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Executives

Marcos Galperin – President and Chief Executive Officer

Pedro Arnt – Executive Vice President and Chief Financial Officer

Analysts

Scott W. Devitt – Morgan Stanley & Co. LLC

MercadoLibre, Inc. (MELI) Morgan Stanley Technology, Media Telecom Conference Call February 27, 2013 3:45 PM ET

Scott W. Devitt – Morgan Stanley & Co. LLC

Thanks., I’m Scott Devitt, Morgan Stanley’s Internet Analyst, very happy to have Marcos Galperin, President, CEO and Founder of MercadoLibre; and Pedro Arnt, the CFO of MercadoLibre. I think the best way to go about this Marcos has given, there is going to be a different level of understanding of the business. So let me just start with a state of the business where the revenue streams come from in current business conditions?

Marcos Galperin

Okay. So we are the largest e-commerce platform in the region. We have few revenue streams; one is our core market base where we did over $5.6 billion of gross merchandise volume last year. We had 23 million active users, 17 million buyers, and six million sellers. Revenues came from sellers paying us fees. It’s a market we saw 80% of the goods transacted are new and 97% of the goods transacted – are transacted on the fixed price. So that’s been very successful, it’s been growing, we launched it in 1999 and it’s been growing ever since. We are the largest e-commerce player in every country where we operate. And then we have MercadoPago, which is the largest online payment platform in Latin America, which started being the platform where we set, but we use to settle payments within MercadoLibre, still most of its payments come from MercadoLibre transactions. But in the last few years we’ve opened it up outside of the platform and we’ve seen very interesting growth. And more recently, we enabled also payments on the mobile phones.

So those are our two largest businesses, then we have two front solutions of e-commerce platform for people who want to do e-commerce on their own sites, that’s kind of compliment our ecosystem and also an advertising business that people come by traffic on our platform and take it wherever they want.

Scott W. Devitt – Morgan Stanley & Co. LLC

And you’ve got and not to go from 30,000 feet directly into the reads, but I guess this topic out of the way first, which is you have a significant base of business in revenue stream from Brazil. There is also a big contribution that comes from Venezuela, which has experienced devaluation and how your company kind of thinks about operating in that market? And then just we’re kind of from even as simply as from a modeling standpoint, how do you think about that market and to the extent that you weren’t able to talk about Argentina as well, again, that’s more speculative in terms of something happening there.

Marcos Galperin

So I would say overall, we operate in a region with 600 million people, that is basically all of Latin America, it’s a very interesting region growing very fast, but it’s obviously an unstable region, we cover 13 countries in Latin America, so you will have all sorts of flavors or I would say, these days are worse in general. If you cover 13 countries in Europe, you will probably be able to say the same thing. Some of those countries are doing great like Chile, Brazil, Columbia, Peru etcetera. And some other countries are more unstable and higher inflation and devaluation like Venezuela and Argentina these days.

For the last 13 years, I mean we’ve seen it all. I mean we’ve seen huge crisis in Argentina and in Venezuela in 2002, 2003. The way we look at it is, first of all, the operational metrics. What vibrancy does a marketplace show in these countries and what marketplace is due largely is they are making efficient market efficient. So in many cases, these high devaluation, high inflation countries are actually more inefficient. People have learned very rapidly that one way to preserve acquisition power of their own currency is buying stuff, because the paper money devalues pretty rapidly.

So it actually accelerates trading in many cases. And that’s what we see. We see a very healthy trading environment both in Argentina and in Venezuela. Argentina is our second largest market, Venezuela is our fourth. And then in terms of the value of our profits, obviously in terms of devaluation, we have less dollar profits, often time that it’s followed by inflation. So in time, it averages out really. I don’t Pedro, perhaps you want to give some greater detail into the effect of late of devaluation.

Pedro Arnt

Yeah, I think more importantly, the way we manage the resource allocation or the capital allocation for Venezuela is a country that really operates on a standalone basis. So there is a team that’s purely Venezuela focus and that runs that business. We do not send any cash into Venezuela, so it’s entirely self funding, it’s actually quite profitable. So in that way, we isolate any sort of lack of focus or any need to drain cash into the Venezuela.

So second part of jigsaw is, what do we do with the cash that is generated in Venezuela given that there are capital controlled and it’s not easy to pro all of that cash out. We’ve been moving cash out at the rate of about $3 million a year, give and take. The outlook for now for that is somewhat suspended. We need to see what the government does going forward. And so, in the mean time you try to buy assets that you feel preserve value better than the Venezuela and Bolivia.

So we bought our own office space. We are always going to look out for other commercial real estate opportunities, and I think we will be able to find that and they have historically been and I think we’ll continue to be windows of opportunity to move cash out.

So as Marcos was saying, we take the long-term view and it’s a market that we think that given those conditions in that way of managing capital allocation, it makes sense to remain committed to. And then in terms of the very specifics of the devaluation and modeling purposes and how I think it would make sense on your side of the table to treat this is, I think we disclosed the other day in the call and the K, we’ll have more specificity on it, given the magnitude of the devaluation, had it occurred during the fourth quarter and not in the first quarter. The impact from the devaluation on the balance sheet assets would have been in the range of $5 million to $7 million. So it’s certainly something that our balance sheet is more than capable of handling.

And I think the more important thing for us in terms of investors is just make sure that you understand what our exposure to Venezuela is, there are disclosures in the Ks and Qs that are specific to the balance sheet of the Venezuelan operations. And then decide how you want to discount for that, or how you want to treat that in whatever way you’re building out your valuation ks.

Scott W. Devitt – Morgan Stanley & Co. LLC

And how much of the current cash balance, I guess as of year end is in Venezuela?

Pedro Arnt

Right. So I think our cash and cash equivalents balance for two years is in the range of about $280 million, and of that the exposure to Venezuela is in the roughly, $35 million range. So it’s by no means, the most significant part of the balance sheet far fronted, and that’s 35 at the old rate, at the new rate, it will be even less than that.

Marcos Galperin

Okay. So that’s a 30,000 feet. We put out a new paper as some number of months ago and highlighted some of the things that had happened in the U.S. in terms of the development of e-commerce and some of the other interesting markets over the next three to five years. LatAm is a market that has a reasonably higher level of friction in terms of the things that ultimately drove success in the e-commerce in more mature markets, but has a ton of potential.

There has always been speculation of Amazon entering probably going back a decade now, you would argue. And MercadoLibre seems to have done everything it’s needed to do to position for growth. The points of frictions still do exist most notably broadband accessibility and fulfillment functionality, but if you could talk through one that you don’t really control, which is the speed and the number of users that actually have access to the internet, but one that you potentially could, which is actually fulfillment.

Scott W. Devitt – Morgan Stanley & Co. LLC

Yeah. So it’s a market with strong secular trends. In our favor, broadband is growing. And particularly the way lower-income people are being increasingly able to access the web via mobile phones is impressive and that is rapidly increasing the size of our addressable market.

And as you say, I think the two very large and very obvious friction points in e-commerce are payments and shipping and fulfillment, which I tugged those two together if you will. We’ve been doing a lot in terms of payments. I think there’s still long ways to go, but we feel particularly in our largest markets that we have through Mercado power, a very good payment solution. That is growing rapidly and is gaining share both within our platform and outside of our platform.

And now we are starting to work in integrating ourselves with the shipping providers in the different countries. So we are right now integrated – have done that in Brazil and in Argentina. It’s still, we are testing it, we’re experimenting it. But we’re seeing very strong growth in the number of transactions that are completed with the full integration of shipping and tracking information, all being able to follow it from our platform.

So we’re happy. We’re on the early stages. And this is just the first step, integrating ourselves with the different shipping providers in the different countries and obviously using our scale and the scale of all of our transactions to negotiate better rates and then pass that, those savings over to our sellers.

Scott W. Devitt – Morgan Stanley & Co. LLC

And specifically as it relates to Brazil, you have a very large presence there, some arenas there. Traditional retailers are starting to test more aggressively online. Where do you think e-commerce is in Brazil, if you were to compare that to other markets or even on an absolute basis?

Marcos Galperin

It’s by far the most developed market in Latin America. And I would say it is as developed as several markets in Europe. So retailers are being very aggressive with their online offers. They are offering free financing for 12 months, 24 months, free shipping in the large urban area. All those things are very common today in Brazil. So I would say it’s gotten very competitive.

Pedro Arnt

I would just add one thing, I think to complement that which I mean is; obviously it’s important to understand the competitive segment, who the competitors are. But in reality, where I think the strongest case for our growth story comes from is not even if we’re stealing share from arena or from another retailer, it’s how fast are we as an industry, stealing share from offline. And I think that’s the case for any e-commerce player anywhere. But in a region where its still less than 3% of retailers going online, I can even make a case to them in the short-term, it’s to our benefit if some of these large retailers actually do well online, because they’re expanding the pace at which consumers are going to move into online from offline and more importantly don’t forget, we’re a marketplace business.

So our vision, not unlike some of our peers globally is that we actually have a very important role to play to help these retailers I think move more and more online. Some of them get it more. I think some of them are going to take more competitive pressures before they get it. But I think the long-term story is one where I think we’re more focused on rapidly capturing offline buyers and moving them online and eventually convincing existing retailers that we can help them capture those same sellers if they start using different parts of our platform and working with us.

Marcos Galperin

And increasingly these large retailers are becoming our clients. Either they are buying advertising from us or they are using our payments like Walmart in Brazil is processing payment through Mercado. So we definitely see these large retailers as clients at the marketplace, we want to have them to e-commerce and increasingly we’re starting to be successful in that space.

Scott W. Devitt – Morgan Stanley & Co. LLC

And I don’t want to dwell on this Amazon topic. It has lingered for so long. But what’s interesting is their approach to some markets, now whether entering Digital First and it’s not certain whether they’re entering Digital First with the ambition of having a physical business or they’re choosing to enter with Digital because they actually don’t have a preference to have a physical presence if that’s possible. And to the extent, you’re willing to comment on that even at a higher level and even in specifically on Amazon, what do you think of that strategy?

Pedro Arnt

I would say for us, historically, it has been very useful to look at all our competitors, analyze them very well. But mostly focus on ourselves and the benefit we give to our users, our buyers and our sellers. Particularly in the case of Amazon, it’s particularly hard to try and forecast. I mean we don’t even know how many Kindle tablets they sell. So I mean, trying to understand what they will be doing in Brazilian well and how I would say, it’s probably a waste of our time and our energy.

So we obviously see how they operate in their most developed markets, the kind of experience that they provide to their users and that’s what we aspire to do in our region and that’s why we’re so focused in serving payments, serving shipping, getting involved in fulfillment and we have invested a lot in customer service.

We have really revamped all of our efforts there and we’re seeing some very good metrics, some very good improvements in our net promoter scores. So I mean that’s how we prefer to spend our energy really. I think it’s more useful.

Marcos Galperin

We’ve answered the Amazon question much of the same way Amazon would have answered, which is we won’t comment on that.

Scott W. Devitt – Morgan Stanley & Co. LLC

Yeah, that’s good. The one thing that you’ve done pretty proactively, even having this dominant position is keeping prices low in terms of fees. You’ve done bundling over time to drive penetration and one would say that in the earlier days, you learned a lot about the mistakes that eBay had made and did the right things in your business. So how do you now think about seller fees in terms of where you are from a market standpoint and the type of pricing power that you may have in the model if you ever chose to exert that?

Marcos Galperin

Okay, so let me give you the big picture and then I’m sure Pedro would love to provide greater detail. But the way we look at this is we’re still really in the early, early days of e-commerce in the region, very early days. I just mentioned we have 23 million active users left here between buyers and sellers. We operate in a region with 600 million people and we aspire to have 100 million people active in one calendar year on our platform. We will do whatever is necessary to try and grow that 23 million to 100 million while keeping our margins roughly where they are today.

We believe we could – we have a tremendous pricing power. But we think it would be a huge mistake to focus at this stage of the industry and our company in your driving margin substantially higher than where they are today. We would much rather continue growing the user base of both buyers and seller and focusing on investing so that we have a better experience both buyers and on sellers and also we’re increasing the efficiency of our payments platform. So that’s the way we look at it. We don’t think it makes sense to drive our margins radically higher at this stage of our industry and our company.

Pedro Arnt

And that side is still predominantly 95% fixed items and the fee structure in terms of delay that it’s structured front end versus back end. What is that percentage? Can you share that?

Marcos Galperin

I think directionally, we’ve said that and that’s another decision that I think strategically it makes a lot of sense and has evolved is the share of fees coming from the front-end. So the fees that sellers need to pay regardless of this, if they’re successful or not, had been shrinking historically. They are less than 20% at this point in time. And it makes a lot of sense because we’re sharing risk with our sellers.

And I think that’s something that the evolution of market price is globally that something most marketplaces has figured out over time, that up-fronting the fees regardless of whether the seller sells or not, is an invitation to somebody else to come in with an alternative pricing model, where you only pay if you’re successful.

So we’ve gone in that direction and I think it’s been great. If you look at most of our listing metrics and our seller metrics, they’ve consistently improved year-over-year. I think a big part of that is that pricing-wise, we back loaded the placing overtime increasingly. You still have the optional ability to up sell and to buy placement. But there’s no such things as an insertion fee where you pay just a list within the core market place.

Pedro Arnt

Perhaps the last thing we did with respect to pricing, the last – very large if you would, movement was to introduce free listings, to better compete with free classifieds. Free classifieds have been very successful in various parts of the world, in the U.S. and some places in Europe and I think motivated because of that some players have very aggressively launched again in the region because ever since we started we have increased classifieds around.

And we’ve been incredibly successful at competing with those platforms. We don’t see anyone really getting any traction because we are more than happy at this stage of the Internet to enable people to list for the first time for free in Mercado and they can do it several times and make sure they have a good experience. And once they see that, they can list, it’s easy in itself. We can either upgrade or continue paying once they really have started to gain traction in their sales. So that is something that has actually worked well for us.

Scott W. Devitt – Morgan Stanley & Co. LLC

And one of the other things that you did as a Company, that was unique to the way that marketplaces were originally built, was being comfortable allowing users to exit your site and you built an ad business, it does that in adjacent revenues now, we’ve approached 30% of the total. Can you just talk a bit about the approach as a company in terms of not thinking about the marketplace as a (inaudible) if you will?

Marcos Galperin

Yes, I mean definitely several years ago what we’ve thought is we want people to start their e-commerce searches on our platform and they should be able to find everything, and if they’re looking for an iPhone, they confined several iPhones that are listed by our merchants, but if they want to buy that from a large retailer, because they know them better or because of a special warranty whatever, they should be able to find a link to that large retailers’ sites from our platform, and we’ve been very successful actually of selling advertising to the large retailers that we’ve seen that it hasn’t cannibalized our traffic at all on the cost of retails. I would say made stronger our site as an e-commerce destination, our people know they can start doing their searches and they will be able to find everything from there, so that has worked very well for us as well.

Scott W. Devitt – Morgan Stanley & Co. LLC

Talk a bit about there’s never able to I guess fully prove these pieces, but there’s always an expectation that product mix, its way on to the site that may not have the appropriate level of tax payments associated with it and you have this method of having businesses registered with the site and you’ve talked to that a little bit, because it’s pretty very relevant down there and not only in that end, because you guys at one point in time had a big problem and created the payroll program of rights ownership as well.

Marcos Galperin

Yeah. So there are two issues; one is the rights and the other one is the taxes. Let me address the taxes first. I mean what we have always said is, this is a model that works in Japan and China, and Switzerland and the U.S. and in Latin America and people only start thinking about these are models that works because (inaudible) taxes only in Latin America. They never think about that in Switzerland, in Germany, in Japan or in the U.S., so it’s clearly a model that works very well.

Now fortunately tax authorities rapidly realize is that we are great allies for them, because if someone has imported something, we are paying taxes and they are selling them on a street corner or on their own physical store, there will never be a record of that. However, if they sell something on our platform, there will always be a record of that. Who sold it, who bought it, at what price and actually what did the buyer say about the transaction. Increasingly there is also the payment and payments are also settled through the banking system. So it’s more and more the lever and we are pretty one of the first platforms in the world to start collecting taxes on behalf of the tax authorities, because they sold it and they said it well.

These sellers that are selling more than x thousand dollars, why don’t you retain their taxes due and hand them over to us, or at these periodically their information and I will do it and that is now for example, starting to happen with Amazon in the United States as well, but that is something that we have been doing in several countries for sometime.

There were program, the right issues is a different thing. You don’t have in Latin America, notes and take down program, but what we did is, we have implemented a private one. So anybody who signs up and gives us a notice that they believe a product that infringes their intellectual rights is being sold on our platform. They just send us an e-mail and it’s automatically removed.

However, they are responsible of proving that to the seller that the product was infringing property rights because sometimes the rights owners don’t even know that. So but we don’t want to be, the ones we need to decide or understand what products have intellectual property rights which one do not because it’s really very complicated. But that area has worked very well and I would say we work very well with almost all the brands in the region (inaudible).

Scott W. Devitt – Morgan Stanley & Co. LLC

Two more from me, hopefully we don’t go through 2008-2009 again anytime soon but Pago – if you could Pedro maybe just walk through the changes like the way Pago is structured now from a risk profile stand point relative to the way it was back then.

Pedro Arnt

From a risk profile, so yes great, I think I said so. Our payments business essentially has certain portion that are very similar to EBay and that we charge a transaction fee for processing payments. But in addition to that, there is a very interesting revenue stream that we accrue from consumer credit and the way we structured this is a way where we don’t have any exposure to the consumer risk on that. The credit card is the one issuing the credit and taking on the risk so regardless of whether the consumer defaults on that loan or not we still get paid by the credit cards, so the only exposure we would have in terms of counterparty is to the financial institution that’s extending that credit.

But even that risk we’ve managed down because essentially what we do is we out flowed those receivables, we sell them back into the market. The discount at which we sell them is actually what we used to price the way that we’re offering the credit on from a kind of progress. So at the end of the day what you end up with is a very solid revenue stream, it’s quite profitable for us and really we removed all of the risk from the balance sheet.

There never was any consumer risk in the first place, and the counter party risk with the financial institution that was extending that loans we offload as well, and part of that I think was the learning we had coming out of 2007 and 2008, thinking all of these financial institutions that looked in kind of way solid maybe, weren’t that solid, we’re in e-commerce company, and that’s the way we want to be measured, let’s not take on any of this financial risk, and the great thing is, we’ve been to able to build the great business on top of that even though we de-risked it significantly.

Pedro Arnt

So the rest that exists as the timing from when you attend to sell environment changes?

Marcos Galperin

Correct, perfect, the good thing about that is you’re never sitting on a very big pile of receivables, and given the fact that our balance sheet has strengthened significantly if at any given point, it gets difficult to offload the receivables that we do have on the balance sheet. We can more than easily cover that ourselves.

Scott W. Devitt – Morgan Stanley & Co. LLC

Okay, and I’ve never really given you the opportunity to do this, but it seems like the culture at MercadoLibre has to be pretty unique, Pedro has probably been at the company for 12 years old, but it seems like…

Marcos Galperin

He looks younger than he is…

Scott W. Devitt – Morgan Stanley & Co. LLC

But the number of employees that you have that are so long, can you talk a little bit about the culture that we felt?

Marcos Galperin

I mean, we’d like to have fun when we work. So I think that obviously the fact that the Company has grown a lot, and it’s very difficult in Latin America to be in a place where you grow a lot, and you also are in the place where you make the decision, so if you work for Google or Facebook that are growing a lot in the region, but the decisions are not taken in Brazil. They are taken in Silicon Valley. So we’d take the decisions there, and I think people enjoy that, the atmosphere is obviously one that I think it’s a very good atmosphere. We work very hard. We discuss a lot, but we have fun and we focus on the objectives, and try to enjoy ourselves on the process.

Marcos Galperin

Okay. We have time for maybe one or two questions if there are any.

Scott W. Devitt – Morgan Stanley & Co. LLC

Although you mentioned a little bit about it can you go in more detail over to two questions Hyoctane regarding to Brazil, player and that is not the hot cone, which by now I believe is bigger than B2W, they are launching like a kind of the market place for all the retailers to put merchandise. So how do you see these new competition and second mobile, most of the Brazilians, they are getting into the internet to mobile, what’s your mobile strategy?

Marcos Galperin

So starting with mobile, we’ve launched and upgraded all, all the time I mean just now I downloaded our most recent upgrade to our iOS app and we are seeing tremendous traction really. We’ve mentioned this in our last earnings almost 10% of our traffic is coming from mobile and almost 10% of our gross merchandise volume is coming from mobile up from almost zero a year ago. So we’re very happy with where we are. We still have long ways to go. We have in our product road map many, many new feature that we will be introducing to the apps but when we see other apps out there and where we stand we think that we stand very well and we’re seeing very good traction.

With respect to the competition, there are many players, I mean, we’ve been doing this for 14 years, I can tell you, I can probably name a 100 market places that have been launched by different players in out of our markets and we look at all of them, we study all of them and then we focus on what we need to do and right now what we’re going to be doing is removing friction out of payments, removing friction out of shipping and fulfillment, opening up our platform. We are the only company that has an open platform by the way in the region, working with developers who are enabling sellers and buyers with solutions that we are not able to do everything ourselves, working on different verticals, for example, motors were the leader in every market and right now we are very focused on real estate, which is doing incredibly well. We grow our listings in real estate like 20 or 30 X last year. We are according to ComScore, the leader in traffic in Argentina and one of the leaders in Brazil even though we haven’t done much.

Last year, we focused a lot in product, now more recently we are focused in growing our listings and now we are going to start doing some markets. So I mean, I don’t know our competitors, but we are focused on ourselves. We have a huge network effect. We have 16 million live listings, so I think it’s very difficult for anyone to just come through our marketplace and compete and beat us. I think we would have to drop the balls substantially and we don’t expect to do that.

Having said that, it’s time to compete. I mean we have been doing this for 14 years, probably we won’t have competition. We are going to have that much motivation to go to the office everyday, so I think we like competition and we have enjoyed and it makes us better and it helps our customers, our sellers, and our buyers.

Scott W. Devitt – Morgan Stanley & Co. LLC

We should leave it there. Lot of time, Marcos and Pedro, thank you very much.

Marcos Galperin

Thank you, Scott.

Question-and-Answer Session

[No Q&A session for this event]

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