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MercadoLibre, Inc. (NASDAQ:MELI)

Q4 2012 Earnings Conference Call

February 25, 2013 16:30 ET

Executives

Alex de Aboitiz - Head of Investor Relations

Pedro Arnt - Chief Financial Officer

Marcos Galperín - Chief Executive Officer

Analysts

Steven Ju - Credit Suisse

Robert Ford - Bank of America/Merrill Lynch

Ross Sandler - Deutsche Bank

Jordan Rohan - Stifel

Gene Munster - Piper Jaffray

Marcelo Santos - JPMorgan

Dan Su - Morningstar

Chad Bartley - Pacific Crest

Zachary Arrick - Morgan Stanley

Ron Reuven - Reuven Capital Investments

Nick Phillips - JANA Partners

Operator

Good day, ladies and gentlemen, and welcome to the MercadoLibre’s Fourth Quarter and Fiscal Year 2012 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will hold a question-and-answer session and instructions will follow at that time. (Operator Instructions) And as a reminder, this call is being recorded.

I would now like to turn the conference over to your MercadoLibre host. Please go ahead.

Alex de Aboitiz - Head of Investor Relations

Hello, everyone, and welcome to the MercadoLibre earnings conference call for the quarter ended December 31, 2012. My name is Alex de Aboitiz, and I am the Head of Investor Relations for MercadoLibre. Our senior manager presenting today is Pedro Arnt, Chief Financial Officer. Additionally, Marcos Galperín, our Chief Executive Officer will be available during today’s Q&A session.

This conference call is also being broadcast over the Internet and is available through the Investor Relations section of our website. I remind you that management may make forward-looking statements relating to such matters as continued growth prospects of 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 Factors sections of our 10-K and other filings with the Securities and Exchange Commission, all of which are available on our Investor Relations website.

Now, let me turn the call over to Pedro.

Pedro Arnt - Chief Financial Officer

Thanks, Alex, and good afternoon to everyone. Today, I will be reviewing what has been another successful year in MercadoLibre’s evolution. We feel that over the past 12 months we are continuing to take important steps in improving what has become the leading e-commerce ecosystem in Latin America. Our combination of marketplaces, payments, classifieds, and advertising solutions, alongside a growing number of services tied to each of these now offers a more comprehensive set of e-commerce tools for online buyers and sellers throughout the region than ever before.

Let me start out the recap of our results by providing you with an overview of key business metrics for the year and a recap of our main initiatives and progress towards our strategic objectives. Summing up our year-on-year performance during 2012, items sold on our marketplace grew 28% to $67.4 million. Gross merchandize volume grew 29% in constant currencies to $5.7 billion. Transactions through MercadoPago, our payment service grew 64% to $23.5 million. Total payments volume grew 56% in constant currencies to $1.8 billion. Revenues grew 39% in constant currencies to $373.6 million. And net income grew 44% in constant currencies to $101.3 million, surpassing a $100 million in annual net income for the first time, a noteworthy accomplishment.

It’s interesting to note that five years ago, the year of our IPO, our top line was only $85 million showing the potential for rapid growth that we believe will continue to be a key trend of our business as e-commerce in Latin America continues to grow. More importantly perhaps, at MercadoLibre, we remain convinced that innovating on behalf of our customers is what allows internet companies to thrive. This conviction explains our constant focus on improving user experience while adding new formats, features, and services to our business portfolio. Consequently, our strategic goals and plan continue to be structured around leveraging innovative technology to facilitate more and more efficient transactions for our users.

At the beginning of 2012, we laid out a series of initiatives that we believed had the potential to positively impact the user experience on our ecosystem and thus drive long-term growth. These were continued payments expansion both on and off-platform, mobile commerce, an open platform approach, vertically expanding into more categories offering shipping and fulfillment services and upgrading our customer experience operations.

Let me now review for you the advances made on each of these. Let’s start with MercadoPago, our payment solution. On-platform MercadoPago has gained penetration of our marketplace consistently gaining almost 200 basis points by the end of the year measured versus the same quarter last year. Much of this penetration growth occurred organically as buyers made the natural transition to paying online simplifying their shopping experience. Additionally value added offerings we have structured such as our financing options and our buyer protection programs create additional incentives for transactions to settle through MercadoPago. Simultaneously we continued to proactively yet cautiously channel a growing number of transactions through our payment solution by making MercadoPago’s settlement obligatory for certain buyers and sellers based on reputation and on certain product categories where mandatory usage of MercadoPago is most beneficial.

As we continue to improve and streamline this obligatory payment process with simplified options and highlighted benefits, we expect to become more aggressive in expanding MercadoPago penetration. Off-platform MercadoPago was another very important driver of our growth in payments during 2012. Our client acquisition efforts continue to compliment the very healthy growth of existing accounts allowing off-platform processing to post triple digit growth for the year as we saw significant adoption of MercadoPago among certain vertical online retail categories.

Moving on to our mobile initiatives, which were introduced in the fourth quarter of 2011, it is encouraging to report that by the end of 2012 mobile already contributes with almost 10% of our daily traffic and nearly that much gross merchandise volume. This is definitely an exciting trend and one we will continue to support through product initiatives such as the recent integration of both our payments and shipping solutions into our mobile checkout.

Another strategic objective we remain firmly committed to is our open platform initiative. You may remember that early in the fourth quarter we publicly launched our marketplace API and hosted our first ever MercadoLibre Developer Conference. A growing number of developers and potential partners are working with these APIs to develop tools and integrations for third parties wishing to transact on our marketplaces. We look forward to seeing many of these go live during the course of the next few quarters and updating you on them.

Moving on to our work with vertical product categories, there have also been important inroads made throughout the year. We have substantially upgraded our real estate category through a complete redesign of the user experience, improved commercial coverage of realtors and developers and technology integrations that have allowed us to integrate listings from other real estate websites. As a result listings and traffic in the category have shown solid growth. Additionally, we continue to advance on the other vertical category we have identified as key for the year, apparel. The advances there have been increase supply throughout the category, new features that make it easier for sellers to handle inventory and improved search that had made it easier for shoppers to find what they want.

These initiatives have helped us grow a non-consumer electronics product mix considerably throughout 2012. As e-commerce penetrates traditional retail across all product categories we will continue to offer more vertical formats to match this growing demand. MercadoEnvios our integrated shipping solution is a promising new strategic driver for our business. While it’s penetration of our volume is still small, we are seeing rapid growth in its seller base and in the transaction volumes being serviced. As results continue to prove positive, we are widening the base of sellers on-boarded to the solution in Brazil and are also laying the groundwork to launch our shipping platform in other markets.

Finally, customer experience is the strategic initiative outlined I have not covered yet. By year end, we complemented a successful migration of our CRM tools to the salesforce.com platform and opened new customer experience centers in Uruguay and Venezuela. This has resulted in improved customer satisfaction retention rates and in net promoter score that grew year-on-year in both Brazil and the Spanish-speaking countries. We are pleased with our success, which validates the need to keep up our efforts and investments in customer service in order to continue seeing returns by way of user satisfaction and increased engagement.

Looking forward, we expect 2013 to be a year of continued execution on the vision laid out and deployed during 2012 understanding that we have identified the correct set of ongoing strategic initiatives that will take our business to the next level and now need to consistently execute behind them. Therefore, we expect 2013 to be a year where we focus on. Growth in payments and shipping eventually including fulfillment initiatives that allows us to eliminate friction points while ensuring the best possible shopping experience and level of service on our platform.

Hand-in-hand, with an excellent customer experience team assisting through multiple channels at each stage of a transaction, these initiatives will continue to add growing value for our platforms. Our mobile and vertical offerings allow us to adapt to the changing demands of consumers shopping from new devices and for a wider array of products. We want to stay at the forefront of these trends that increase our ubiquity in the e-commerce space.

Finally, our work on open technology will allow third-parties, retailers, and developers alike to take advantage of our platform to grow and in some cases build their businesses, thus enabling MercadoLibre to position itself at an operating system of swords for regions e-commerce. As you can see, these are all transformative processes aimed at meeting the full potential of what is already the largest and most complete e-commerce hub in the region. We look forward to keeping you updated as we make this happen.

With that, let’s now focus on our most recent quarter, starting with a detailed overview of our key operational metrics. Growth rates are year-on-year unless I specify otherwise, and that will include constant currency growth when applicable to give a better idea of how our business is growing without foreign exchange headwinds. In the fourth quarter of 2012, 4.3 million new registered users came on to our site, growing our base of confirmed registered users 24% year-on-year. Successful items grew 19% reaching $19 million.

Number of payment transactions grew 43% to $6.7 million. Gross merchandise volume was $1.6 billion, growing 14% in U.S. dollars and 21% in local currencies. And total payment volume reached $525 million, growing 30% in U.S. dollars and 47% in local currencies. This positive operational performance flowed through to our P&L.

Also during the fourth quarter of 2012, net revenues were $103.8 million, growing 20% in U.S. dollars and 31% in local currencies. Gross profit margin was 73.6%. Income from operations was $39.1 million with an operating income margin of 37.7%. Year-on-year, operating income grew 35% in U.S. dollars and 50% in local currencies. Net income before income and asset tax expense was $42.2 million, growing 37% in U.S. dollars and 50% in local currencies.

Net income was $30.2 million, a 40% year-on-year growth in dollars and 48% in local currencies. That resulted in earnings per share of $0.69 for the quarter. Addressing our top line results first, solid growth in each of our revenue streams changed despite the toughest year-over-year comparisons we have had. Our improved platform was newly launched at this time last year gaining the most traction during the fourth quarter of 2011 particularly sold in Brazil, our largest market.

The result is an expected deceleration in our items sold this quarter, mitigated by a sequential lift in average selling prices as consumers raise their spending in the holiday season resulting in a slight acceleration in local currency GMV. Core marketplace revenues grew practically at the rate of GMV since there was no significant impact from pricing or mix shift during the quarter.

Revenues outside of our core marketplace represented 30% for the fourth quarter of 2012, up from 27% in the same period last year. Total payments revenues grew 51% in local currencies year-on-year during the fourth quarter. These results from off-platform processing fees that kept outpacing the rest of our ecosystem on volume strength and continued growth of installment purchases carried out through MercadoPago.

Classifieds and advertising both performed strongly throughout the year and continued to do so in the last three months of 2012, growing at a rate of 46% in constant currencies during the fourth quarter. This combined growth is led by strong classified listings momentum, upgrades, and better monetization than a year ago for the business unit. Here is a breakdown of our top-line growth by largest countries.

During the fourth quarter, consolidated net revenues in local currencies grew 19% for Brazil, 62% for Argentina, 19% for Mexico and 43% for Venezuela. Ramping up our top-line even after factoring in, our step function and volume at the end of last year, which had its largest impact on Brazil, total revenues in constant currencies grew at an above market rate of 31%.

Now, let me move on to the rest of our P&L. Gross profit grew 16% in the fourth quarter to $76.4 million. Gross profit margin came in at 73.6% revenues versus 76% in the fourth quarter of 2011 and 73.6% in the third quarter of 2012. Gross margin contraction versus last year results from our faster growth in payments, which is a lower gross margin business. COGS from payments grew at the rate of total payment volume representing approximately 270 basis points in margin contraction, while incremental expenses primarily related to our investments in hosting and customer service represented 67 basis points in gross margin contraction. These effects were partially offset by efficiencies in sale related taxes, generating 92 basis points in margin improvement.

Operating expenses for the period totaled $37.2 million, only 1% higher than in the fourth quarter of last year. Operating expenses as a percentage of revenues were 35.9% in the fourth quarter versus 42.5% for the same period last year as our business showed impressive scale, which I will now breakdown line item by line item.

Sales and marketing, our largest line item expense decreased 1% to $19.2 million dropping to 18.5% of revenues versus 22.4% for the same period last year as we continue to improve our bad debt ratio in addition to posting improved returns on our marketing spend. Bad debt fell from 7.1% of revenues in the fourth quarter of 2011 to 4% of revenues in the fourth quarter of 2012 representing 311 basis points improvement resulting from increased efficiency in our collection efforts, and also including a non-recurring $900,000 recovery that aided OpEx margins by 87 basis points.

Online and offline marketing decreased 8% year-on-year as we optimized our mix of traffic sources scaling a combined 158 basis points on both of these concepts. One additional note, we are pleased to report that our work around remedies and scoring led to the lowest rate of charge backs over total payment volume for the year, an issue we had highlighted as an unexpected operational challenge during past quarters. For the fourth quarter, this expense line scaled versus last year despite being a function of payments volume, which grow faster than our average revenues.

Moving on, product development expenses also fell 1% to $6.7 million representing 6.4% of revenues in the fourth quarter versus 7.8% in the same period last year. Scale was driven by a $644,000 accrual related to our long-term retention program during the fourth quarter of 2011, and greater capitalization of salaries versus the prior year fourth quarter. G&A only grew 7% year-over-year to $11.4 million in the fourth quarter contributing additional scale to our business going from 12.3% of revenues during the fourth quarter of last year to 10.9% of revenues during the current quarter. As a result, operating income for the fourth quarter of 2012 was $39.1 million. Operating income margin for the quarter was 37.7% versus 33.5% during the fourth quarter of 2011. The low operating income we benefited from $2.9 million of interest income $100,000 short of last year due to lower interest rates, while ForEx was positive at $488,000 greater than the $272,000 in the fourth quarter of 2011.

With this, we arrive at pretax income of $42.2 million, 37% higher than in the same quarter of last year in dollars and 50% higher in local currencies. During the fourth quarter, income tax expense was $12 million resulting in a blended tax rate of 28.4% versus 29.9% during the fourth quarter of last year and 27.5% during the third quarter of this year. The year-on-year improvement in our blended tax rate resulted from Argentina’s highest share of volume in the current quarter versus the same period a year ago.

Let me remind you that we continue to be the beneficiaries of a tax advantage in that country throughout 2012. Net income for the three months ended December 31, 2012 was $30.2 million, 40% higher than last year’s $21.6 million. Net income in local currencies grew an impressive 48% year-on-year during the fourth quarter. Net income margin was 29.2% for the fourth quarter versus 25% for the same quarter last year resulting in a basic net income per common share of $0.69. Property and equipment and intangible asset purchases for the quarter totaled $5.1 million and consequently, for the period ended December 31, 2012. Net cash provided by operating activities less purchases of property, equipment and intangible assets, our non-GAAP measure of free cash flow totaled $51.1 million versus $25.1 million last year. Cash, short-term investments, and long-term investments at the end of the quarter totaled $281 million.

Wrapping up my review, our financial performance was robust during the fourth quarter ending the year on a note of strong earnings and with a very solid balance sheet. As noted, we recorded our first ever quarter of over $100 million in revenues and our first year of over $100 million in net income. As we enter 2013, we believe we are in an optimal position to keep pursuing the growth initiative discussed today and to continue investing in this virtuous cycle that brings value to our users and investors and keeps us at the forefront of our regions e-commerce. I look forward to the work and to the opportunities we have ahead of us this year and also to keeping you informed along the way.

With that, we will now take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is from Steven Ju of Credit Suisse. Your line is open.

Steven Ju - Credit Suisse

New user accelerated for the second quarter in a row, are you doing anything different in terms of the user signup path to increase conversion rates? And second, it seems like you saw bit of a drop off in payment penetration rate as a function of GMVe on a sequential basis, which is something we are not really used to seeing for the fourth quarter. Can you give us any color in terms of why this might be happening? Thanks.

Pedro Arnt

Sure. So, I think the first question, Steven was regarding the rate of new registrations, there haven’t been any significant changes in what we are doing. We are seeing improved and accretive registrations coming from mobile. That’s one part of the story, but other than that, no significant changes. I think the fourth quarter many times is one of more online shopping and that could have helped.

Marcos Galperín

And with respect to payment penetration, we launched in Q1 the checkout for payments on mobile. Obviously, as mobile starts to gain traction on the overall mix of gross merchandize volume becoming increasingly important to have our payments solutions working adequately on the mobile as well. So, that might have an impact. Although on a sequential quarterly basis, we will continue to continually see variations in penetration rates.

Steven Ju - Credit Suisse

Yeah, thank you.

Operator

Thank you. Our next question is from Robert Ford of Bank of America/Merrill Lynch. Please go ahead.

Robert Ford - Bank of America/Merrill Lynch

Good evening everybody and congratulations on the quarter. I had a question with respect to just listings, it looks as if listings are beginning to accelerate in Brazil post the introduction of the merchant API, and I was curious as to how those listings are converting?

Pedro Arnt

Great, Bob. So, this is Pedro, I think the API certainly will be a key piece of the strategy in terms of attracting more supply going forward. The open technology approach we think will be instrumental in bringing on more and more retailers and partners that we’ll list through our ecosystem. But we have also I think consistently said that this is an ongoing process. So, similar to what we had disclosed last quarter, the area that continues to show the greatest strength there continues to be the classifieds areas, where we are getting significant lift in listings, and to a lesser degree in the other core categories, whether there is a lot of work being done by third-party developers and retailers now that the fourth quarter is behind us. And they are once again focusing on new channels and we are high up there on their priorities for new channels. But most of the growth is still in the classifieds categories. And in terms of conversion rates, they seem to be fairly consistent with what we have seen in the past. So, hopefully going forward, we’ll have more news, but that in theory will bode well, because it will be in more listings at similar conversion rates for the future.

Robert Ford - Bank of America/Merrill Lynch

Great. And then you touched on adding to the number of verticals that you have right now with respect to supply, but there are also several categories that you are under-indexing with existing interface is sufficient right? Can you talk a little bit about your efforts to go after those categories of merchandize and how they maybe contributing to maybe this acceleration in listings growth in Brazil?

Pedro Arnt

Yeah. So, I think I understood the question, right, I would say that the sufficiency of the product is something that we could talk about at end. I think the longer term vision is that many of these categories will benefit from a more vertical approach. We have already talked about realistic classifieds and apparel. We’ve also in the past identified other future opportunities like car park. So, I think verticalization will be a piece of growing more rapidly in many of these categories going forward. So, I think that answers your question. We do believe that there is room for verticals in any of these categories and then the other ones that we under index that we mentioned I think really we have identified the ones that we think are more relevant being a parallel, some of the home and garden and appliance categories and auto parts, all of those are growing very fast. So, the level of under indexation is smaller and smaller. And one of the things we pointed out in the prepared remarks is that when you look at consumer electronics, they have been consistently shrinking their share of our overall mix, which we think is very positive.

Robert Ford - Bank of America/Merrill Lynch

Great, thank you very much.

Operator

Thank you. Our next question in queue is from Mark Miller of William Blair. Your line is open. Please go ahead.

Mark Miller - William Blair

Hi, good afternoon. Pedro, I was hoping you could give us some perspective around what portion of the seller base or categories are now compulsory for MercadoPago, what kind of change that is year-to-year and my sense is that maybe you slowed back the pace of implementation on that, is that fair in the fourth quarter?

Pedro Arnt

Yeah, so, it’s still very small, it’s not a material percentage of overall transactions and in large part that is because of what you mentioned, which we have experimented the fourth quarter is not always an ideal quarter to experiment. In addition as we mentioned in the past, the initial very controlled launches showed if that there was significant room to improve conversions on the obligatory payments, so a lot of work in AB testing has been going on, on this small controlled segment of transactions over testing this. We are seeing consistent improvements in conversion rates and in the processes we have. So, I think going forward we are cautiously optimistic I think I said in the remarks that as we improve these flows and we improve conversions, we will be able to get more aggressive going forward, but it’s still a small overall portion of GMV that has compulsory payments.

Mark Miller - William Blair

Great and then could you give us some perspective on the take rate, how that changed for the core marketplace, we can make our own estimates, but it will be helpful to get your perspective on that?

Pedro Arnt

Yeah, so there haven’t been significant take rate changes in the core marketplace year-over-year, slightly up but very, very low. So, I would say trend wise relatively flat quarter-on-quarter for the same – for last year’s quarter, I mean.

Mark Miller - William Blair

Good, thanks, Pedro, just one last one if I can, the expense control was quite tight here at the end of the year and also earlier in the year and is there a way for us to think about expense growth into 2013 whether these are going to be tough comparisons for you? Thanks.

Pedro Arnt

Great question, and thanks for asking that. So, certainly I think this has been a year that we have been very disciplined in terms of OpEx. Some of that as we’ve consistently pointed out is the consequence of improvements in bad debt ratios, which is one of our sales and marketing expenses. Part of that is one of the benefits in MercadoPago, part of that has simply been improving our collections processes and how easy it is to pay us. And I think the other significant trend obviously has been our investment in user acquisition and online marketing where really over the last 18 months, our vision has been let’s focus significantly on the product, let’s significantly improve the product. And once we feel we have made these improvements, we can get more aggressive again with user acquisition. So, without delving into too much detail in forward looking statements, which we don’t make, I think it’s fair to say we do feel a lot better about the product today than we did 18 months ago. And it’s possible that we will get more aggressive in terms of customer acquisition going forward. So, these do setup tough comps in terms of continuing to deliver this kind of scale going forward, because two of the most significant drivers of that scale aren’t necessarily trends that rollover easily into next year.

Operator

Thank you. And our next question in queue is from Ross Sandler of Deutsche Bank. Your line is open. Please go ahead.

Ross Sandler - Deutsche Bank

Just two questions and one more follow-up on the take rates, so when you say that the take rate kind of unchanged from a year ago, is that excluding the impact of the higher margin faster growing areas like classifieds and advertising or is that inclusive, is take rate including that going up is basically what I am trying to get a sense of and if not what’s offsetting it. And then on the OpEx, so I think you called out a few different items totaling somewhere between $1 million and a $1.5 million that were kind of one-time items in the quarter we got these happen in years passed and you guys have consistently kind of said that you don’t expect EBITDA margins to increase over the long-term, yet they continued to, so any update on where you think margins are going in kind of ’13 and beyond? Thanks.

Pedro Arnt

Great. So, let me start with take rates first. The question that Mark had asked me was specifically about core marketplace take rate, so that excludes the overall take rate, it doesn’t include many of the business units that today account for already roughly 30% of overall revenue. When you look at consolidated take rate, the trend continues to be positive and continues to be upward. Consolidated take rate is up about 35 basis points – 34 basis points year-over-year, so that was a common on specifically just the marketplace business excluding classified, excluding payments, excluding advertising. And then in terms of margins again we don’t guide. I think just referring back to my previous question and more conceptually, we feel we have made significant strides in terms of the user experience we offer. We feel we are overlaying a more complete set of services with the shipping initiative, more penetrated payments. So, we do feel in a position where perhaps it makes sense to start getting more aggressive with customer acquisition. And so we continue to say what we said before this is early stages of the internet, it probably doesn’t make sense to have EBIT margins in the mid to high-30s, it probably makes sense to reinvest some of that in customer acquisition and growth. And that’s the way we are viewing the financial model over the next four, six, eight quarters.

Operator

Thank you. Our next question in queue is from Jordan Rohan of Stifel. Your line is open. Please go ahead.

Jordan Rohan - Stifel

Thanks so much. So, I can’t help but noticed that the disproportionate growth that you seem to be seeing both from Argentina and from Venezuela and what may or may not be a coincidence in the country specific currency risk. In particular the devaluation on the Venezuela which was announced recently, is there any relationship between those, has any demand been pulled forward when the currencies were stronger in anticipation of a consumer – consumer anticipation of a devaluation later that will make things more expensive. And separately when do you expect to incur any charges related to the carrying value of any Venezuelan currency you had on your balance sheet in that country at the time of devaluation how much will that be, is that a meaningful change to your first quarter? Thank you.

Marcos Galperín

Hi Jordan, this is Marcos. In general macro trends impact our growth and our business models substantially less than other business models just because e-commerce is still a relatively small percentage of retail in the region and that’s why we like to look at this in a five to ten year horizon. Typically the things that we do to product have a substantially higher impact on our business metrics and our financial metrics than micro trends. Having said that, when there are large devaluations and high inflations as we have in Venezuela and Argentina consumers tend to protect their purchasing power by accelerating consumption and having more transactions, so typically these are always in the long-term we want to have stable ongoing economies, not high inflationary economies. In the short run when you have higher inflation you tend to have higher frequency in the purchasing decisions on behalf of consumers. Pedro Arnt will help out with the second part of your question.

Pedro Arnt

Yeah. So, definitely the Venezuelan devaluation does generate a loss during the first quarter. The Q that’s coming out towards the end of the week, we’ll have more detailed disclosures it’s nothing that’s very material. I would expect looking at what our balance sheet looks like today and that could still change before the end of the quarter something in the range of maybe $5 million to $8 million probably not more than that impact from the devaluation.

Jordan Rohan - Stifel

And a follow-up question to what Marcos said if I could, with the acknowledgement that there maybe some acceleration of purchase behavior does that also mean you would expect a deceleration of purchase behavior on the other side of the currency deval, is that how it has worked historically going back to 2010 and other times in Venezuela? Thank you.

Pedro Arnt

Jordan with the specific Venezuelan issue I think let me try to build on what Marcos was trying to convey. It’s a very unique case and that when you look at the way that the economy was running it was really running a parallel rate already. And because it’s a highly inflationary market I think your point is valid and the consumers or more inclined to buy things and they already try to store value in a currency that’s devaluing. But the trajectory hasn’t varied significantly because of the official devaluation. So, although the devaluation is very significant for accounting purposes and for our books I would say the impact on actual consumer spending is more mitigated than what you are seeing in the official rate. So, I wouldn’t say that there is acceleration of spend and then a hold back of spend looking forward, I think if anything we need to look at what’s happening at a macro level in Venezuela and as Marcos said that typically doesn’t hurt our business or impact our business as much. So, I wouldn’t be expecting this very specific trends you’re looking at tied to what happened with the official rate.

Jordan Rohan - Stifel

Alright. Thanks very much.

Operator

Thank you. Our next question in queue is from Gene Munster of Piper Jaffray. Your line is open.

Gene Munster - Piper Jaffray

Good afternoon and congratulations. And just in terms of the overall growth rate can you remind me what the local currency growth was in Brazil and how fast you believe the overall e-commerce market was growing just specific to Brazil. And my second question is related to potential devaluation Argentina that’s often debated whether that is a reality or not just above your updated thinking on that? Thanks.

Marcos Galperín

Yeah. So Brazilian revenue in reals grew 19% for the quarter, that’s somewhere around what the market go for the quarter I think our best estimates some of the other large public companies have released numbers that are significantly below that for e-commerce. And let’s not forget that Brazil is coming off of the toughest comp it ever had. So, Q4 last year really was a monster quarter for us and that I think is a significant factor in understanding the growth rates for Brazil year-over-year. The first quarter is still a difficult comp, but certainly not as difficult to this one and then once we get into Q2 we will return to a more normalized growth rate on the previous year Q. Devaluation in Argentina, so very different to Venezuela, Argentina has a moving currency the Argentine peso has been devaluing consistently over time it does have some foreign exchange controls which generate a parallel rate that’s lower than the official rate that is similar to Venezuela. But I think the case is different in that the official rate is sliding. And I think most forecasts has it, it’s at 5 today. I think most forecasts has it devaluing towards 6 towards the end of the year. So, it’s not like Venezuela where you have these huge step function movements, and more importantly also for Argentina unlike Venezuela, we have significant cost bases in that country still. And so the devaluation although it’s not accretive to earnings, certainly it gets offset, because it does reduce our local currency costs in line with whatever the peso is devaluing.

Gene Munster - Piper Jaffray

Great, thank you.

Operator

Thank you. Our next question is from Marcelo Santos of JPMorgan. Your line is open.

Marcelo Santos - JPMorgan

I have two questions. The first is you mentioned you have some customer support services in Venezuela I wanted to understand if you intend to move more cost to that country so to offset the fact that you have difficulties to take resources out of there? And then you could protect yourself against devaluation? So, that would be the first question. And the second I just wanted an update on the competitive environment in Brazil, do you feel that – although you had a very comp this quarter, do you feel that the deceleration might also be to abnormal competitive activity or it’s really the tough comps only?

Pedro Arnt

So, in terms of Venezuela, I think what we have done is opportunistic when it makes sense to incur cost in Venezuela. We have done so. A lot of those services directly are Venezuelan business that we used to service from outside of Venezuela and we can service from there. So, it’s something we’ll continue to look at, but don’t expect any significant ramp up of cost in Venezuela or large scale reallocation of cost centers there.

Marcos Galperín

H, Marcelo. With respect to the second part of your question, I would say similarly to what we just mentioned, we believe what impacts our growth rates is substantially more impacted by the product decisions that we take and the product execution that we do. In the case of Brazil, we have been working throughout the year really in laying the groundwork for a substantially different product experience with payments and shipping integrated in to our platform. We did a lot of experiments into our search results, our view item pages, and the checkout process, trying all sorts of different positions and bells and whistles to see what converts better. And in that process we were pretty conservative with our marketing spend in an environment that I am sure you know, we saw lots of other players really being very aggressive with their marketing spend.

As Pedro was saying earlier, we are starting to feel very well with the state of our product, the way shipping and conversion is working, the way payments are working, then the integration of payments into our mobile platform, and particularly how we are managing customer support also in Brazil. So, we are feeling better. We think it’s like we will be more aggressive in 2013, but the growth rate I think will depend on all those factors and not that much on what other players in the market are doing. We believe the market is very large. It’s still on its infancy, very, very small percentage of retail being done on e-commerce, so that’s very likely plenty of room for several players to do very well.

Marcelo Santos - JPMorgan

Okay, thank you.

Marcos Galperín

Thank you.

Operator

Thank you. Our next question in queue is from Dan Su of Morningstar. Your line is open.

Dan Su - Morningstar

Good afternoon. Thanks for taking my question. My question is regarding the technology investment, so my understanding is that for 2012, there is some modest efficiency gains in terms of the product and technology. And the question is going forward given the couple of initiatives that the management has talked about in terms of improving user experience and system integration, what kind of trend is the management seeing for in terms of technology investments and the kind of related question is what kind of labor cost trends are you seeing for engineering talents in Latin America? Thank you.

Pedro Arnt

Yeah. I think conceptually we have historically said that product development was key for us and it was an area that we typically look to invest whatever we feel is necessary to hire and retain the talent that we need to carryout our strategic plan and that continues to be the case. So, if that line isn’t scaling versus revenue, it’s not something that we get too concerned about as long as we make sure that we are hiring the right people and that they are showing that the right long-term ROI by a consistently improving product, which is what we feel what we have seen throughout the year.

Very specific to your question and I think it was called out in the prepared remarks, if you look at the Q-on-Q evolution of product development costs, some of that scale is because last year’s quarter had a ramp up in compensation driven by the way we account for our long-term retention plan for engineers. And so really, if you were to take that out you would see that there is more ramp up in investment than what you are seeing in the Q and that should signal the kind of trend that we see going forward, where product development costs might grow above revenue by somewhat, so that we make sure that we are investing there, which is the key to our long-term growth.

Dan Su - Morningstar

Thank you. And my other question about the labor cost trends in Latin America please?

Pedro Arnt

Yes. So, one of the strategies we have pursued and it’s been very efficient is what Latin America has a good talent pool of engineers and it’s fairly distributed throughout the region. You can find very good technical universities in some of the smaller countries and in some of the interior provinces. So, I think we have done a good job in opening an increasing number of development centers in the interior of Argentina, in Uruguay, even in Venezuela. And so that way, we haven’t necessarily found ourselves in the bind of having to hire engineers in only one city, where the market could heat up significantly. So, I think in dollar terms given the devaluations that we have been seeing in local currencies, I don’t expect significant labor cost pressure going forward. Yes, there might be some, but I don’t think it’s anything that is very high on our concerns in terms of OpEx and how it evolves going forward, because of these new centers we have in areas where you have very good talent and perhaps not as much wage inflation.

Dan Su - Morningstar

Thank you.

Operator

Thank you. Our next question in queue is from Chad Bartley of Pacific Crest. Your line is open.

Chad Bartley - Pacific Crest

I was hoping you could repeat the currency-neutral growth rate in payment revenue. And then, I had a follow-up question on operating margin, specifically where will your investments in shipping in essence show up in the income statement, and could that be a near-term pressure on your operating margin? Thanks.

Pedro Arnt

We don’t disclose payment revenue growths in local currency. I don’t think I addressed that, I said that Brazilian revenues or the Brazil segment in our financials grew 19% in local currencies for the quarter.

Chad Bartley - Pacific Crest

I am sorry I thought that along with the classified and ad revenue, you broke out something around payment revenue specifically?

Pedro Arnt

Sorry, the prepared remarks had a total payment revenue growth of 51%, you are correct.

Chad Bartley - Pacific Crest

Okay, that’s helpful. And then yeah, any color on the shipping investments and impact to margin would be helpful?

Pedro Arnt

But that’s on a Brazil number, right, that’s an overall payment revenue in the local.

Chad Bartley - Pacific Crest

Right.

Pedro Arnt

Yes. Shipping, so let me just take a step back and remind everyone, what it is we have done in shipping so far. So, so far what we have done in shipping and to a certain degree it borrows a page from what we have done in payments is we have built the technology layer that integrates the transactions that are occurring on MercadoLibre with the existing shipping carriers, so that buyers and sellers have more deeply integrated shipping prices, shipping alternatives without us actually getting involved in that. It’s still all done by the carriers. So, there is no incremental cost from operating that, besides the R&D that has gone into that. And actually similar to payments, although we are running that at pretty much at breakeven if as volumes increase, the volume discounts we are able to drive for our users grow, you could even think of that as a spread business over the long run. So, that one shouldn’t have an impact on OpEx, it’s more of a what we charge versus what we pay and we probably book that net of the cost very similar to the way the financing business is run.

Going forward but none of that has occurred, we have signaled that we are open and exploring a very small pilot program in Brazil where we actually begin to get involved in offering fulfillment services for our sellers. That won’t be material this year, it’s a pilot program. And I think we have committed to making sure that we keep you very well informed ahead of time if at some point the investment in that will ramp up. So, as of now nothing significant there, that you should expect in the financials over the next few quarters from that fulfillment pilot program.

Chad Bartley - Pacific Crest

Alright, great thank you very much Pedro.

Operator

Thank you. Our next question in queue is from Scott Devitt of Morgan Stanley. Your line is open.

Zachary Arrick - Morgan Stanley

Hey this is Zach I am calling for Scott. First wondering if you could – I know you emphasized what currency impacts for GMV revenue TPV? I am wondering if you can kind of give us the local currency impact for your operating line items as well?

Pedro Arnt

So, let me see Zach if I can understand that question. So, if you think of the OpEx there is a greater concentration of OpEx in Argentina than in the countries, so trend going forward is you need to be more aware of what’s happening with the Argentine peso than other currencies where it’s more driven by revenues and you have that breakout. And then specifically this quarter actually if you look at OpEx growth in local currencies, it’s higher than in dollars. Dollar OpEx growth was 1%. Local currency OpEx growth was about 13%. So, some of that leverage comes from what we have been mentioning which is devaluation in the Argentine peso actually helps the dollar reported cost numbers.

Zachary Arrick - Morgan Stanley

Thanks. And could you tell us what the – what exchange rate we should use for Venezuela for Q1 and then going forward for 2013, if it doesn’t change again?

Pedro Arnt

Yeah, so again this is an ongoing picture depending on if any new data comes out from accounting boards or what not. But which as far as what we understand so far the change in the official exchange rate occurred I believe it’s February 8th or around the first week of February. So, at that point the exchange rate went from 5.3 which is the rate we were using to the new official rate which is 6.3. And unless there is another official devaluation or some new occurrence out of Venezuela our best understanding at this point in time is that that’s the new exchange rate to be used starting on that early February date.

Zachary Arrick - Morgan Stanley

Got it. And one last question, in terms of TPV penetration of mobile can you – how is that different than desktop?

Pedro Arnt

So, the it’s let me put it this way, the payments portion of our mobile apps have been rolled out and deployed out of slower rate than the marketplace one, so it’s a few quarters behind in terms of how long we have been using it and where it’s been rolled out for the initial iterations of the apps MercadoPago wasn’t as deeply penetrated, so that’s slightly behind. I think if you look at the trends and the speed at which the mobile opportunities are occurring Latin America I think our expectations going forward are equally upbeat about both payments on a mobile device and GMV, but the numbers we gave out focus on GMV and the payment numbers are slightly behind that.

Zachary Arrick - Morgan Stanley

Thank you.

Operator

Thank you. Our next question in queue is from Ron Reuven of Reuven Capital Investments. Your line is open.

Ron Reuven - Reuven Capital Investments

Thank you for taking my question. In regards to the Venezuela business what portion of your business overall revenues come from Venezuela. And as a follow-up in regards to the devaluations and so it’s recently devalued by a little over 30%. And you mentioned the loss would be up to $8 million would it be correct to assume that if it continues go down as much as 50%. We should adjust it accordingly as far as trying to put on our model or are you exiting out of Venezuela to some extent?

Pedro Arnt

Okay, great. And so the Venezuelan business last reported numbers, Venezuela represented let me give you the exact number, so I don’t give you just directional, about 17% of revenues.

Ron Reuven - Reuven Capital Investments

Okay.

Marcos Galperín

The devaluation just one clarification here, so the official exchange rate in Venezuela went from roughly 4.3 to 6.3. However, we were not accounting at the official exchange rate. We were accounting at the SITME rate which was a second government sanction rate that we had to use. So, the devaluation for us was actually less than that, it was some 5.3 to 6.3. Going forward, I think we continue to explore ways in which we can invest the bolivars we have in non-bolivar denominated assets. We did some of that last year we bought real estate everyone in Venezuela is trying to do that. So, there aren’t that many opportunities, but if we continue to find others we will do that and that could lessen our exposure to future bolivar devaluations if they occur. If they don’t then you should continue to project the same kind of math, which is whatever the bolivar continues to develop, devalue has a hit on our P&L. But again lots of its there, because if we are able to buy more real estate then that’s one way to hedge against future devaluation. Then that’s something we continue to pursue quite actively.

Ron Reuven - Reuven Capital Investments

Okay. And I guess as a follow-up with this recent change in the currency in Venezuela, did it change your ability to withdraw currency?

Marcos Galperín

So, it certainly has, but let me just put that into a greater context. So, the ability to withdraw our currency had been in the range of our about $300,000 per month per – that is currently suspended. So, over the last time we were able to take money out was January. We haven’t been able to take out any money in February, which doesn’t mean that that will continue to be the case. I mean depending on who you talk to that covers Venezuela you can get projections that actually think the government will make it easier to move money out to try to control the power of exchange rate and you can also have analysts who predict the opposite. So, I think Venezuela is still very much wait and see, the rate of currency expatriation has always been very controlled. So, even if it’s kept at low levels that doesn’t signal a change in what we had been facing over the last few years, which is exactly why finding non-bolivar denominated assets in Venezuela is probably the way to go, it’s what we done in the past and what will continue to try to do.

Ron Reuven - Reuven Capital Investments

And would you be able to breakdown I guess with portion of your liquidity is in Venezuelan’s currency that’s I guess in essence respected to some extent at this point?

Marcos Galperín

Yeah. So, you have detail disclosures in the Qs. You have them I think over the last three or four quarters, so you can dig into that with detail, ballpark figure we’re talking something in the range of maybe $30 million to $40 million of balance sheet position is in bolivar.

Ron Reuven - Reuven Capital Investments

Okay. Thank you.

Operator

Thank you. And we also have a question from Nick Phillips of JANA Partners. Your line is open.

Nick Phillips - JANA Partners

Can you give us any better visibility into the Brazilian payments growth and maybe how close it was to the 51% growth for the whole company? Thanks.

Pedro Arnt

So, our Brazilian payment volume is we believe a sensitive data point prices with Reggie Card and MasterCard are negotiated on volume. I would love to know what PagSeguro, PayPal and BCash and everyone else is doing in Brazil. And I am sure they would love to our numbers. So, we don’t disclose that. I can give you a general directional trend, Brazil is by far the largest of the TPV countries, so it drives the overall number. However, Argentina, Mexico and Venezuela are growing at a faster pace than Brazil they are also coming from a smaller rate. So, Brazil is below that 51% for sure.

Nick Phillips - JANA Partners

Thanks.

Operator

Thank you. And with that, I am showing no further questions in queue. I’d like to turn it back to your MercadoLibre hosts for further comments.

Pedro Arnt - Chief Financial Officer

Great. So, thank you everyone for the interest and for the questions. And we look forward to keeping you up-to-date on a year that we feel will have significant new things coming up and a lot of exciting work going on at the company. And we look forward to talking to you again in the quarter. Thank you.

Operator

Thank you. And again, thank you ladies and gentlemen for joining today’s conference. You may now disconnect. Have a great day.

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