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Executives

Martin de Los Santos – Vice President-Finance

Pedro Arnt – Executive Vice President and Chief Financial Officer

Marcos Galperin – Chairman, President and Chief Executive Officer

Analysts

Gene E. Munster – Piper Jaffray, Inc.

Mark R. Miller – William Blair & Co. LLC

Ross A. Sandler – Deutsche Bank Securities, Inc.

Alex Chavdaroff – Stifel, Nicolaus & Co., Inc.

Marcelo Santos – JPMorgan CCVM SA

Steve D. Ju – Credit Suisse Securities LLC

Michel Morin – Morgan Stanley & Co. LLC

MercadoLibre, Inc. (MELI) Q3 2013 Earnings Conference Call November 5, 2013 4:30 PM ET

Operator

Welcome, ladies and gentlemen to the MercadoLibre’s Third Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. After our prepared remarks, we will conduct 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 the company.

Martin de Los Santos

Hello, everyone, and welcome to MercadoLibre earnings conference call for the quarter ended September 30, 2013. My name is Martin de Los Santos, and I am the Head of Investor Relations for MercadoLibre. Our senior management presenting today is Pedro Arnt, CFO; additionally, Marcos Galperín, Chief Executive Officer; and Osvaldo Gimenez, Executive Vice President of Payment 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 sections 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 Factors sections of our 10-K and other filings with the Securities and Exchange Commissions, which are available on our Investor Relations website.

Finally, I would like to remind you that during the course of this conference call, we may discuss some non-GAAP measures. A reconciliation of those measures to the nearest comparable GAAP measures can be found in our third quarter 2013 earnings press release available on our Investor Relations website.

Now, let me turn the call over to Pedro.

Pedro Arnt

Good afternoon and thanks for joining us. I’d like to start today’s call with a brief update on the major trends we are seeing across the ecosystem, reviewing some of our KPIs and delving into the most relevant qualitative aspects behind our progress, before jumping into a detailed review of our financial performance.

I am pleased to say that our third quarter of 2013 saw good progress along many different fronts, as each of our ongoing strategic initiatives gain further traction, and as we continue to execute against our plan, despite currency devaluations which still present headwinds for our reported financials.

As a result, our business delivered strong and accelerating revenue growth of 45% in local currencies, 27% in U.S. dollars, given the aforementioned currency headwinds, and EPS growth of 30% in local currencies, and 12% in U.S. dollars. We saw strength across most geographies with accelerating revenue growth in local currencies in Brazil, Argentina and Venezuela.

As we indicated last quarter, the Company’s results confirm that our ability to consistently deliver solid execution in a market constantly expanding due to the secular shift of commerce towards online channels makes for a powerful business combination that continues to override the softer macro cycle in most countries where we operate.

Let me give you some data to illustrate this virtuous business cycle generated by secular

tailwinds that we benefit from. According to ComScore data for the first half of the year, internet unique visitors in Latin America are growing 13% year-on-year, the fastest consolidated pace of growth out of any continent worldwide. This growth in our addressable user base is compounded by our ability to further penetrate existing internet users, leading to 20% year-on-year growth in new users on our platforms during the third quarter.

Furthermore, as we maintain our pace of innovation and focus on delivering an improving trading experience to our users, we are able to drive incremental results in engagement metrics from those existing users, leading to volume growth that outpaces user growth; 25% in units sold, and 32% in payments processed both year-on-year.

This cycle of increasing user engagement and increasing market penetration, atop increasing market size, leads to incremental brand awareness for MercadoLibre among consumers.

As a September 2013 study by Millward Brown quantifies, we not only remain the regional top of mind leader for e-commerce in each of the markets where we operate, but have also seen improved brand awareness, as reflected by an unaided recognition level of our brand that surpasses 50% of responding regionally, and peaks at above 80% in some of our largest markets.

This improved brand awareness allows us to continue capturing new users as they move online, and gain share of wallet of existing users, thus kick starting the cycle I just mentioned all over again.

Furthermore, we believe we have been able to maintain this strong brand position in Latin America by focusing on the following initiatives. Offering the widest possible selection of products and services at the lowest possible prices, while making our platform compatible with a broad base of devices and form factors as they become increasingly relevant and by providing the right set of value added functionalities and services primarily through technology to guarantee an outstanding user experience.

Each of our strategic initiatives is about improving on one of these key aspects. Let me then update you on how they advanced in the third quarter. First, we continue to diversify product mix on our platform, be it through our work on vertical categories or through our open platform which in the third quarter enabled new integrations with renowned brands such as DZ, Mizuno, Pony, Quiksilver and Diesel in apparel and Phillips in consumer electronics to name a few.

Combined with the right commercial push these initiatives are diversifying the basket of what gets bought on our platform. In addition to apparel, sports and fitness, baby products, furniture and office equipment all kept gaining share of the units sold on a quarter-on-quarter basis not to mention year-on-year as well.

In terms of capturing share in new devices our mobile initiatives continue breaking new ground expanding as a point of entry and as a habitual gateway to our platform. Mobile keeps gaining share of sales ahead of our own expectations. And in September, it broke into double-digit territory as a percentage of our total gross merchandise volume for the first time. In fact mobile GMV has been growing in the triple digits all year, contributing to the vibrancy of our core marketplace.

In the mean time, our key value adding services kept gaining traction on our platform in the third quarter. Payments continue to out place marketplace growth particularly in Brazil were on platform total payment volume continue to reach record levels gaining 4 percentage points of gross merchandize volume quarter-on-quarter.

Argentina also saw good progress. As on platform penetration rose by 3% also quarter-on-quarter. As this takes place our shipping solution, MercadoEnvios expands its runway. Operational in Brazil and Argentina, it is growing extremely well from a small base claiming share of GMV on a monthly basis.

We started the year with only a handful of transactions but during September surpassed 4% of unit sold in both countries with Brazil leading the way, with more than 5% on units being shipped through MercadoEnvios. We look forward to continuing on our roadmap of shipping initiatives by adding more countries carriers and logistics related services to the offering.

Finally as you recall we are complementing all of these initiatives with parallel efforts and investments in our customer service operations. We are pleased to report that some of these efforts and functionalities contributed to important sequential and year-on-year improvements in our net promoter scores. And we believe we will able to sustain this positive trend going forward.

Having covered these operational highlights, let’s now review how our key metrics performed in the third quarter of 2013. New registered users on our platform grew 20% as I mentioned earlier with mobile contributing 12% of these in the quarter. Item sold grew 25%, GMV grew 49% in local currencies, total payment transactions grew 32% and total payment volume grew 55% in local currencies.

Let’s now see how all this flow-through to our financials beginning with our consolidated highlights for the quarter. All growth I’ll mention are year-on-year unless I specify otherwise. During the third quarter of 2013 net revenues came in at $123.1 million, accelerating in local currencies and in dollars as well despite foreign exchange headwinds. Revenues grew 45% in local currencies and 27% in U.S. dollars. Gross profit margin was 72.3%, 133 basis points lower than last year. Income from operations was $37.4 million with an operating income margin of 30.4%. Year-on-year operating income grew 11% in U.S. dollars, but 28% in local currencies.

Net income before income or asset tax expense was $41.2 million, growing 15% in U.S. dollars and 33% in local currencies. Net income was $29.1 million growing 12% year on year in dollars and 30% in local currencies. This resulted in earnings per share of $0.66 for the quarter.

Our revenue acceleration during the quarter was driven mainly by the marketplace businesses with strengths across most markets including Brazil where good traction on the supply front brought placement fee revenue acceleration and while favorable listing type mixes brought final value of the acceleration despite slightly decelerating GMV, leading to an increase in marketplace take rate in that country.

Our non-marketplace revenues also grew well. Classified and Ad sales posted continued growth in line with the previous quarters. The motors classifieds category was the driving force behind non-marketplace revenue growth in Mexico and Venezuela while in Brazil and Argentina non-marketplace revenue growth was primarily spurred on by off platform MercadoPago processing revenues, which remained our fastest-growing revenue stream. While financing revenues despite slowing monetization due to increases in interest rates continue to grow leading to a record volume of finance transactions during the quarter.

As a result, consolidated non-marketplace revenues grew 21% year-on-year in U.S. dollars and 39% in local currencies. Consequently total revenues accelerated with good momentum heading into the fourth quarter, delivering local currency year-on-year revenue growth of 28% for Brazil, 66% of Argentina, 19% for Mexico and 92% for Venezuela where currency and inflationary distortions impact growth, but where nonetheless we continue to run a profitable and fully self-financing business that presents us with strong earnings potential in the mid-to long-term and where units sold grew 26% year-on-year during the third quarter underlining the resilience of our business model even in tough macro conditions.

Furthermore, if we consider local currency growth for our consolidated revenues excluding Venezuela we get year-on-year growth of 37% in the third quarter as all our operations are witnessing robust volume growth, starting with Brazil which posted 29% growth in units sold during the third quarter year-over-year. Advancing down on our P&L, gross profit grew 24% in the third quarter to $88.9 million.

Gross profit margin was 72.3% of revenues versus 73.6% in the third quarter of 2012 and 72.3% also in the second quarter of 2013. Gross margin compression year-over-year is primarily a consequence of our previous year third quarter having had a 50 basis point non recurring sales tax credit that generated a tough comparison and an additional 70 basis points of margin contraction from our incremental investments in fraud prevention this year.

Beyond those two items a higher proportion of payments processing fees as a consequence of growth in MercadoPago had been offset by scale and efficiencies in site operations and customer service.

Operating expenses for the period totaled $51.5 million, 36% higher than in the same period of 2012. Operating expenses as a percentage of revenues were 41.9% in the third quarter versus 38.9% in the same quarter last year and 40.7% in the second quarter of this year. These expense levels are coming in according to plan as we have been investing more aggressively than in the past in product development, brand spending and in compensation costs to attract and retain talent. We believe that these three areas are critical to our long-term success and we are comfortable with the margin profile the business continues to deliver, despite the year-on-year deleveraging generated by these line items.

I will now call out the most significant variations in OpEx levels in greater detail. Sales and marketing, which remains our largest line item grew 30% to $24.2 million or 19.6% of revenues versus 19.1% for the same period last year. Our TV campaign accounts for a 163 basis points of additional marketing spend versus last year’s third quarter. Salaries and wages account for another 29 basis points while both are largely offset by a 70 basis points improvement in our chargebacks line as we kept reducing a rate of fraud losses over credit card volume. And an 88 basis point improvement in bad debt and trust and safety combined.

Moving onto Product Development, expenses grew 51% to $12.1 million representing 9.8% of revenues in the third quarter versus 8.2% in the same period last year, making this the line item where expenses grew most markedly versus revenues on the year-over-year basis. One quick note on this as the fast growing technology company if there is one line where we believe short-term scale is less relevant, this is it.

Finally, G&A grew 35% year-over-year to $15.3 million in the third quarter or 12.4% of

revenues versus 11.6% a year ago, primarily driven by an increase in compensation related costs. As a result, operating income for the third quarter of 2013 was $37.4 million. Operating income margin for the quarter was 30.4% versus 34.7% in the third quarter of 2012.

Below operating income, we benefited from $2.8 million of interest income, down 5% year-on-year as a result of lower interest rates on our investments. We also saw a $1.6 million gain in our forex line, as the U.S. dollar balances held by some of our subsidiaries appreciated quarter-on-quarter, whereas in the same period last year we saw negative $200,000 from an inverse effect.

As a result, our pre-tax net income was $41.2 million, 15% higher than in the third quarter of last year in U.S. dollars, and 33% higher in local currencies. During the third quarter income tax expense was $12.1 million, resulting in a blended tax rate of 29.3% versus 27.5% in the third quarter of 2012.

Net income for the three months ended September 30, 2013 was $29.1 million, 12% higher than last year’s $26.1 million. Net income in local currencies was 30% higher than in the same period last year. Net income margin was 23.7% for the quarter versus 26.8% for the same quarter of 2012, resulting in a basic net income per common share of $0.66.

Payments for the acquisition of property, equipment, intangible assets, advances for fixed assets and acquired businesses net of cash acquired for the quarter totaled $38 million, driven by the purchase of commercial real estate in Venezuela as a strategy to protect value in Venezuela from devaluation risks.

Consequently, for the period ended September 30, 2013, free cash flow totaled $25.7 million, versus $21.9 million last year during the quarter, despite the investments made in fixed assets. Cash, short-term investments and long-term investments at the end of the quarter totaled $289.2 million.

Concluding this afternoon’s review of our business, we are pleased with the operational results that all parts of our ecosystem are showing, and feel that they are all falling in place to deliver a very solid financial performance. The multiple initiatives we are focused on continue to align themselves nicely behind our ultimate goal of delivering world class trading solutions for our community of buyers, sellers and partners. I look forward to reporting our progress during our next call after the holiday shopping season.

And with that, we’d like to now take your questions

Question-and Answer Session

Operator

Okay. (Operator Instructions) And our first question in queue is from Gene Munster of Piper Jaffray. Your line is open.

Gene E. Munster – Piper Jaffray, Inc.

Okay, good afternoon and congratulations on the GMV growth with take rate. If you could give a little bit of context, I know you gave the growth rates, local currency ex- Venezuela’s 33%. Peter what would have that number been in the June quarter and then a follow up question.

Pedro Arnt

So Gene, I think we started disclosing the ex-Venezuela now. So I don’t have that in front of me and we haven’t made disclosures on that.

Gene E. Munster – Piper Jaffray, Inc.

Okay and then separately as through easy comps in December, now you don’t give guidance, making a little bit more difficult in March. As we start thinking about 2014 can you give us some just general context about kind of the acceleration in mobile and how that would impact in open ACI. And just in general, more or less just to how to think about the sustainability of these impressive local currency growth numbers versus the reality that the numbers are just getting bigger.

So as you are thinking about 2014, I guess naturally, those local currency GMV growth rates will come down but how should we think about some of these other accelerators like mobile and the open API offsetting that? Thank you.

Pedro Arnt

Great. So directionally Gene, I think we continue to be extremely positive about the business. This is still very early for e-commerce in general. And I think large numbers –it’s probably a bit early to speak about that. I think we have embarked during 12 months to 18 months on a series of strategic initiatives that we’ve been very consistent and within [indiscernible] and the reality is that many of these paths, I think there mostly will be a significant upside still to come.

These are mid-to-long-term investment cycles in mobility in opening our platform in shipping and payments. And as I mentioned in the prepared remarks, I think we feel very good about how many of these are beginning to fall in place and align themselves. So I think having said that we believe 2013 has been a very good year of setting the stage for 2014 and beyond in terms of growth and the opportunity behind our business.

Gene E. Munster – Piper Jaffray, Inc.

Great. Thank you.

Operator

Thank you. And our next question in queue is from the line of Mark Miller of William Blair. Your line is open.

Mark R. Miller – William Blair & Co. LLC

Yeah, Hi. Good afternoon. Peter can you put into perspective the modest deceleration and the rate of the units sold quarter-on-quarter versus the acceleration in local currency GMV. Quarter-on-quarter the difference really just a higher rate of inflation or is there something else that’s impacting that average ticket?

Pedro Arnt

So a couple of things, right, if we look at the deceleration it happened a few percentage points in Brazil. We had called that Brazil for the last quarter 33% down to 29%. Brazil GMV as I mentioned in the prepared remarks is actually down slightly, offset by improved monetization in the marketplace business, still growing units very strongly. Average selling prices even when we actually for inflationary impact and we look at the mixed shifts, technique shift, did improve somewhat in Brazil and some of the other markets.

So no, it isn’t entirely inflation, but it is also positive product mixed shifts that goes into that. And I think more importantly on the inflation front right this is a commission based business. So from a revenue perspective, we do capture those price increases whether they’d clearly price inflation or mixed shift across different categories.

Mark R. Miller – William Blair & Co. LLC

I got it. Yes, it’s an important point. On the shipping solution, can you share with any metrics, I know this is very early and still small, but what do you think for costumers satisfaction when this shipping solution is employed? I mean how is this affecting fulfillment times, and then what's the biggest push back you get from sellers to engage with the shipping ablution?

Marcos Galperin

Hi, this is Marcos so, as Pedro was saying on the prepared remarks we are very happy with the way shipping is evolving, to finish the quarter, I know it’s on high and we expect very strong and continuous growth going forward. The feedback we’re getting from centers is very positive, obviously while growing from a low base and the product is still in its early stages of the development we have many, many improvements that we are working on, and then we will continue to work on for the following quarter. But this really works and as are excited and I’m eager to join, and they are joining at record numbers everyday, so we’re very happy with this first step towards in this initiative that is going to break out several years to get to where we want to be.

Mark R. Miller – William Blair & Co. LLC

Okay, and I just have a final question on the TV marketing campaign, how do you assess the ROI on that, the [indiscernible] campaign and I thought that was great.

Pedro Arnt

Obviously it’s harder to measure ROI on offline campaigns but we track – I’ll tell you we’re seeing brand awareness. We track our visitors from non-traceable sources from not surge on things like that. We’ve seen a very healthy increase in all those metrics. We attribute an important part of those to the TV campaign, but I would say overall in our – overall marketing budget offline is not the most important aspect of our marketing campaign by any means.

Marcos Galperin

Next question please.

Operator

Our next question in queue is from Ross Sandler of Deutsche Bank. Your line is open.

Ross A. Sandler – Deutsche Bank Securities, Inc.

Thanks guys, two questions. First, on unit growth and then house keeping question on the model. The page of the unit growth, do you sell is somewhat surprising given the easier comparable versus last quarter, and then increased marketing, so can you give us a little bit more color on which regions are experiencing some of the deceleration versus as they are hold up outside of the comments on Brazil going from 33 to 29.

And then the second question is just the house keeping on sales and marketing and this maybe really bad question, so I apologize in advance, but you guys have continuously called out improvements in bad debt and fraud loss chargebacks within sales and marketing. So the question is what’s driving those improvements? You’ve seen some more counterintuitive given the macro transit some of the regions are experiencing so. Can you just talk about what fundamental are you guys are doing to detect bad transactions or for drive those improvements? Thanks.

Pedro Arnt

So let me start with the unit growth question, Ross if we look sequentially what these sales has been about 200 basis point as I called out the majority of that will be sell from 33 to 29, which is still a very solid number.

The market I would say are very much inline with the previous quarter, some of them are slightly up, some are slightly down but by and enlarge no significant change in the trajectory over the previous quarter in notes of the markets. So Brazil has the biggest impact there on the deceleration.

In the terms of the chargebacks, if I’ve understood the question, I will try to answer it. We have both invested significantly over the last year and you can see that in the COGS line. But also we believe improved significantly our capability around fraud detection and fraud prevention. And so this is beyond the macro issue of what’s happening at consumer loan default rates but rather this is operationally driven.

It’s driving a lot harder for people to be able to charge something on MercadoPago and then intentionally not recognize that purchase as our modeling in our operational capabilities have improved on that front. And that’s what’s driven the consistent improvement over the last few quarters.

There is a question around the marketing spend, I believe I guess that was associated with the units sold, so I think we have answered both of your questions.

Ross A. Sandler – Deutsche Bank Securities, Inc.

Thank you.

Operator

Our next question in queue is from Jordan Rohan of Stifel Nicolaus, your line is open.

Alex Chavdaroff – Stifel, Nicolaus & Co., Inc.

Hi, this is Alex Chavdaroff for Jordan Rohan. Can you discuss the treasury policy change with regard to Venezuela? Is it possible to get any dollars out of the country at all and if not, how long do you think it will be that way, thank you?

Pedro Arnt

So I wouldn’t say that there’s been a change in the treasury policy and we continued to have a very conservative and consistent treasury policies in countries where those are applicable where the vast majority of our cash is stored in U.S. dollar balances in the U.S.

The point you allude to is over the last, I would say since the beginning of this year, even the smaller amounts of dollars that we will previously able to repatriate from Venezuela have not been granted, and so the profit of the Venezuelan subsidiary generates all stays within Venezuela.

So as an asset management strategy what we began to do, we preserve that value in asset that makes more sense mid-term than believe ours is to buy either operational real estates or own offices, we will more recently commercial real estate as an asset value protection. In terms of understanding for how long Venezuela might continue to have restricted policies on cash repatriation, I think your guess is as good as mine. I don’t think if anything that happens in the short-term and fortunately we don’t mange this business for the short-term.

So in the mean time we continue to grow our business there, as I just called about our Venezuela business continue to grow at 25 plus percent units, year-on-year despite the tough macro. And I think, mid-term to long-term when Venezuela finally turns around we will emerge from that really very strong competitive position in a sizable market and hopefully we’ll have an interest asset base in terms of real estate that we – then we will be able to repatriate back to the U.S.

Operator

So our next question in queue is from Marcelo Santos of JPMorgan. Your line is open.

Marcelo Santos – JPMorgan CCVM SA

Good afternoon. Thanks for the opportunity. My question is related to shipping and delivery. It took us a little bit of page [ph] in your prepared remarks on the questions. I just wanted a little bit broader update on several initiatives you have. So I think you had a pilot plant the order fulfillment you had in Argentina initiative where you were working with, I think a delivery company to so I think 10-day delivery. I’m not really think that was the case, so just a broader update that would be very nice.

Pedro Arnt

So out there pretty earlier we have a multi-year plan for shipping and for logistics. We’re just starting on the plan. We are very happy with how we have started, growing very rapidly and we’re delivering a great user experience, bringing down prices, standardizing prices, incentivizing free shipping providing additional traffic to those centers that are using our shipping solution and operating for shipping. So plenty of things that we like, but it’s very early on our plan and we intend to dive much deeper and we will be more than happy to provide additional color on the initiatives that we are undergoing as we come live and start delivering actual results.

Marcelo Santos – JPMorgan CCVM SA

Okay. About the customer relationship initiative, you’ve migrated to sales force and you’re implementing live chat and maybe live calls. Do you have any update on that front?

Marcos Galperin

Yes, we’re making great progress as well. As Pedro was mentioning, we see consistent increases in our net promoter scores both on a weekly – week-on-week basis, month-on-month basis and even further on a year-on-year basis. As we have said we have recently started to experiment with click-to-call, which is also providing great results on amazing net promoter scores. So we are opening different channels for people to be able to contact that and for us to be able to provide the best solution and the best response possible, and I think we are substantially better than what we were a year ago, but we still think we have a long way to go to be where we want to be.

Marcelo Santos – JPMorgan CCVM SA

Okay. Thank you very much.

Marcos Galperin

You’re welcome.

Operator

Thank you. Our next question is queue is from Stephen Ju of Credit Suisse. Your line is open.

Steve D. Ju – Credit Suisse Securities LLC

Marcos, is there anything you can share in terms of the behavior of the incremental user, you’re adding either on desktop or mobile. It seems like the incremental items purchased for the new users are coming down, and I’m wondering if any newer users are taking longer to get comfortable, buying stuff on a platform. And Pedro, can you give some additional color on the step up and product development in particular, what are the additional expenses going toward additional engineering talent data centers or if the market for talent getting tougher? Thanks.

Marcos Galperin

So on mobility I really attribute the deceleration in units shipped to either mobile or desktop and you shipped and to buy. I think these are quarter-on-quarter oscillations. Given the rate at which the market is growing we’re growing in terms of units. It’s still probably slightly above market or at market with very solid results in our largest market, which is Brazil and so I wouldn’t look for any trend line there as consumers shift to other devices. I think we are noticing some very interesting numbers coming out of our mobile devices and our overall strategies and I’ve shared some of those.

We are seeing a significant uptick in user registration as you just mentioned. Average tickets on mobile devices are slightly higher than on desktop currently, which is to a certain degree somewhat kind of intuitive. I think we’ve attributed that perhaps to an increased phenomenon of showrooming where consumers actually have their hands on the product and are willing to buy more expensive things. Perhaps it’s also a higher income demographic, but still I think early days and there is lots of data that we will continue to put through going forward.

Steve D. Ju – Credit Suisse Securities LLC

And the step up and…

Marcos Galperin

Exactly. So the step up in product development, most of that is really compensation cost for growing the number of engineers and retaining talent. I think we’ve historically always said that over longer periods of time we are going to focus on driving scale in the business in certain marketing and G&A. Occasionally we will enter investment cycle, but that doesn’t happen. Therefore longer term trend for our business is so scalable, always should definitely be to scale those two lines.

Product development, we are less focused on driving scale from. It’s still smallest of the three line items and it’s the one where we need to make sure that we continue to invest in. It’s the most important line for the long-term prospects of the company and I think this quarter has been a casing employed [ph] and most of that is actual compensation for engineers. There are some additional costs, but that’s the biggest driver.

Steve D. Ju – Credit Suisse Securities LLC

If I can have one more I mean just out of curiosity, what are you going to be doing with the new office buildings in Venezuela, are these occupied right now and you are going to be collecting some sort of rental income?

Marcos Galperin

Right. So if you look at our purchasing of real estate, the initial purchase we carried out in the past was actually for our own operations. So those were using ourselves. The most recent ones, as you mentioned, we do have a tenant for it now. There will be monthly rental fees that we will approve from that.

Again, the objective here is really to preserve the value in BRICs and in commercial real estate that have AAA quality, not to generate revenue from this, but it is the consequence of not losing an item.

Steve D. Ju – Credit Suisse Securities LLC

Thank you.

Operator

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

Michel Morin – Morgan Stanley & Co. LLC

Yes, two questions. First on Brazil, was there – did you notice any disruption from the demonstrations that you faced during the summer months and I suppose continue to take place on and off?

And then secondly, if you can elaborate a little bit more in Venezuela. What is driving that 92% and I obviously know that there is inflation, but is the high inflation also affecting behavior of your users, are they more inclined to look at acquiring some assets that a little bit as you are doing the commercial real estate is becoming bit of historic value for them. I’m just wondering if you can explain a little bit better that 92% figures. Thank you.

Marcos Galperin

So with respect to Brazil, I would say we cannot return on any impact if there was any. It’s not one thing that we can account for, typically macro factors, I’m very specific. I would say even micro factors like those demonstrations in Brazil have not had an impact on our business. Our business is mostly driven by the secular trends that are driving Internet penetration from 3% 10 years ago to 50% in Brazil today, driving down the prices of devices, increasing the quality of broadband. All those things continue unabated in Brazil and in the region and whether economy growth at 3%, at 1% would decline 2% typically have not impacted our growth rate and I think that the demonstrations are just one more anecdote. I mean we are growing very healthy in different countries like Venezuela or Brazil, which have different economy indicator. So that goes to address the first question. With respect to Venezuela the question was…

Pedro Arnt

Yeah, I think you were trying to get a sense if there’s some element on I think carry-forward at consumptions and their inflationary cycles. I think what we’ve always said about this is what is true about inflationary economies that saving rates are very low. People don’t typically hold on to their money for very long and that’s the case I think of any economy in an inflationary cycle and has been the case for a long administrator, has had inflation, which have been over 10 years now.

So I think that explains part of the strength of the business despite the incredibly tough macro environment. We’re still growing units again 26% year-on-year and have been doing number similar to those over last few quarters. So no one is savings and people are buying. I think the gap between units and local currency GMV is probably driven more by inflation as you were saying and to a lesser extent a significant starting forward to purchasing.

Michel Morin – Morgan Stanley & Co. LLC

Great. Thank you very much.

Operator

Thank you. And with that, I’m showing no further questions in queue. We’d like to thank you ladies and gentleman for joining today’s MercadoLibre’s third quarter 2013 earnings conference call. You may now disconnect. Have a great rest of the day.

Marcos Galperin

Thanks everyone.

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