Good day, ladies and gentlemen, and welcome to the El Caddo Libre Q1 2014 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. Now I would like to turn the call over to Martin De Los Santos.
Mr. Los Santos, you may begin.
Hello, everyone, and welcome to the MercadoLibre earnings conference call for the quarter ended March 31, 2014. I'm Martindra Santos, VP of Finance and Head of Investor Relations for MercadoLibre. Our senior management presenting today is Pedro Arndt, Chief Financial Officer. Additionally, Marcos Halperin, Chief Executive Officer and Eduardo Jimenez, Executive Vice President of Payments will be available in the late 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 a new reliance on these forward looking statements. 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 the Q1 2014 earnings press release available on our Investor Relations website. Now, let me turn the call over to Pedro. Thank you, Martin. Good afternoon, and welcome everyone to our 1st quarter 2014 earnings call. The Gallaudimis platform for e commerce is off to a solid start this year.
And as always, I want to highlight for you all our key developments, metrics and areas of progress. Reviewing key metrics for the Q1, registered users topped the 100,000,000 marker, reaching 103,700,000, up 21% year on year after adding 4,300,000 new registered users during the period. Successful items grew 20%, reaching 21,700,000. Gross merchandise volume grew 58% in local currencies, reaching $1,800,000,000 Total payment transactions grew 36% to $9,200,000 Total payment volume grew 64% in local currencies, reaching $664,000,000 All this led to solid revenue growth in local currencies of 50% year on year. Excluding our Venezuelan operations, revenue growth in local currencies came in at an equally solid 39% year on year.
Additionally, mobile sales reached 14% of GMV. MercadoEnvious, our suite of shipping solutions surpassed 11% of items sold in Brazil and Argentina combined. And our mall initiative continued to move ahead as we onboarded a growing number of brands onto our platforms. These are some of the headlines, but what best summarizes our Q1 is the consistent progress on stated goals, which are already proving transformative to the user experience we offer our buyers and sellers. MercadoLibre has teed in on the set of fast growing initiatives, which we view as value drivers to the company in the future.
While many continue to be in their early stages, as we have consistently pointed out, we believe that our sustained commitment to these catalysts will ramp growth of e commerce for the company as they gather further momentum and penetration. Consequently, these have been the key strategic priorities for MercadoLibre during the Q1 and will continue to be so for the remainder of 2014. As you may be familiar by now, these include the promotion of our payments and shipping solutions as strategic facilitators for e commerce, helping to eliminate friction points and enhance user experience both on and off our platforms. The ongoing development of mobile and category specific vertical capabilities for our users, which are widening both our reach of consumers and of supply, while generating new and customized markets for incremental trading on our platform. The promotion of our open platform, making our services increasingly accessible to 3rd parties, be they outside developers building new solutions or brands and retailers requiring technological integration and support for their businesses.
Through this approach, we strive to be the technological partner of choice for anyone looking to trade online throughout Latin America. And finally, all of this necessarily is underpinned by ongoing efforts to deliver a constantly improving overall customer experience. We are devoted to innovation on this front, coming up with new solutions for the growing and customer service operations. Beyond the highlights I started out with, let me give you a little more data around how these have evolved during the 1st 3 months of 2014. Total payments penetration was up 2 91 basis points with a strong push from on platform payments, which reached new highs in our marketplace, surpassed 60% of GAV in Brazil and 38% in Argentina by the end of the quarter.
That's an on platform penetration increase of 13 percentage points and 8 percentage points of GMV respectively year over year. Shipping also gained considerable ground as Mercalandia's volume in Brazil went from 10% of successful items in December to more than 14% in March and from 3% to 4% in Argentina for the same period. Our mobile efforts doubled their year on year penetration from March to March from 7% 14% of our GMV and our mobile app totaled 10,000,000 downloads by the end of the quarter. Mobile remains accretive to our platform as new registrations from either mobile web or app already account for approximately 20% of our total new users registering on our site during a given period. We kept advancing our mall initiative efforts as we continue to onboard brand in Brazil and Argentina.
By the end of the Q1, we more than doubled our number of active official branded stores, reaching a total of 85 stores by the end of March. Our vertical category efforts continue to gain traction, led by sports and apparel. And finally, our customer experience efforts remain in full gear and we confirm this with significant gains to our net promoter scores during the Q1. So all in all, we made good progress across our strategic initiatives and we will continue to develop and execute our key business plans around these priorities during 2014. We operate in a thriving competitive environment where online shoppers are becoming increasingly sophisticated.
As a growing number of business models compete for traffic and user acquisition, often ramping up their marketing spend to do so, we remain convinced that the best ROI comes from investing in technology that drives ever improving user experience. Looking forward to the next few quarters, we must keep turning reliable payments and shipping into the norm on our platform by penetrating MercadoPago and MercadoEnvios further, making sure we offer the best financing options, most efficient settlement of transactions and delivery of product. We will cater to the ever more relevant mobile consumer by perfecting our capabilities on those screens and use cases. And we must keep expanding the mall concept on our platform, onboarding new brands at a faster pace, but also building new relationships with large retailers and within the development community. Look for all this in the coming year.
Now, I'd like to take a closer look at our financials. The business drivers exchange headwinds that we continue to experience across our major countries. All growth rates are year on year, unless I indicate otherwise. For the Q1 of 2014, net revenues were $116,400,000 a 50% growth in local currencies and 12% in USD. Excluding Bell Venezuela, net revenues grew 39% in local currencies and 10% in dollars.
Income from operations was 34,000,000 dollars a 19% growth in U. S. Dollars and 68% in local currencies. Excluding Venezuela, income from operations grew 5% in dollars and 29% in local currencies. Net income before income and asset tax expenses was $39,100,000 growing 54% in U.
S. Dollars 117% in local currencies. Net income was $30,300,000 growing 70 3 percent year on year in U. S. Dollars and 150% in local currencies.
Excluding Venezuela, net income grew 48% in local currencies and 16% in dollars. Resulting earnings per share $6 Now let's take a look at our top line growth for the quarter. Marketplace revenues accelerated on strong revenues from optional placement fees within listings, while final value fees maintained their solid year on year trend in line with stable growth of our unit volume sold. Specifically for Brazil, our largest market, items sold grew 25% year on year with local currency marketplace revenues outpacing that and showing year on year acceleration versus prior quarter, mostly on favorable listing type mix. Items sold in Venezuela grew 24%, while local currency GMV and related revenues grew substantially higher due to inflation in country, partially offset by a significant devaluation of the bolivar during the quarter.
While I'm still in Venezuela, I'd like to remind you that as we had informed earlier, we determined that the Venezuelan CCAD-one exchange mechanism is the primary system through which the company could request U. S. Dollars to settle transactions during the Q1. As a result, the exchange rate we have used to remeasure the monetary assets and believer transactions of our Venezuelan operations as of January 24, 2014 has been the CCAD-one exchange rate. The average of which was 10.1 delivers per U.
S. Dollar during the Q1 of 2014. I will cover the P and L impact of this devaluation later on in my prepared remarks. Additionally, there have been further developments in terms of the restylem exchange rate alternatives and we are monitoring these closely to determine what is appropriate for MercadoLibre. Specifically, during late March of 2014, the Venezuelan government introduced an additional exchange mechanism known as CCAP2, which trades at approximately $50,000,000,000 to the U.
S. Dollar. We have not requested to exchange currency at this new rate, but are currently evaluating the viability of CCAT 2 and its availability and accessibility during future periods. The mechanism is still in its early stages and there is very limited information being published around it. Hence, it is still very difficult to determine how this CCAT2 exchange mechanism works and the volume constraints that would limit our ability to access it.
Depending on our final assessment of these issues and our ability to access the CTAD-two market with consistency and regularity for both exchange and repatriation purposes, we could decide to start using this rate to re measure the monetary assets and transactions of our Venezuelan operations. We will keep you posted on any developments along this front throughout the quarter. Also to illustrate our sensitivity to a potential move to the CCAD-two exchange mechanism for reporting purposes, we have included a detailed sensitivity analysis in our earnings press release and 10 Q documents to be filed with the SEC. Non marketplace revenues grew above 30 percent year on year in local currencies, robust though a deceleration versus last quarter's growth mainly driven by a slowdown in classifieds and advertising businesses. The main effect came from classifieds, which slowed down driven by a weak motors and real estate activity in our main countries, but particularly in Venezuela, which has a higher share of classifieds than in the rest of our businesses.
Payments continue to post high growth through both our financing revenue stream and our off platform processing revenues. Financing was very much in line with prior quarter growing north of 40% in local currencies, while off platform continued to outpace all other revenue streams, accelerating in Brazil, while decelerating in Argentina as some of the verticals for which we process payments were negatively impacted by the currency devaluation that occurred during the Q1 in Summing up our top line performance, some of our revenues grew a robust 50% in local currencies, constant versus last quarter's growth. Consolidated net revenues excluding Venezuela also maintained their previous quarter growth rate of 39% year on year in local currencies. And finally, local currency revenues by country grew 30% for Brazil, also constant compared to the last quarter, 66% for Argentina, 9% for Mexico, 116% for Venezuela and 31% for the segment that contains the remaining countries in which we operate. Moving down our P and L, gross profit grew 13% in the 4th quarter to 83,800,000 dollars Gross profit margin was 72.7 percent of revenues versus 72.1% in the Q1 of 2013 and 73.1% in the Q4 of 2013.
Year on year, higher payments processing fees resulting from growth in MercadoPago accounts for 121 basis points of margin contraction, partially offset by efficiencies in taxes also related to our payment volume. When you add scale of 120 basis points in our customer support operations, This accounts for the slight margin expansion versus prior year. Operating expenses for the period totaled 49,800,000 dollars 10% higher than in the same period of 2013. Operating expenses as a percent of revenues was 43.2% in the 1st quarter versus 44.3% in the same quarter of last year and 34.4% in the Q4 of 2013. Our yearly salary adjustments contribute to sequential margin compression as typically happens each start of the year.
Year on year, long term retention plan accruals are lower by 124 basis points due to the lower stock price and our fraud loss provisions kept posting year on year gains for a 300 basis point positive impact on margin. This gets partially offset by a write off in tax credits, higher bad debt and higher product development spending year over year. Let me break this down for you line item by line item. Sales and marketing, our largest operating expense line remained flat at $22,400,000 or 19.4 percent of revenues versus 21.7% for the same period last year. A higher bad debt ratio than usual increased expenses by 105 basis points year on year, though this was amply offset by scale coming from salaries and charge backs.
Scale in salaries accounts for 50 basis points of margin improvement, 5 basis points owing to lower long term retention plan accrual year on year. Chargebacks from our Mercado Cargo operation scaled almost 300 basis points year on year. Our efforts to substantially reduce our rate of charge backs over total payment volume have definitely paid off, meaning that while payments far outpace revenue growth, the charge backs they generate are scaling. Product development expenses grew 31 percent to $12,300,000 representing 10.6% of revenues in the Q1 versus 9.1% in the same period last year, with higher infrastructure as well as outsourced development costs partially offset by 43 basis points in lower long term retention point costs. Finally, G and A increased 10% year over year to $15,200,000 in the first quarter or 13.2 percent of revenues versus 18.4 percent a year ago.
Salaries scaled 134 basis points, 77 of those coming from long term retention plan and outside services are also scaling approximately 80 basis points from lower legal fees than last year. This scale was largely offset by more than 200 basis points worth of margin compression coming from a $2,400,000 write of certain tax credits that will expire with the current software development law that applies to us in Argentina. While a new law replaces the old extending benefits for 5 more years, unused tax credits from the previous law expired generating these write offs. As a result of all this, operating income margin for the quarter was 29.5% versus 27.8% in the Q1 of 2013. Below operating income, we benefited from $3,000,000 of interest income, down 11% year on year as a result of lower amounts invested.
In our ForEx line, we saw a $3,100,000 gain versus a $6,200,000 loss in the Q1 of last year. Last year's loss resulted from the devaluation of Venezuela's local currency cash balances, which were considerable at the time. The current devaluation in Venezuela generates a ForEx loss of only $1,300,000 A smaller impact on local currency holdings in Venezuela have been considerably reduced year over year after the purchase of commercial real estate in that country. These losses are more than offset by a $4,600,000 ForEx gain resulting from the appreciation of U. S.
Dollar current assets held by our Argentine subsidiary. Income tax expense was $8,800,000 in the 1st quarter, resulting in a blended tax rate of 22.4%, lower than usual and considerably lower than 30.9% in the same prior year quarter. The prior year quarter had an unusually high tax rate due to Venezuela's larger non deductible FX loss in that period. In the current quarter, U. S.
Dollar liabilities on Venezuela's balance sheet appreciated, resulting in losses recognized under Venezuelan GAAP, driving Venezuela's effective tax rate down to 2%. Excluding these impacts, blended tax rate for the Q1 would have been 31.4%. Net income margin came in at 26 0.3% in the 1st quarter versus 17.1% for the same quarter of 2013, resulting in a basic net income per common share of $0.69 Excluding the foreign exchange loss and income tax effect resulting from Venezuela's devaluation, earnings per share would have been $0.63 Purchases of property, equipment and intangible assets during the quarter totaled $7,100,000 primarily driven by upgrades in hardware and software critical to our business. For the period ended March 2014, this resulted in free cash flow defined as cash from operating activities, less payment for the acquisition of property, equipment, intangible assets and acquired businesses, net cash acquired was $20,500,000 versus $24,000,000 last year. Cash, short term investments and long term investments at the end of the quarter totaled $263,500,000 This ends my review of a solid start to the year with financials accompanying solid performance from our business drivers.
I look forward to updating you throughout 2014 as we keep working on the strategic goals we discussed today, driving important improvements to our value proposition and helping to speed up the rate at which e commerce takes hold of our region's retail space. With that, we'd now like to take your questions.
Thank Our first question comes from Mark Miller of William Blair. Your line is now open.
Thanks and good afternoon everyone. So nice result and thank you for all the detail. Could you explain the wider differential in the growth rates between unit growth, which was stable 20% from the Q4 to the Q1 and then the acceleration in the local currency GMV growth from 49% to 58
Sure. So primarily when you look at the consolidated numbers, what we're seeing there is that some of the markets where we operate have high inflation rates, primarily Argentina and Venezuela. And so that drives local currency GMV growth in those markets primarily to accelerate significantly more than successful items. So it's essentially an inflation issue.
Great. And then the market growth for e commerce, I guess I'd like to know your view of what that is right now in Brazil and across all your markets? And in your view, are you holding share or gaining share at this rate?
There are different measures of market growth. We believe we are growing at market or above market in the different markets. So we aspire to grow between 20% 30% per year. We believe e commerce is growing roughly at those rates. And that's what we have been doing in the last several years and we aspire to continue doing the next several years.
And to be clear, Marcos, are you talking in terms of unit growth or in terms of total dollar fee growth?
Well, unit growth for us is very important, volume is very important and revenues is very important. So, we look at all these metrics.
Okay. I guess moving on for the shipping solution, you highlighted the importance of that as well as payments. What can the company do to drive even faster penetration growth? Is there anything you might consider for your sellers to pick that up at a faster pace? I know it's moving nicely in Brazil, but how about across the enterprise?
So let me take the shipping part and Oswaldo from Macau Pao is going to take the payments part. I believe you asked about shipping and payment penetration. Is that correct?
I mean, basically on the shipping side, it seems like a clear win for the customer experience. And also my understanding is that it's a positive solution for the seller as well. So what are the constraints to you in moving that along faster and anything that we should expect this year that could cause a step function increase there?
So shipping is growing really fast. We are very, very pleased with the evolution of Marcalon Dios. Its growth is continuous unabated on a month by month and that has essentially week by week basis. And we expect to see the same growth trend in the future because we are very happy with the way both sellers and buyers are adopting this product. As you said, it's bringing down costs in the system.
It's standardizing and improving the buyer experience with standardized shipping costs, with tracking. So overall, we're very pleased with how this is evolving and hopefully we'll continue to see penetration of shipping going up, particularly in Brazil and Argentina where these are the 2 countries where we have launched the solution and it is more and better implemented.
And Eduardo, on the side of the payments, we are growing between 13% and 8% points of GMV respectively year over year in Argentina and Brazil. And this growth has been related, I said, to better positioning in the size and also a good synergy between payments and shipping. With both services together and that has also driven payment penetration.
Thanks. And just a final question, I'll turn it over. What should we expect to be the impact to you from the World Cup? And to what extent might there be a somewhat of a diminution in the rate of e commerce purchases to the extent people are otherwise entertained? And are there any positives for the marketplace over that period?
Thanks.
So the World Cup really is not a catalyst for additional trade or e commerce. If anything, what we have observed from previous World Cup is that consumers tend to not shop very much on those days. On top of that, the World Cup is being held in one of our markets this time, which is something we don't have experience with. But I think in general, retailers and it certainly applies to ourselves are saying that it's probably a bit of a headwind if anything.
Thank you. Our next question comes from Jordan Rohan of Stifel. Your line is now open.
Thanks. Can you talk about the shifting competitive landscape in Brazil with new entrants such as what you may have observed at all of Amazon's intentions and some recent announcements by eBay that they're launching some sort of an offering in Brazil for cross border trade? And try to differentiate, if you could, your platform there and the level of scale and the role that MercadoLibre platform plays in Brazil. Tell us how you think it's truly differentiated? Thank you.
So I would say that Brazil and even more so for other markets are probably a few phases behind the U. S. Market in terms of both consumer expectations, but also the ability given existing infrastructure and logistics capabilities to deliver the kind of service that the U. S. Consumer is accustomed to.
However, I think we're all working diligently to get to those levels as quick as we can. So, I would say that right now, when you look at the sellers who have onboarded our shipping solution in the different markets, they're actually offering a very competitive and very compelling shipping solution from both the time, reliability and price standpoint. I think some of the pilot programs we have in Argentina and that we will launch very soon in Brazil that is very advanced even allows us to do things such as overnight and in some cases even same day delivery if you purchase an item before noon. So we are very much I think on the front end in terms of the quality and reliability of the shipping solution. Our challenge is to continue to drive adoption.
So as we've said, we're still in the mid teens of adoption, growing very rapidly and very pleased with those results, but the vast majority of the platform hasn't onboarded yet. And that's where most of the work is occurring right now. Okay. And then in Brazil, do you see American owned companies offering a compelling service and particular eBay, which seems to have some sights set on Brazil? So I think I would differentiate.
I mean, your question around shipping and logistics, right? The overwhelming majority of e commerce in Brazil is occurring intra Brazil. The cross border trade when we look at the overall volume of that is probably minuscule compared to the actual in country e commerce that's occurring. Additionally, I think when we're talking about shipping, I mean, our belief has always been that one of the disadvantages of cross border trade into the region is that obviously the product takes a lot longer to get there. So when we look at the competitive threat in terms of shipping and who's competing against us, we're looking at the other Brazilian online retailers and what kind of offerings they have in terms of shipping on their platforms.
If you want a brief addressing of the eBay recently launched solution, essentially what we've seen is basically it's primarily cross border trade and our focus continues to be on how we can better our solutions and drive value to our customers, not so much on what other players are doing. All right. Thank you very much.
Thank you. Our next question comes from
Pogo kind of the future as it rolls out, is that going to be more or less adoption of a traditional online payment? Or do you have aspirations around the digital wallet? And then a follow-up question.
So, what we're seeing is lots of growth coming both from all platform and out platform. And moving forward, we see lots of opportunities in the mobile market arena. There's a huge opportunity there in most of the countries we are in.
Okay. So would you as PayPal talks about kind of a more enhanced wallet than Google talks about that. I mean is it the same kind of thought process you have is going far beyond just simple payments? Am I hearing you correctly that that's something that is on the roadmap? Or is it on the road map, but so far down the road, it doesn't really matter?
Yes. Hi. This is Marcos. We as you know, we typically do not like to speculate or give forward looking statements. But obviously, we see a huge opportunity in payments.
We started with a non platform product. We expanded it off platform to other websites. Obviously, right now, mobile is a huge opportunity. And moving forward, with the internal things, so it's likely to be many opportunities in many places. We are opening up our platform in mobile as we have done with our core marketplace.
So together with the community of developers that is already working on top of our platform, we expect to take our mobile our payment solutions to many places.
Okay. That's helpful. And my second question is just regarding some of the gives and takes in the business in terms of comps going forward. Obviously, you don't give guidance, but your comments about the World Cup were helpful for us to think about the June quarter. And can you just walk us through how you see the comps progressing in the back half of the year, whether it's units sold comps or local GMV and just which ones that you think we should be more aware of?
And that may be helpful for us in tuning the models for the year here? Thank you.
Gene, 2 quick reactions. So the first one is again, we try to steer clear of forward looking projections or anticipations of how the business
might evolve.
More macro answer is, we're function change in most of the comp of the key metrics. So I wouldn't place undue focus on the comp issues. We've done that in the past and I think I've said this a few times, because we have seen step function accelerations in our business at times and therefore the comp issue becomes more relevant. Right now we're coming off of a fairly stable growth rates, as Marco said earlier, within market growth rate ranges. And so I think focus should be more on how well we're executing and what we're doing in our strategic initiatives to drive the business rather than any specifics around comps.
Okay. Thank you. And then I guess final question is the successful items sold. Can you just remind me what the successful items sold growth was for Brazil in March versus
December? So Brazil grew in the March quarter 25 percent units, down roughly 3% from 28% in the 4th quarter period.
All right. Thank you.
Thank you. And our next question comes from Ross Sandler of Deutsche Bank. Your line is now open.
Thanks, guys. So the Brazil unit growth you just called out seems to be holding up very well. And you mentioned earlier that Pago penetration is now I think 60% or north of 60% in Brazil as a percent of GMV. So can you just talk about maybe how the high penetration of Pago in Brazil is kind of benefiting the whole flywheel effect versus where penetration stands in other markets where it might not be as high. So just the benefit you get from that.
And then as you guys move from smaller sellers under your kind of tiered listing model to these branded stores. Can you just talk about the impact of on unit economics, if it's the same pricing or if there's a different pricing scheme? Thanks.
So with respect to the penetration of Fagro in Brazil and overall Brazil growth rate, Brazil is, as Phil was mentioned before, within our set of markets, the most advanced e commerce market and it's also the one where we have deployed better all of our tools, our e commerce ecosystem tools, both payments and shipping have a substantially higher penetration there than in other markets relative to the U. S. It's still not the same type of e commerce experience, but relative to the other countries in Latin America, consumers in Brazil are faster adopters of shipping and payments, etcetera. So we believe that with respect to what varies in those markets, we are competing well and we are happy to see that the ecosystem is working very well there. Clearly, we like to have a shipping and a payment ecosystem and believe that all the tools are working well, definitely one thing helps the other.
Pedro will help out with
the pricing part of the question. So the way we're currently handling this is there isn't any significant change to
the unit
economics. The opportunity to sell through the marketplace is actually a very compelling opportunity for many of these brands that are on boarding. It's a way to jump start their online operations and in some cases to start their online operations. So the pricing has been very similar to what we had already been charging large power sellers and power sellers. So right now and this is still in the very early days, there is no change to the unit economics.
We'll monitor that going forward, but up to now, it's a very similar financial model for a large retailer, a brand or a power seller we have.
Got it. And one more just on Pedro, I think you called out an operating income gain from of $2,500,000 from this Argentina tax situation. Can you just give us a little more clarification on that? And is that one time? Did I hear you correctly?
What exactly was that item? Thanks.
Yes. So it's naturally it's a one time loss. It's not a gain. We are beneficiaries of a tax holiday in Argentina because of the software law. The original law expired this year.
Fortunately, there is a new law that gives us an extension to these tax holidays for another 5 years. So that's really the most relevant news. On the flip side of that, there are certain tax credits that we had that we lose with the rollover to the new tax law. And so that caused a one off tax loss in the range of $2,000,000
Got it. Thank you.
Thank you. Our next question comes Marcelo Santos of JPMorgan. Your line is now open.
Hi, good afternoon. I have two questions. The first question is, if you could, from the operational point of view, provide some update on how Venezuela is going because of the inflation, it's hard to see excluding the currency effect how they're going. So for example, if you could provide item growth or just qualitatively. And the second question is, you showed lower expenses with legal fees.
Is this somewhat related to the improvement in customer experience? Is there a link there? There are no two questions. So I think I understood, but it's a little bit garbled. I think the first one was around if we could give some sort of notion of structural growth in Venezuela because inflation distorts the number somewhat.
In the prepared remarks, we called out that Venezuela had actually delivered 24% unit growth. So we shipped 24% more sold items this year than last, which given the situation in Venezuela is a pretty solid number. I think the second part of the question related to legal expenses that actually improved and were a driver of scale. And if there is a connect between that and an improved customer experience, there is. It might not be direct, but as we mentioned also our net promoter scores are improving.
We are seeing significantly better fraud loss and fraud number of cases on the site. All of that eventually flows through to lower legal expenses. So there is a connection between those two things. So just a follow-up on the first question. I think in the previous quarter, you had a 12% item growth in Venezuela.
So is there something specific that prompted this recovery in the sales? Yes. So, I think one thing you need to bear in mind is that Venezuela has been a very fluid situation. When you look at the Q1 of last year, that's when Chavez passed away and they had elections. So I think some of this improvement has to do with the fact that the comp is somewhat easier.
And also, in general terms, the last quarter was quite difficult for Venezuela, so was this quarter, but somewhat less so. And I think if you combine those two things, you get to the 24% growth. In terms of units, which is probably the best way to understand the actual health of the business. Okay. Thank you very much.
Thank you. Our next question comes from Michael Moran of Morgan Stanley. Your line is now open.
Thank you. And just to follow-up on that earlier question on items sold in Venezuela. Can you give us similar metrics in Argentina? What are you seeing there in light of the recent devaluation? And also, I think in your prepared remarks, you called out the slower classifieds trends in Venezuela.
But I think you also said that you were seeing weaker trends outside of Venezuela. So I'm just wondering, if you can elaborate a little bit more on that. Thank you.
So Argentina actually accelerated unit growth. We haven't been calling out the unit growth for all the countries. Argentina accelerated about 3 percentage points versus the 4th quarter. So if anything, the business there delivered better numbers this quarter than the last quarter.
And with respect to classifieds and also Argentina and the devaluation, Argentina is also another country where we have a strong presence in classifieds, particularly in the cars category, which was strongly impacted by a devaluation and restrictions, etcetera, in the car industry in the country. So that market has also had an impact in Q1.
Okay. That's very helpful. And if I can throw another one in there. You saw divergent trends in Mexico in the other countries. I know they're smaller, but I'm wondering if you can give us a little bit more color.
I mean, Mexico had been accelerating and there was a sharp slowdown this quarter and then the opposite happened in the other countries.
So Mexico in general for us is a country where we are not pleased with the evolution of our business. We would like to see substantially higher growth rates and absolute numbers coming from Mexico. It has been the case for a while now. And with respect to the other countries, there's a we don't disclose on a country by country basis, but there's, I would say, there's some countries that are doing really well, that well. And every quarter that varies a little bit.
Okay.
All right. Thank you very much.
Thank you.
Our next question comes from Chad Bartley of Pacific Crest. Your line is now open.
Hi. Thank you very much. Certainly a lot of puts and takes around expenses in the quarter. I did want to ask about the gross margin and operating margin expansion on a year over year basis that we saw. Is that a trend that you guys are managing too?
Is that something we should expect going forward? Or I guess just in general any sort of update on how you're thinking about managing operating margin particularly with some of the fluctuations in currencies and other variables? Thank you.
Yes, Chad. So I think you touched upon probably the 2 critical drivers there. So we continue to run a business that's quite scalable. I think sometimes for us the challenge is making sure that we're making the right investments in the right areas. If you look at the OpEx and where we're scaling and where we're not scaling, that's exactly the way we think we should be running the business.
Product development continues to receive significant growth in investment, sales and marketing somewhat less and G and A the least. On the gross margin piece, I think we continue to aggressively try to offset the margin compression that comes from the good results in the payments business. And so that story should be the same going forward. The one additional factor that I think did help this quarter and we've always said that is that when we do see strong devaluations or currency movements in Argentina, although that hurts our top line, we have enough of a cost base in Argentina that it significantly dilutes some of our costs as well. And so there are about slightly north of 2 50 basis points of OpEx margin improvement that come from the devaluation of the Argentine peso.
And that's something that should continue to be there at least until we lap the comp, which is Q1 when the peso devalued significantly. So this is an example of something that we had been saying all along, which is Argentina was a good place in a way to have a lot of our cost base because of the assumptions in our reality of the devaluation of the peso going forward.
Got it. That's a good point. That's helpful. Thank you.
Thank you. I'm not showing any further questions at this time. Ladies and gentlemen, this does conclude the conference for today. Thank you all for participating. Everyone have a great day.