fago therefore rose by 12 percentage points quarter on quarter, accumulating 21 percentage points year on year. Moving on to another area of strategic focus for us, we are pleased with the advance of mobile on our platform. In the Q3, we continued to perform usability enhancements that apply to mobile web as well as our mobile apps continuing to capture the spread of e commerce to smartphones and tablets.
Mobile kept gaining share of our GMV in the Q3 and also contributed a higher proportion of new users to our platform than ever before. 4 out of 10 new users registered through mobile devices in the quarter, an indicator of a key potential accelerator of e commerce. And for that reason, our progress in the quarter also extended to new initiatives we are seeding in the mobile payment space, which should also build
momentum for us going forward.
In the same way that we are extending our desktop leadership to mobile, creating new formats for more sophisticated buyers, we also keep advancing our specialized formats for large volume sellers in all categories. This includes our growing vertical solutions for the sale of sports and apparel goods and also our storefronts for branded retail, which totaled 364 by the end of the third quarter, growing above 60% quarter on quarter, while we kept improving their traffic and sales promoting them in commercial events such as our 15th anniversary sales event. Our vertical and official store formats fall under the umbrella of our mall initiative as they both contribute to the ongoing sophistication of solutions for professional sellers, widening both our reach of consumers and of supply and generating new customized markets for incremental trading on our platform. Our improved selling formats are evidently increasing our success at drawing large retailers onto our platform. As in the 3rd quarter, we opened official stores for the largest electronics retailer in Brazil, Picardo Electric as well as for Walmart in Argentina.
Our mall initiative is therefore advancing nicely also aided by our open platform as it connects us directly to outside developers and to large retailers requiring tailored solutions on our platform. As a final stop in our review of strategic initiatives, all the penetration and cross usage of services I just mentioned is generating solid improvements in the user experience we provide. We are also going the extra mile by continuing our investments in customer experience, growing our online contact channels, shortening queues and improving our tools for dispute management, part of the checklist that we accomplished in the Q3 yet again elevating our Net Promoter Score. This wraps up our strategic progress report. We are pleased with the way each of these aspects of our business are coming together to visibly strengthen our platform like different pillars supporting the same structure something that is evident in the health of our key metrics and also in the financials that we will now review.
Before calling out our financial highlights for the Q3, I would like to provide an update on MercadoLibre's reduced exposure to Venezuela. As I reminded you earlier, in mid May, we transitioned to the The CCAD II rate averaged 50 bolivars to the dollar in the 3rd quarter, marking a sharp devaluation versus the average CCAD I rate of 10 bolivars to the dollar employed during the Q1 of the operation was further devalued during the Q3 reducing its share of our total top line from 17% during 1Q 2014 to only 6% in the current quarter. This greatly reduces the impact of future Venezuelan macro developments on our consolidated results. As always, we remind you that we are in Venezuela for the long term running a cash positive business and currently converting a limited amount of bolivars to dollars under the CCAD II mechanism based on the quotas we are allowed, an improvement versus the previous status, I would now like to call out our consolidated financial highlights for the quarter. Net revenues were 147,900,000 dollars accelerating to 89% growth in constant currency and 20% growth in U.
S. Dollars. Excluding Venezuela, net revenues grew 59% in constant currencies. Income from operations was $47,100,000 up 26% in dollars year over year and 145% in constant currencies and 75% in constant currency, excluding Venezuela. Net income before income asset tax expense was $51,800,000 year over year growth of 26 percent in U.
S. Dollars, 134 percent in constant dollars and 69% in constant dollars excluding Venezuela. Net income was $33,800,000 growing 16% year over year in U. S. Dollars, 114% in constant dollars and 43% in constant dollars, excluding resulting in an earnings per share of $0.76 Taking a look at our top line performance, our consolidated revenues saw year on year acceleration in local currencies and notably also in U.
S. Dollars. Despite currency headwinds that include the strong devaluation of our Venezuelan business, our consolidated revenues grew 20% in U. S. Dollars.
Excluding Venezuela, consolidated revenues grew an impressive 39% in U. S. Dollars despite other FX headwinds. Marketplace revenues accelerated to 95% growth in local currencies, driven mainly by an acceleration in items sold a consolidated basis and individually across Brazil, Argentina, Mexico and Venezuela. Excluding Venezuela, marketplace revenues also accelerated growing 50% in local currencies.
Brazil in particular posted strong growth in underlying metrics, rebounding after World Cup headwinds subsided early in the quarter accelerating items sold growth to its highest level in the past 4 quarters, a year on year growth of 29% versus 21% during the 2nd quarter. Non marketplace revenues also experienced notable growth in the Q3, accelerating in both local currencies and U. S. Dollars on a consolidated basis and also in each of our largest markets. The main contributions to this growth came in order of relevance from the following: Financing revenues accelerating to local currency growth north of 70% year on year driven by our new interest free financing listing types in Brazil.
MercadoPago processing revenue growth, which posted above 60% growth in local currencies for the 3rd consecutive quarter, thanks to the increased adoption and usage of MercadoPago off of the MercadoLibre platform. Strong growth in advertising revenues, which make up a small but relevant component of non marketplace revenue classifieds revenues which accelerated to 42% year on year in local currency including Portali Movilario, our recent acquisition. All of these effects resulted in acceleration of total net revenues to 89% year over year growth in constant dollars, also accelerating to 59% year on year growth if excluding Venezuela. Total revenue growth in local currencies for each country were 49% for Brazil, 84% for Argentina, 23% for Mexico and 220% for Venezuela. Moving down our P and L, gross profit grew 18% year over year in the 3rd quarter to $104,500,000 Gross profit margin was 70.7 percent of revenues versus 72.3% in the Q3 of 2013 and 72.4 percent in the Q2 of 2014.
Lower gross margins were driven primarily by a 192 basis points contraction related to collection fees from MercadoPago as payment volume continues to show strong growth both on and off our platform. These effects were somewhat offset by scale and customer support and site operations. Operating expenses decelerated to 11% growth year over year reaching $57,400,000 representing 38.8 percent of revenues versus 41.9 percent in the same quarter last year and 39.4% in the 2nd quarter excluding one off impairment costs due to the transition to CECAD II in Venezuela. Let me break that down for you. Sales and marketing grew 22% year over year to $29,400,000 or 19 point 9 percent of revenues versus 19.6 percent for the same period last year and 20.1% last quarter.
This slight contraction in margin represents 168 basis points of increased customer acquisition costs and 115 basis points of higher costs related to our buyer protection program associated with the growth of payments and shipping. These effects were partially offset primarily by an improvement of 114 basis points as payments penetration has aided the reduction of our bad debt ratio in addition to 40 7 basis points of improved fraud loss provisions or chargebacks. Product development expense grew 12% to $13,600,000 representing 9.2 percent of revenue in the 3rd quarter versus 9.8% in the same period last year and 8.9% in the Q2 of 2014. Scale versus last year is mainly related to a prior year one time cost. General and administrative expenses decreased 6% year over year to $14,400,000 representing 9.7 percent of revenues versus 12.4 percent a year ago and 10.4% during the Q2 of 2014.
198 basis points of scale came from a one time benefit as we were able to use a previously written off tax credit related to the software development law in Argentina. The rest of G and A scale came from salaries and wages, 65 basis points specifically from a larger long term retention plan accrual in the Q3 of last year versus this year quarter. As a result, operating income for the Q3 was $47,100,000 or 31.9 percent of revenues versus 30 0.4% in the Q3 of 2013. I remind you that currency continues to be a relevant driver for scale. Of the 148 basis points improvement in EBIT margin year on year, approximately 100 of those were generated by the devaluation of the Argentine peso year over year.
Below operating income, we saw $4,900,000 in financial expenses, a majority of these corresponding to interest accrual on our convertible bond. Further down, interest income was $4,400,000 up 57% year on year due to higher interest rates on larger invested amounts as our MercadoPago stored balance has increased considerably versus the Q3 of last year. Our ForEx line is positive $5,200,000 due to the appreciation of U. S. Dollar balances held by our subsidiaries.
Brazil alone accounts for $4,700,000 of this amount. Net income before taxes totaled 51.8 $1,000,000 up 26% year over year and representing 30 0.5% in Q3 of last year. Income tax expense was $18,100,000 in the 3rd quarter, representing an effective tax rate of 34.9 percent, up from 29.3% in Q3 of last year. The year on year increase results mainly from a higher tax rate in Argentina due to the expiration of the software development law in September. Also by our convertible bonds financial expenses, which are only deductible in the U.
S. Where we do not generate significant revenues and finally, by a higher proportion of pre tax income coming from Brazil, which has a higher tax rate than other countries. Net income came in at $33,800,000 or 22.8 percent of revenues versus 23.7 percent in the Q3 of 2013. All this resulted in basic net income per common share of 0.7 $6 Purchase of property, equipment and intangible assets net of cash acquired during the quarter totaled $8,400,000 For the period ended September 2014, free cash flow defined as cash flow from operations, less payment for the acquisition of property equipment and intangible assets net of cash acquired was 42 point $1,000,000 versus $25,700,000 in the same period last year. Cash, short term investments and long term investments at the end of the quarter totaled $566,200,000 Finally wrapping up, we declared our quarterly dividend of $7,300,000 or $0.166 per share payable on January 15, 2015 to shareholders of record as of the close of business on December 31, our focus is to continue to enhance the marketplace, scaling our businesses, driving payments growth both on platform and off platform and seeking new avenues and clients.
We will continue striving to an easy and optimal way to access our users' transactional needs across all devices. All this while perfecting our mall concept, broadening vendor categories, building new relationships with large retail and within the development community. I look forward to reporting back to you on our progress on all these fronts next quarter. Thank you very much. And we can now take your questions.
First question comes from Scott Debit with Stifel. Your line is open.
Hi, thanks, Joe. Sorry for the speakerphone. I can't get it off. But and I don't want to put words in your mouth. But at the Analyst Day, you seem to be happy growing in line with some of the faster growing e commerce markets.
And particularly Brazil. You just saw a meaningful acceleration in your 2 largest markets to levels that seem to us to be market share gaining. And several of the reasons you provided as an explanation for the improved growth seem like they're going to continue into the future. And so I'm just wondering and there is a question here. If you think the format service improvements you've invested in may just be beginning to drive a sustainable inflection and growth rate of the business?
Trying to get an understanding in terms of how to model this on a forward basis. Thanks.
Hi, Scott. How are you? Thanks. So let me break down your question very quickly. Yes, we do believe that a lot of the drivers behind the solid revenue numbers are the coming together of the different pieces of the ecosystem payments, shipping, financing, whatnot, and hopefully those are sustainable in time.
Having said that, I think we've also said that our growth trajectory historically has been somewhat jagged over time. But if you take a step back and you look at longer periods of time, we've typically been able to gain share gradually over time and that we set as a floor for ourselves the rate of growth of the market because we see no reasons why we should be losing share. I don't think that overall philosophy has changed. I think we're very pleased with the way the business is coming together, definitely seeing that in better financials. Some of that is also driven by monetization.
As you've heard many times, we believe in capturing value and value is being generated, but we've also gone through long periods where our take rates have been relatively flat and that could be something that could happen again in the future.
Thank you. Our next question comes from Gene Munster with Piper Jaffray. Your line is open.
Good afternoon and congratulations. Two questions. In terms of Envios, the buying patterns, do you have enough data behind an individual who uses the service, how they typically buy versus someone who does not use it? And my second question is at the Analyst Day, you talked about some a little bit greater investment. Can you just clarify in terms of the magnitude of how you're thinking about that investment and how we should be evaluating that?
Thanks.
So in terms of the Envios product, I think what we've disclosed is that average ticket items are higher. We haven't disclosed any cohort analysis or any analysis on repeat usage beyond qualitative. Obviously, it's a much improved buying experience. It's a safer buying experience. And we believe that over time, it should drive engagement.
We haven't gotten into the specifics of the data. It's interesting proprietary data, but definitely it's a better experience and we trust it builds long term engagement with the platform. And then your second question, which is always also forward looking, we typically like to comment on the current quarter, but conceptually I think what we've been saying is you can see a little bit of that in this quarter and you don't see more of it because currency also helps. As we grow increasingly comfortable with the platform, we have been investing some margin into customer acquisition. If you look at the sales and marketing line, it doesn't show leverage this year.
And I think that gives a sense that what we said we would be doing is playing out, which is to invest some of the margin that the business is delivering back in the right areas of OpEx and customer acquisition we've said is one of those.
Great. Thank you.
Our next question comes from Ross Sandler with Deutsche Bank. Your line is open.
Thanks guys. This is Deepak on behalf of Ross. Just a question on the Brazil unit growth. The 29% unit growth was good acceleration despite comps being a little bit easier. But wanted to get a little bit more color on that.
I mean, what exactly are you seeing that's driving that? Can you give more color in terms of what the customer growth is versus purchase frequency that's driving it? And then secondly, can you give a little bit more color on the unit growth in other markets like Argentina where revenue growth was strong? Thanks.
Great. So as you can see definitely there's strong unit growth in Brazil, higher than the previous quarters. Couple of factors there I think worth noting. First of all, as we had highlighted that the second quarter had some hangover from the World Cup that hit primarily in that quarter. So I did think that we tried to be clear in saying that there is some slowdown previous quarter that was not sort of run rate, but was specifically attributable to the World Cup.
We're seeing a pickup in our unique buyers in Brazil. So we're seeing improvement in units per buyer, but we're also seeing a pickup in new buyers, which is also very healthy. And then the final thing I would say or 2 more things I would add. There continues to be downward trend in average selling prices. So that's an inclination that we continue to expand into more categories that have lower ASPs than the old core categories in consumer electronics.
So the verticalization of category strategies is playing out nicely in terms of incremental purchases in units. And then finally, we also see when we segregate between transactions that have one of our value added services overlaid, whether that be shipping, payments, credit, we see acceleration in growth of those transactions versus the transactions that are the old model where there is just a purchase and none of our additional services are overlaid. So those are probably the drivers behind the Brazil acceleration. World Cup is behind us. We're seeing growth in buyers.
We're seeing expansion into new categories and we're seeing some really good traction in transactions that have one of the enhanced services. The Argentina question, Argentina had interesting growth. If we look at Argentina breaking it out between marketplace and non marketplace, similar growth among both BUs or segments. In other words, both payments and the core marketplace had strong performance in Argentina during the quarter. If we look at local currency growth, it's in the mid-80s consolidated and both segments are close to that.
Obviously, Argentina, some of the local currency growth needs to be adjusted for inflation. But even if you back that out, you still see very solid growth in top line both in the marketplace and the non marketplace businesses.
Our next question comes from Stephen Ju with Credit Suisse. Your line is open.
Thanks. So Pedro, this is the Q2 in a row on which you posted what looks like an accelerated rate of user sign ups. So did you do something to simplify the registration path onto the platform or is this all due to mobile? And secondarily, I neglected to ask this at the Analyst Day, but MercadoLibre, Provisitat looks like a pretty interesting move to adopting more, I guess, more of the ad driven model seen in other marketplaces platforms in Asia. So how has the seller adoption of this product been so far?
And between this and the interest free listings, there now seems to be multiple ways for you guys to capture some more of the marginal economics. I'm just wondering what the seller adoption of these two products have been? Thanks.
Great. So user acquisition, I think this quarter is organic. We had said that some of the user acquisition pickup last quarter was also driven by the purchases of real estate sites in Chile and Mexico. That's not the case this quarter. This quarter, it's just solid organic pickup in the rate of new users.
As I had mentioned before, there is a financial offset to that if you will, which is there are some margin points in customer acquisition that were given up. We're quite comfortable with that trade off and that's exactly what we're managing too. In other words, there's just more spend in bringing in more customers through the door and we're seeing the results of that. Obviously, mobile is driving some of that. We've said that more than 30% of user reg is coming from mobile.
A lot of that incremental spend is going into mobile advertising. So we're carrying out the investment plan in terms of user acquisition that we wanted and we're seeing the results. The advertising business, it did begin to pick up its rate of growth, growing in dollar terms around 20%. It had been sluggish in the past, but it still continues to be quite small. I think what we've always given is as an order of magnitude, it's sub-three percent.
It continues to be sub-three percent quickly moving in that direction. But given the growth was quite strong across the board, the rate of growth although it accelerated versus prior quarters for the advertising business, it isn't necessarily higher than the other parts of the business. It's actually in line with what overall revenues were growing in dollars. And then interest free that is newer, so it's coming from a slower base and that has showed some very strong growth. So that one is a very interesting initiative that going forward I think we'll be looking at very closely.
Thank you.
Finance and local currency grew north of 70% year over year, finance revenues. So strong contributor.
Understood. Okay. Thank you.
Our next question comes from Marcelo Santos with JPMorgan. Your line is open.
Hi, good evening.
Thanks for taking the question. I have two questions. The first is on the zero interest feature that you introduced. Just get a little bit more color, which categories are using more this? I know it's very early, but which criteria are using more this tool?
And what's the profile of the sellers that are using it? This is my first question.
Hi, Marcelo. This is Oswaldo. What we did initially with zero interest with Parcelaos and Juros in Brazil is limited to the power sellers. So it's mostly the larger sellers of Bergao Libre who were able to use it. And now we're expanding that to some other sellers.
And category wise, it's basically we've seen most of the use in higher ticket items, which are the ones that consumers are more willing to pay in installments.
Okay. Thank you. And the second question is about the tax benefit in Argentina. You mentioned that now you're not receiving it and then there is a new law. Have you been admitted to receive the benefits under the new law?
Or what are the steps for that to happen?
So the answer is no. We have not received official notification of our entry into the new law. No one has that we're aware of. So it's still pending government implementation. To the best of our knowledge that is something that should not be an issue, but until it's official, I think we need to maintain a wait and see position.
Regardless of whether we enter or not, it increases our tax rate because the new law although it extends the tax holiday, it does so at a slightly higher rate or with less benefits than the old law.
Okay. Thank
you. Our next question comes from Mark Miller with William Blair. Your line is open.
Hi, good evening. I also have a question on the interest free financing. And I wanted to get your sense for how quickly you think this can be introduced and drive penetration in Mexico. And Pedro, in your comments, I thought you also alluded to, as a market leader, viewing the company as an opportunity to actually drive faster growth. So do you think that we could see an acceleration in Mexico?
And then as you've been tracking this offer be implemented in Brazil, are you able to see whether effectively sellers are not passing through the full amount of the value to the consumer with that interest refinancing? In other words, absorbing some of it to drive faster unit growth?
Hi, Mark. This is Oswaldo. Let me start with Mexico and then let's move on to Brazil. In terms of Mexico, we as we said, we are in the process of rolling out zero interest financing and that will happen during this quarter before the end of the year. And we start again with a small segment of sellers and then see how we are willing to expand it to other sellers.
And in terms of Brazil, what we are seeing, some users are obviously passing through part of the increase in price, but what we're seeing is that the percentage of transactions done with Parcelaos in euros is significantly higher than the percentage of listings with that type of listing. And therefore, consumers are finding it more attractive than regular listings and it's driving volume.
And then can you, I guess, share what element of uniqueness or how sustainable you think this benefit is to you?
We believe this to be sustainable. We believe that this is we think that we are able to sustain this in Brazil and to roll it out in Mexico. We think that we are able to sustain this in Brazil and to roll it out in Mexico.
I think, Mark, just to compliment that, The interest free purchase in Brazil is fairly standard among retailers. I think what's interesting for us about this is that it actually allows us to address what was in the past somewhat of a non competitive offer. So I wouldn't say that this is something that we have and others don't, but I think it is very relevant because in the past it was one of the few areas where we felt a lot of our retail competitors perhaps aggressively pursued this as a growth strategy and we couldn't replicate since we weren't the retailer, it was our merchants. And with this new feature and listing type, we're now able to allow our merchants to offer interest free financing. So that puts us on par and then we can allow all the other competitive advantages we have to sort of do their work and I think that's what's driving growth.
So despite not being something unique, I think it's something that's very relevant because it puts us back on equal footing on one of the few areas where we clearly weren't in the past.
Great. Thanks for the clarification. And then just one other on the customer acquisition investment. So up 168 basis points as a percent of revenue. Can you help frame what the rate of increase is in customer acquisition?
And I'm gathering it's going faster than what the number of new users are. So to some extent there is an investment in future periods. Customer add number actually potentially accelerate in coming periods? Thanks.
One second here. Let me give you an order of magnitude of growth in customer acquisitions. You're accurate in that the investment increase is higher than the increase in the clip of new users. That's by design one of the ways that we're able to allocate more money is by going after perhaps slightly lower ROI channels when measured short term than we were in the past. But again, we think we need to continue to push more people through the door.
Long term that should be beneficial to us given where the platform is at and then the multiple services we have to drive improved engagement.
Terrific work by the team. Keep it up.
Yes. So roughly just to give you sense, the increase in customer acquisition costs and for us that's not just marketing spend, it includes a couple of other things, but was roughly 50% year on year.
And Pedro, the other part of the question was, I mean, since there is some lag in terms of the customer acquisition, It'd be reasonable to think it seems that that number might begin to grow faster in future periods.
Yes. I'd rather not enter into forward looking statements. I think what we're saying is look, we're willing to invest more behind customer acquisition. Customer acquisition has many different flavors. There's mobile investment, desktop investment, there's other areas that might have different ROIs in different quarters.
So let's wait and see. I think the one thing we're committed to given where the platform is at is to be somewhat more aggressive in bringing users through the door and hopefully that will continue to drive positive growth not just in users, but obviously in transactions and financials. Great. Thanks.
Our next question comes from Michel Morin with Morgan Stanley. Your line is open.
Thank you. Hi, everyone. So two questions. The first is given in Brazil, you talked about getting the World Cup behind you. So should we take from that that during the quarter you saw acceleration of the growth?
And then secondly regarding the financing again in Brazil, can you help us understand the nature of that 70% growth rate? Is it the same if we were to break out the gross because that 70% is net if I recall correctly. So I just wanted to see if there's anything that's driving that number, whether it's really gross financing or if it's a change in terms of the financial expenses? And how are you in financing today relative to the peak levels that you had achieved in the past? Thank you.
Great. So, yes, first part of the question, yes, implied in the World Cup impact was that, obviously July still had some World Cup tailwinds. So July was lower. August and September were probably more in line with each other. So really the World Cup was a part of a drag that extended into the back end of the quarter.
In terms of financing, I don't know, Oswaldo, if you want to take a
I'll stop at that one. Yes. In terms of finance fees, the acceleration we saw in growth is related in Caixo Brazil to this euro interest financing. And here what we see is a growth in volume in the amount of items that get bought with a financing option. Even though we are losing a little bit of margin in those items, overall, we have significantly higher revenues.
Okay. So your gross financing is actually up more than 70%?
Gross financing will be higher than that. Yes, correct.
Okay. And then as a percentage of your revenues in Brazil, are we at a new record level from net financing fees?
We're trying to see here historical data for back when CELIQ was lower because there has been some pressure. Looking over the last few quarters, we're definitely at some of the highest financing take rates and implicitly therefore revenue as well. So my intuition would be yes, I'd have to look at a longer historical sequence, which I don't have in front of me. But I would say by and large pretty sure that yes.
That's great. Okay. Thank you very much, Pedro.
Thank you. This ends our Q and A session and the call for today. Ladies and gentlemen, thanks for participating. You may all disconnect.