Good day, and welcome to the MercadoLibre First Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to MercadoLibre, Management.
Please go ahead.
Hello, everyone, and welcome to the MercadoLibre earnings conference call for the quarter ended March 31, 2012. My name is Alex Der Boites, and I am the Head of Investor Relations for MercaVie. Our Senior Manager presenting today is Pedro Arndt, Chief Financial Officer. Additionally, Marcos Galperin, Chief Executive Officer and Osvaldo Jimenez, Senior Vice President of Mercado Palo 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, you are cautioned not to place undue reliance on these forward looking statements. Our actual results may differ materially from those discussed in this call for a variety of reasons, including those described in the forward looking statements and risk factor sections of our 10 ks and other filings with the Securities and Exchange Commission, which are available on our Investor Relations website. Now, let me turn the call over to Pedro.
Thank you, Alex, and hello, and welcome to everybody. Before I jump into a recap on the results of our most recent quarter, I'd like to provide you with an update on our current efforts as they relate to our ongoing strategy and as new initiatives gain speed in our quickly evolving e commerce market. A little under 2 years ago now, we set out on an ambitious agenda that involved rewriting our entire platform architecture to make it more flexible, open and adaptable to new technologies. We made this decision knowing that it was of strategic importance, not only for the optimization of our existing business, but also to allow us to better respond to new challenges and opportunities that our ecosystem faces in the rapidly changing and evolving landscape we operate in. Today, as we recap how 2012 has started, it's important that we point out that we are pleased with how we have been executing against the strategy we outlined.
Our New World platform, as we called it, already makes it easier for us to advance on the ambitious product and service roadmap we have set out, enabling parallel improvements and a faster pace of innovation across our different business units. Not only has this allowed us to pick up our pace of innovation, but it has also enabled us to start thinking ahead and making up for lost ground as we make our initial forays into mobile commerce, social commerce, verticalization of our category offerings, expansion of our payments platforms and improvements in our customer service levels and more. This quarter and most of this year will be about continuing to build on the solid groundwork of our New World project, advancing on key improvements to the user experience across our marketplaces, payments, advertising and shops services. We look forward to bringing you quarterly updates and the advances we make starting with this quarter's highlights. During this quarter, we saw sustained momentum in our metrics, while continuing to focus on executing the above mentioned strategic initiatives.
Advances made in the second half of twenty eleven to the way users shop online on our properties continue to drive additional growth. A quicker registration process built into our buying flow has consistently brought us a strong inflow of new users. Now in the Q1 of 2012, 3,600,000 new users registered on MercadoLibre, a 37% growth versus 2,700,000 in the Q1 of last year. Simultaneously, the redesigned buying flows have kept unit sales growth above the market rate of growth as we believe we continue to gain regional share let me first highlight some of the key metrics for our latest quarter. 15,000,000 items were sold on our marketplace versus $10,900,000 in the Q1 of 2011, a year on year growth of 38%.
Gross merchandise volume was $1,300,000,000 versus $954,000,000 in the same quarter of 2011, a year on year growth of 45% in constant currencies and 39% in U. S. Dollars. We had 4,900,000 transactions on our payments platform versus 2,600,000 in the same quarter of 2011, a year on year growth of 85%. And total payment volume reached $370,000,000 versus $245,000,000 in the same quarter of 2011, a year on year growth of 61% in constant currencies and 51% in U.
S. Dollars. These metrics all illustrate the health of our e commerce ecosystem from the perspective of both marketplace and payments despite the foreign exchange headwinds we face this quarter. A consequence of improvements in the way we enable users to shop on our platform. Many of these first quarter improvements have been gradual iterations on previously launched products, services or features, while others have been recently released product innovations that we believe will generate important long term value.
Among these newer initiatives, I would like to mention a few. We surpassed 2,100,000 downloads of our mobile applications since it went live, promising a significant source of future volume. Additionally, during the quarter, we launched an HTML mobile version of our website and continue to improve the native iOS and Android versions of the application. You can now complete the entire purchasing flow from search down to checkout on the mobile app. We also made progress on verticals, which as I mentioned earlier, is an important initiative for future growth.
While consumer electronics still represent more than 50% of what is sold on our marketplace, Vertical categories such as sports and apparel are beginning to show their potential and we believe we can speed this up. In the Q1, we launched the 1st phases of vertical fashion categories in Brazil, making it quick and simple for our sellers to offer more variety in terms of colors and sizes and improving the visual interface for apparel product pages with better pictures and zoom capabilities. We are very excited with the initial results and we'll continue with more subcategories throughout the Q2. In the meantime, it is exciting to see that another of our initiatives, social integration, is making its first steps. We are increasingly exploring innovative ways to leverage social networks, integrating them with the experience of buying and selling on our platform.
Although actual gross merchandise volume being generated through social networks is not yet material, we believe we are laying a solid foundation by increasing the amount of commerce content distributed by our users throughout their social graph. We are already seeing millions of users per day streaming MercadoLibre products through their social networks and we see increased potential going forward. In beginning to match optimizations made to the buying flow in the second half of last year, this quarter, we increased the pace of improvements made to the selling flow and seller inventory management tools with the objective of ensuring that sellers on our platform have the proper tools to manage increased traffic, transactions and information being generated by our platform. Our classifieds marketplace has also benefited from new vertical functionality rollouts as its own vertical features have undergone significant improvements over time. During the Q1, we made progress on our real estate platform a newly launched Quick View feature, more prominent highlights of our most popular offerings and an open API for realtors to bulk list properties on to MercadoLibre.
These enhancements and our focus on professional broker dealers in both motors and real estate are all driving the current success of this business as reflected in its solid top line growth. And finally, during the quarter, we finalized the first stage of our migration over from a proprietary CRM that had served us until now to sales force. This initial milestone means that all customer service queues are now running on salesforce.complatform and we can advance with greater efficiency on the constant process of improving customer interaction processes and service levels. Before I walk us through our financial results, I would like to address our payments business quarterly performance in particular. After a thriving holiday season, payments volume decelerated in the Q1 of 2012.
Solid transaction growth of 85% year over year was partially offset by lower average payments in dollars as we experienced. FX headwinds year over year saw a lower proportion of multiple item or large ticket payments
after the holiday
season and witnessed less demand for installment options. To a lesser extent and on a more positive note, lower average payments year on year also resulted from our impressive off platform payments growth, which has brought a variety of new e commerce players into our ecosystem such as group discount sites and the diversity of other stores that generate lower ticket payments on average. We are obviously pleased with this particular lower average ticket driver as the growth of payments outside of our marketplace occurs across a diversity of different players, allowing us to grow with them and develop our e commerce ecosystem in the region. While factors behind our decelerating Q1 growth were mainly, as I just mentioned, seasonal or FX related, in part, this deceleration was also attributable to the fact that most of our MercadoPago programming efforts in the Q1 focused on long term initiatives as we continued transitioning from old to new architecture and payments, completed our migration to a new and more flexible gateway and kept improving our fraud scoring models and CRM capabilities, helping us to ensure that the growth of MercadoPago occurs alongside a steady improvement to our user experience. This focus on the back end came at a cost in terms of short term growth rates as a consequence of 2 main factors.
On one hand, less innovation on consumer facing features on the Mercado platform during the quarter and some non planned downtime during the March migration to the new architecture generating operational backlogs and loss of total payments volume that have been fully fixed by April. Moving on to our financial results for the Q1 of 2012, we believe our e commerce ecosystem continues to perform well because of the additional value it is providing our users quarter after quarter year after year. As this platform grows and develops, we are retaining our focus on offering increasingly better service and satisfaction to both our buyers and sellers alike. We are convinced that this is the right strategy and we must continue to focus on executing against it. As long as we do so, we trust that financial results will accompany regardless of other external factors such as macro conditions or changes in the competitive landscape.
Allow me now to highlight some of our key financial metrics before going into further detail on our performance in this quarter. I will call out year on year growth rates unless specified otherwise. Specifically, during the Q1 of 2012, net revenues grew 36% in U. S. Dollars to $83,700,000 a 44% growth in local currencies.
Gross profit margin was 74.8 percent versus 76.7% in the Q1 of 2011 Income from operations grew 29% to 24,900,000 dollars with an operating income margin of 29.8 percent versus 31.4% in the Q1 of 2011. In local currencies, operating income grew 36% year on year during the Q1. Net income before income asset tax expense was $26,900,000 representing 34% growth. And net income was $19,600,000 a 40% growth year on year. This represents a 23.5% net income margin versus 22.9% a year earlier.
In local currencies, net income grew 47% year on year in the Q1. And now for a detailed discussion of these results starting with our top line. Since our core marketplace fees represent the majority of revenues, gross merchandise volume remained a principal factor behind our year on year revenue growth. Final value fees continue to grow at a very solid pace, also driven by year over year pricing as a consequence of processing more payments on our marketplace and charging for greater value delivered. This was partially offset by a greater share of lower monetizing GMV than last year as Mexico and Venezuela did not offer free listings a year ago.
I remind you that these free listings continue to be an important part of our strategy as they are a seller acquisition tool and improve selection for buyers. In the meantime, upfront fees accelerated this quarter due to price adjustments in the Q1 on our optional listing formats that offer better placement to sellers. Total payment volume growth also contributed to our top line, not only through bundled pricing on platform, but also through off platform payments that contributed standalone processing fees on significantly more volume than last year as this business expanded organically and geographically. Mexico and Venezuela contributed growing off platform payments in the first quarter of 2012, while these operations had not been launched in the Q1 of last year. Additionally, financing revenues contributed to revenue growth on the basis of a higher payments volume choosing installment options versus a year ago, partially offset by a shift to lower installment purchases that carry a lower spread.
Topping off our revenue growth, classifieds and advertising grew at a very good pace on the basis of enhanced features and a larger client base than last year. Classifieds and ad sale revenue for the Q1 of 2012 grew 43.4% combined over the Q1 of 2011. In summary, the underlying drivers of each of our revenue streams were healthy as indicated by the following growth on a country basis. In local currencies, consolidated net revenue growth was 29% for Brazil, 85% for Argentina, 35% for Mexico and 66% for Venezuela. In terms of units sold, items grew 43% for Brazil, 31% for Argentina, 33% for Mexico and 42% for Venezuela.
Let me now take a detailed look at our cost structure during the Q1. Gross profit grew 33 percent to $62,600,000 representing 74.8 percent of revenues versus 70 6.7% in the Q1 of 2011. Year on year gross margin contraction is attributable to increased interchange fees associated with processing additional payment volume as well as $1,200,000 of incremental other costs of goods sold mainly related to MercadoPago as well. Operating expenses for the period were 45% of revenues versus 45.3% in the same period last year, 30 basis points improvement in operating leverage, which would have been higher in the absence of certain events specific to this quarter, which I will describe shortly. In absolute terms, operating expenses totaled $37,700,000 a 35% increase versus the Q1 of 2011.
More specifically, sales and marketing remained the largest light item expense, increasing 32% for the quarter to $17,400,000 and continuing to show cost efficiencies having decreased as a percentage of revenues to 20.8% from 21.5% for the same period last year. Aiding the natural leverage of our business model in this expense line, during the quarter, we received a reimbursement of $600,000 from one of the banks that process our payments in Brazil for amounts erroneously processed in the Q2 of last year, a charge that we had absorbed in our P and L during that period. It's also important to note that we were able to attain this leverage despite chargebacks increasing year on year at a faster pace in revenues as a driver of this cost line is our rapidly growing payments volume. Spending on these fraud loss provisions during the quarter totaled $2,400,000 more than they did in the Q1 of 2011. G and A grew 34% year over year to $12,700,000 in the Q1, impacted by the accrual of $1,000,000 pertaining to our long term retention plan based on our higher stock price during the quarter.
In addition, this quarter, we accrued $900,000 corresponding to a claim from Venezuelan tax authorities of previously unpaid taxes. As a percentage of revenues, G and A was 15.2% versus 15.4% in the same period last year. The leverage would have been more significant without the one offs I just discussed. Product and technology expenses grew 47 percent to $7,600,000 compared with $5,200,000 for the Q1 of 2011, mainly through increased investments in headcount and technology related services as we continue to expand and strengthen this team, which is essential to the plans for our business. One additional point of note pertains to seasonal salary and wage increases.
The first quarter has the largest sequential increase in payroll costs due to annual inflation and merit compensation adjustments. Total salary and wage expenses in OpEx for the quarter grew 24% on a sequential basis and 33% versus last year as headcount grew by more than 60 employees sequentially and more than 250 employees versus a year ago. All this leading to operating income for the Q1 of 2012 of $24,900,000 Operating income margin for the quarter was 29.8% versus 31.4% in the Q1 of 2011, a decline primarily driven by increased charge backs and one off expenses. Below operating income, we benefited from $3,100,000 of interest income aided by higher cash balances and interest rate yields in Brazil. With these numbers, we arrive at a pretax income of $26,900,000 34% higher than in the same quarter of last year.
Tax expense was $7,300,000 in the first quarter of 2012, resulting in a blended tax rate of 27% versus 29.9% in the Q1 of 2011 and also 29.9% in the Q4 of 2011. Year over year tax improvements were mainly driven by greater mix coming from Argentina, where we have our lowest tax rate and certain tax ended March 31, 2012 was $19,600,000 reflecting an increase of 40% when compared with $14,100,000 during the same period of 2011. This represents a 23.5 percent net income margin, up from 22.9 percent for the same quarter of 2011, resulting in a basic net income per common share of $0.45 Property and equipment and intangible asset purchases for the quarter totaled $3,700,000 Consequently, for the period ended March 31, 2012, net cash provided by operating activities, less property equipment and intangible asset purchases, totaled $15,300,000 of free cash flow versus $12,200,000 last year. Cash, short term investments and long term investments at the end of the quarter totaled $201,700,000 Wrapping up our Q1 results, we think the solid momentum of our business reinforces our focus on products and execution against the strategic initiatives I outlined at the beginning of this conference call. I look forward to a year that will continue to bring new improvements to the user experience we deliver, improvements that over time have proven the most effective driver of growth to our business.
As our suite of e commerce offerings keeps broadening its already unmatched selection, we will continue working on the most efficient formats to bring buyers and sellers together and allow them to transact online as efficiently as possible. I am eager to report back to you on our progress as we strive to make this happen throughout 2012. With that, we will now take your questions.
Thank We have a question from the line of Stephen Ju with Credit Suisse. Please go ahead.
Hi, guys. So as we think about some of your medium to longer term strategic initiatives, you called out mobile earlier, but I'm wondering if you can give us an update on your shipping and fulfillment efforts. And I know it's early days on mobile, but any sort of observations you can share with us in terms of transaction velocity or ASPs of the user base right now? Thank you.
Hi, Tivon. This is Marcos. So with respect to our strategic initiatives, mobile, as Pedro mentioned in his prepared remarks, we're making great progress during Q1 and also during Q2. We are seeing accelerating growth both in transactions and in GMV and we're very pleased with the results and we have a roadmap of continuous product improvement. So we're very satisfied with the progress thus far and expect to continue making progress in this front.
With respect to social also as Pedro mentioned, these are an important strategic area where we're making different experiments, particularly more recently in Q2, we have done some very interesting integrations in Argentina, where we're seeing some very interesting metrics, but mostly in activity not as much in transactions, but we're very happy with the initial results we're getting there. And verticalization, as Pedro mentioned, is also a key strategic area for us. We made some progress in Q1, which continues in Q2. And with respect to shipping, we continue to work strongly in this front, but still in the back end. So nothing that we can show in the front end.
So we will be announcing this when we have concrete things to show in the front end.
And any sort of color on whether user behavior on mobile, is there faster velocity in terms of transaction, are there higher or lower ASPs, anything to that effect?
No, the type of ASPs is quite similar, maybe a little bit lower, but very, very similar.
Thank you.
Thank you.
Thank you. And our next question is from the line of Gene Munster with Piper Jaffray. Please go ahead.
Good afternoon. Maybe you could talk a little bit about you mentioned New World earlier and maybe 1 or 2 things you talked a minute ago about shipping, but 1 or 2 things that you think will be impactful that we can really investors can really wrap their head around? And maybe talk a little bit about when we might see that kind of in the model? I know you don't want to really commit to a specific time, but is this first half of twenty thirteen, back half of twenty thirteen or any sort of thoughts on that? And then second, Pedro, if you can just talk a little bit about just the GMV, your perspective, I know in your prepared remarks you did on GMV growth of 45%.
I think some of the Street was a little bit higher. Obviously, you don't give guidance, but how we should think about that number? Thanks.
Great. So, Gene, in terms of impact of New World initiatives, we tried to give some color and Marcos just went over those. What we think are the most interesting long term items we're working on. Obviously, some of those might take time to actually have significant impact on the P and L. But I think we believe strongly that once they hit stride, they can be very significant.
Verticalization of categories, mobile improvements in our customer service offering. And I think in terms of the more specific short term stuff, as we've always said, New World platform has allowed us to iterate on a much more constant and efficient way on the overall platform. And so there are small tweaks that at times have bigger or smaller impact, hard to predict, But the pace of innovation and the pace of work within the company, I think, is significantly more rapid than it was 2 years ago. I think also in the prepared remarks, we point out that there's a lot of work that's now being done on the payments back end, And hopefully, we will emerge from that with a very, very solid payments product, both in deeper integration on the marketplace and in advancing on making pain through Mercado Cargo compulsory on the platform over the long run, but also in the off platform business. So those are the areas where we are placing the most focus now.
In terms of GMV growth, as you said, we don't issue guidance. I think what we've always said is the e commerce market in the region seems to be growing depending on the market anywhere between the mid-20s to low-30s. In most of these markets, our growth rate is above that. So I think we continue to be very satisfied with the fact that we believe we are still market share gainers. And that's really what we strive for, to continue to sustain rates of growth that are above the rate of growth of the e commerce market.
That's good perspective. And just back to the New World in terms of the timing and I think you mentioned 4 initiatives there and it's kind of a continuation. So is this kind of a building momentum Or could we see a point kind of in the back half of twenty thirteen where you would think that we could see some reacceleration and some growth at that point as these initiatives are kind of well in place?
Again, I think being consistent with what we've said all along, I think it's important to understand that the comps get progressively more difficult this year given the phenomenal initial results of the New World launch last year. We always have new initiatives that are rolling out, very difficult to be able to tell in advance what the impact of those are. So we'll keep you posted as the year develops, but impossible to commit to any specific type of number at this point.
All right. Thank you.
Thank you. And our next question is from the line of Mark Miller with William Blair. Please go ahead.
Hi, good afternoon. Peter, you called out with Pago the initiatives being more focused on the long term and more back end in nature and less innovation on the consumer facing initiatives. Can you, I guess, walk us through the transition you see in this business, maybe through the rest the year? Is there going to be an acceleration in terms of customer facing initiatives? And then the downtime that you experienced in March, you said it was fully fixed by April.
Was that by the end of the month? Should we expect that there's still some slower revenues in Pago as a result this quarter? Or was that early in the quarter? Thanks.
Hi, Mark. This is Eduardo. In terms of the initiatives themselves, during most of Q1, what we worked on was, 1st, on accelerating the migration from old world to new world, particularly regarding what is related to the payment flow, so that users are able to pay totally in the new world platform and we will complete the part of the migration during this quarter. Then those work on the migration from an old gateway to a new gateway, we already completed that migration and that was where some of the bags were generated by the end of February beginning of March. I think we have already ironed out most of those.
So we are happy with what we have to get in today. And finally, the last point was the migration in our scoring fraud prevention tool, both scoring tools and CRM tools, we migrated to Salesforce. And again, these loans have generated most of the backlog by end of February, beginning of March. It was sold and the numbers we are getting in April are better than before those migrations. Going forward, I'd say, starting this quarter, but mostly after these migrations are completed, after the next quarter, we'll be focusing more on front end improvement in order to improve the user experience that we are happy with that job generating with the back end.
And the non planned downtime you highlighted in March, is that negative smaller than in the second quarter than it was in the Q1?
Yes. It was the end of plant downtime was had an impact both on the front end. It was short on the front end, but also when we migrated the CRM in the first days of the sales force, there was some downtime in the back end tools, which made the process of capturing some payments slower than we usually are. But this is working fine today.
Okay. And my other question was on the
$2,400,000
Pedro that you highlighted in terms of the charge backs. And could you just discuss what's happening there with the fraud loss? And to what extent do we anticipate higher costs to continue versus this being a one time event?
The most important point to highlight there is that fraud losses on credit card transactions, the driver there is TPV, not revenue. So that's an expense line that won't necessarily scale because the underlying driver is our total payment volume, which is growing at a significantly faster pace than our revenue fortunately. I think more importantly, we feel confident that our fraud models are improving and are adapting as they are intended to. And we should drive down the chargeback related fraud losses as a percentage of TPV down going forward. Historically, they've been lower than where they are today.
And we think that through continued execution, we can drive them down to levels where they were at previously. So that should also improve the cost line that we've expensed on charge backs over the last 2, 3 quarters.
Great. Thanks.
Thank you. And our next question is from the line of Marcelo Santos with JPMorgan. Please go ahead.
Good evening. I have two questions mostly related to Brazil. I wanted to know what's the impact that you have been seeing from the decline in the interest rates in Brazil? Have competitors become more aggressive? Do you think you lose competitiveness with this decline?
And related to that, my second question, I wanted you just to comment a little bit on Brazilian growth, which has decelerated a bit in terms of both revenues and items sold. Is this related to the interest rates or is there any specific thing you could mention here?
So I think typically we begin to get most of the relevant readouts of Brazilian e commerce around this time as some of the large retailers report their online numbers. The numbers we saw yesterday from Nova indicate that we continue to grow at a faster pace than their online properties. Let's see what happens as we gather other data points. But similarly, the answer we gave, Jean, I think, although there was some deceleration, the business continues to grow above market and at a rate that we're very comfortable with. In terms of financing, I think if anything, we've seen the overall financing environment from a competitive perspective become more rational over the last 3, 4 quarters, and I think that's sustained throughout the Q1.
So I don't think our level of competitiveness around the financing offer has necessarily disimproved over where it was a year ago. But if anything, it's probably slightly better. The payments business, I think, was more impacted on a seasonal basis by the fact that generally consumers tend to buy a lot more on financing during the Q4 and by some of the migration operational issues that we mentioned in addition to currency headwinds. Just
to build on Pedro's comments, I mean, we grew successful items in Brazil 43% year on year and GMV local currency 38% year on year. So we're pretty pleased with those growth rates.
Thank you very much.
Thank you. This concludes the Q and A portion of today's conference call. Thank you for your participation in the MercadoLibre Q1 earnings conference call. This does conclude the program and you may now disconnect. Thank you and have a wonderful day.