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MercadoLibre, Inc. (NASDAQ:MELI)

Q1 2010 Earnings Call Transcript

May 6, 2010 4:30 pm ET

Executives

Pedro Arnt – IR

Marcos Galperin – Chairman, CEO and President

Hernan Kazah – CFO and EVP

Analysts

Marianne Wolk – Susquehanna

Imran Khan – JP Morgan

Scott Devitt – Morgan Stanley

Gene Munster – Piper Jaffray

Steve Weinstein – Pacific Crest

Stephen Ju – RBC

Operator

Good day, ladies and gentlemen, and welcome to MercadoLibre's first quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. (Operator instructions) As a reminder, this conference call may be recorded. I would now like to turn the conference over to your host, Mr. Pedro Arnt. Sir, you may begin.

Pedro Arnt

Thank you. Welcome everyone to MercadoLibre's earnings release conference call for the quarter ended March 31st, 2010. The company management presenting today are Marcos Galperin, CEO; and Hernan Kazah, CFO. This conference call is also being broadcast over the Internet and is available through the Investor Relations section of our Website.

Let me quickly remind you that during the course of this call, management may make forward-looking statements relating to such matters as continued growth prospects for the company, industry trends, and products and technology initiatives. These statements are based on currently available information and our assumptions, expectations, and projections about future events.

While we believe that these assumptions, expectations, and projections are reasonable in view of the currently available data, you are cautioned not to place undue reliance on these forward-looking statements. Our actual results may differ materially from those discussed in this call for a variety of reasons, including those described in the forward-looking statements and Risk Factor sections of our 10-Q, 10-K, and other filings with the Securities and Exchange Commission, which are available on our Investor Relations Website.

With those disclaimers, let me hand the floor over to Marcos to initiate the conference call.

Marcos Galperin

Thank you, Pedro, and welcome everyone to today's conference call. First of all, let me say that following an excellent 2009, we are off to an exciting and promising start in 2010 as well. Our first quarter results demonstrate the continued progress of ongoing strategies and recent initiatives. All our different business units showed tremendously positive traction during the first quarter as we continue to carry-forward the momentum gained from the many innovations that were launched during last year.

Before I move on, let me just clarify that all growth rates that I would be mentioning refer to year-on-year growth rates unless specifically stated. During the first quarter, the company generated impressive 39% growth in items sold, 103% growth in number of payments made to MercadoPago, 40% growth in gross merchandise volume, 49% growth in gross merchandise volume in local currencies, and 99% growth in total payments volume in local currencies.

During Q1, we added 2.3 million new users to our community of buyers and sellers, giving total confirmed registered users at $44.9 million, a growth rate of 26%.

Net revenues for the quarter came in at $45.9 million, a jump of 42%. Our marketplace revenues grew 27%. And revenues were particularly strong in our payments business, which grew 103%. Income from operations grew 123%, with an operating income margin of 32.9%. All in all, we believe Q1 performance validates the strength of our business model; efficient execution by our teams, our leading brand, and market position; and, the still compelling secular growth trends that benefit our industry throughout Latin America.

The strong reserves we posted for Q1 also highlight another important factor that I would like to bring to your attention. The fact that we not only continued to strengthen our business units on an individual basis, but even more notably that we are hitting a freefall in terms of the synergies and interplay between these business units. And as we deepen these relationships between the different platforms, marketplaces, payments, advertising, and the soon-to-be- launched Web stores, we are constructing a powerful ecosystem of complementing e-commerce services.

The positive consequences of this ecosystem are many, increasing network externalities, higher switching costs, more cross-selling opportunities, and deeper knowledge of our customers; all advantages that we are successfully putting into place in order to further cement our leadership in the e-commerce industry.

Most evident among these synergies during Q1 were those between MercadoLibre and MercadoPago. Kazah will go into greater detail later on, these two platforms mutually strengthen each other's position and generate easily identifiable growth opportunities for them. As the marketplace business grows, the addressable market for MercadoPago on-platform transaction also grows. And as MercadoPago increases penetration of marketplace transactions, trading frictions are reduced and the potential for even further marketplace growth is augmented. We believe this positive interplay is one of the key factors behind MercadoPago's triple-digit total payment volume levels and the MercadoLibre's marketplace market share gains during the quarter.

Cross-platform benefits are not restricted to marketplaces and payments. Our other portfolio businesses are also benefiting from the positive interplays within the ecosystem. Our classifieds business is leveraging cross-selling opportunities and classic derivation from the marketplace, making it the most visited automotive Website throughout Latin America.

Our advertising business is taking advantage of the customer relationships and the account managing teams we already have to market its offerings to our large centers enabling it to post impressive growth. And our nascent Web store solution, MercadoShops, targeted to sellers that want to pursue a multi-channeled strategy will soon be launched with built-in payment and advertising capabilities offered to MercadoPago and Mercado Click, and will be linked to and from our marketplace to facilitate sellers to our strategy of having inventory on our marketplace and on their own Web store.

As we move forward with our plans, further strengthening this ecosystem of complementing businesses and the relationships between them, we will be a key element of our strategy. We believe we're only scratching the surface of the potential of this ecosystem we are building, with more to come in the areas of combined pricing promotions, inter-platform functionalities, customer data mining, and bundled services.

Before getting into the details of the quarter, I'd like to reiterate that we are very pleased with the momentum our business is showing, the opportunity that e-commerce in Latin America continues to present as well, and the strategic vision that we have devised to sustain the momentum and capture that opportunity.

I would now like to address, on a per business unit basis, certain key aspects of the quarter. Concentrating first on our core marketplace, I want to provide more detail on three important initiatives carried out during the quarter. First of all, I am pleased to announce that as part of our continuous process of experimenting new ways of putting buyers and sellers together, we launched a free listing option on all categories in Argentina that is available for new or low volume sellers.

Free listings carry neither placement fees nor final value fees, and hence are entirely free for sellers. They do, however, carry in the View Items page, additional advertising placements, and those who show similar products from other sellers' listings that do pay fees. We have also placed a limit of one simultaneous free listing per seller, and finally, these free listings are always shown in the last group of listings regardless of how our user is searching the site.

These free listings, in the same way as those in classifieds in Chile and Brazil, aim at allowing new sellers that may be put off by having to pay upfront or even a final value fee to try our platform. We believe that during the next 5 to 10 years, we will continue to have millions of potential new sellers accessing the Web for the first time. And we want to do everything possible to have them try the liquidity of our marketplace, and later on, up-sell them into higher quality listing options. And while doing so, free listings will also help us improve the breadth of offering on our site.

We firmly believe that having the deepest selection possible is one on our core value propositions, and we are committed to continuously enhancing that selection over time with initiatives such as this one. In parallel, we are also confident in our ability to monetize these incremental free listings to advertising revenues and thus, selling enhanced listing formats to sellers who initially will only list for free. First results have been very encouraging in every aspect. And it is likely that we will expand this offering to other markets throughout this year.

Secondly, we continued to fine-tune and adjust pricing on the platform during the quarter, mainly in the form of non-disrupted increases to the maximum costs assigned to placement fees. As of the end of March, we conducted our first test in Colombia and took further tests in other markets. Given the timing later in the quarter, the effect on revenues was not yet visible in Q1. We believe that this constant recalibration and fine-tuning of pricing will be important for us as we continue to aggressively make changes to the platform that alter monetization dynamics.

As we have stressed many times over the last year, our primary focus at this stage of our development is to grow our business and capture market share. However, that does not mean that we will not remain committed to reviewing all opportunities for monetization improvement as long as these do not conflict with the above-mentioned objectives.

Finally, we launched marketplace and classifieds operations in an additional country during the quarter. As many of you probably noticed, MercadoLibre Portugal is now up and running. This is an initial trial intended to test project feasibility before making any further commitments. We believe Portugal is potentially an interesting market for us since its shares are common language, culture, and strong commercial trades with Brazil allowing us to leverage our existing know-how of brand and market position. We will monitor the evolution of the Portuguese site closely and see how it plays out. The site is still fully free and being run remotely from our Brazil offices. But if at some point we feel there is a strong business case to pursue the opportunity more aggressively, we will do so.

Moving on, I will spend a few minutes on MercadoPago before handing the call over to Hernan. Our payments business is on a roll, posting triple-digit growth in the number of transactions and transaction volume during Q1. We believe these external numbers are a combination of the vast and expanding online payments market in the region in general, and also of the unique position we are in to claim much of that growth.

As we have stressed in the past, the ideal launch pad for our payments business is our marketplace. In our case, we continue to capitalize this competitive advantage as we see MercadoPago growing rapidly on the MercadoLibre marketplace. Q1 results show what we believe to be the sustained positive gains towards that objective. Eventually, we believe that reaching 100% penetration of our payments platform on our marketplace, like other marketplaces around the world already do, is a reasonable objective to pursue.

As you may recall, in Argentina, during Q4, we stopped charging a separate processing fee for our payments service and increased our marketplace fee to compensate. This pricing has resulted in a very rapid increase in the usage of MercadoPago. During Q1, penetration of total payment volume over merchandise volume on the Argentine site has more than tripled versus the same prior-year period, and even delivered higher penetration rates than our December holiday season, which typically marks a high point in MercadoPago usage.

March's level of MercadoPago penetration is also twice when it was at the beginning of the prior quarter when we began this initiative. This sharp increase in GMV penetration is particularly impressive given that Argentina's GMV has grown at over 60% year-on-year over the last two quarters.

During the first quarter, we also took another important step towards maximizing MercadoPago penetration on marketplace transactions. We made offering MercadoPago as a payment option compulsory in Brazil and Argentina. Consequently, all these things will soon be offering MercadoPago in our two largest markets.

Towards the end of the quarter, we also fully launched MercadoPago 3.2, our platform in Brazil, where until now it had been available in beta format on an invitation-only basis. This officially inaugurates our merchant servicing business in Brazil. And while recognizing that the absolute numbers are still small, we are enthusiastic with the initial results. Already the site of the off-platform market for MercadoPago in Brazil is larger than the one in Argentina. The continued expansion of our off-platform payments business is important to us, and we will aim to continue prioritizing it in the future.

We understand that these businesses unfold in a very competitive market and near-term growth of our platform is subject to more variables and growth within our marketplaces. Nevertheless, our efforts are guided by the longer-term prospects of this tremendous opportunity that we have to become a standard for online payments in the region.

Wrapping up, before I hand things over to Hernan, I would like to leave you with this thought. I cannot remember a time over the past 11 years where we have felt that there is this much growth opportunity for MercadoLibre. When we look at our marketplace business and the small portion of total retail it still represents, our payments business and the growth potential that exists from both on-platform adoption and off-platform merchant services business and our national advertising and Web store initiatives, we have seen more opportunity than what we have ever seen.

On top of that, we see a company that today has a more solid foundation from which to pursue those opportunities. We are undisputed leaders in e-commerce, have built the leading brand in the region, have a higher market share than ever before and a stronger balance sheet than ever before. In short, we are very optimistic about our future prospects.

With that, let me turn the call over to Hernan.

Hernan Kazah

Thanks, Marcos. I would now like to go into more detail on our financial performance before taking any questions. First of all, I would like to stress what an excellent start of the year our Q1 represented as already mentioned by Marcos. We continued to see great topline momentum driven by very solid volume growth that we owe both to our own internal improvements and also to the strong tailwinds of Internet and e-commerce growth in the region.

Closely neighboring the health of our core business is the interdependent network of subsidiary businesses we are running, the performance of which has us very excited indeed. I would like to briefly review our main financial metrics before delving into all our different segments. Please remember that all growth rates refer to year-over-year growth rates unless specified.

With this, during the first quarter, most of our key financial metrics evolved positively. Specifically, net revenue grew 42% to $45.9 million, a 45% growth in constant currency. Gross profit margin was healthy at 78.5%. Income from operations was $15.5 million, with an operating income margin of 33.8%. And net income was $9.6 million, a 20.9% net income margin, compared to $5.4 million on an income margin of 16.7% a year earlier.

Revenue growth was driven primarily by a 39% increase in items sold, taking marketplace gross merchandise volume to $731.6 million, a 40% increase in US dollars and a 49% jump in local currency. Within this total, Brazil maintains a very strong local currency gross merchandise volume growth of 31% and a total payments volume of $123.8 million, 133% growth in US dollars or 99% growth in local currency. Our marketplace revenues grew to $33 million, a 27% increase in US dollars and a 39% increase in local currency. Payments revenues reached $12.9 million, 103% growth in US dollars and 72% in local currency.

Brazil continues to be the most significant payment business. However, given the bundling of the marketplace and payment fees implemented in Argentina, it is important to highlight how we are allocating revenues in this particular operation. For those transactions that are settled through MercadoPago, roughly 60% of revenues correspond to payments processing fees and 40% to marketplace fees. This is equivalent to the revenue split that would have been generated by these same transactions under the previous system, which takes into consideration the cost structure and margins intrinsic to each business.

Overall, the marketplace accounted for 72% of total revenues and payments for the remaining 28%, representing an impressive increase in share of total revenues for our payments business granted to the 18% to 20% breakdown for the first quarter of 2009. This follows directly from the important organic penetration of total payment volume over gross merchandise volume in all our countries where payments business currently operates, enhanced by the aforementioned initiative in Argentina specifically.

In local currencies in a country basis, consolidated net revenue growth, including both marketplace and payments businesses, was 35% for Brazil, 68% for Argentina, 25% for Mexico, and 59% for Venezuela. These growth rates reflect how our strong volume growth extends throughout all countries. On a consolidated basis, the increase rose to 6.28% from 6.20% in Q1 of 2009, as payments continue to gain share of total revenues.

Seen independently, marketplace segment take rate fell to 4.61% from 4.98% in Q1 of last year. And payments segment take rate fell to 10.45% from 11.98% a year ago. Marketplace take rate decline versus last year was driven primarily by lower revenues coming from classifieds, mostly due to the change in the exchange rates that we report Venezuela Revenues Act. Since we have a sizeable classifieds business in Venezuela, particularly after the acquisition of TuCarro, this change had a considerable impact on classifieds revenues.

Have in mind that we reported Q1 2009 results at the average exchange rate of 6.52 bolivars to the US dollar when we reported Q1 2009 at the previous official exchange rate of 2.15, and Q4 2009 at the average foreign exchange rate of 6.58 bolivars to the US dollar. However, note that poor market exchange rate improved sequentially versus Q4 2009. Payments take rate versus Q1 of 2009 fell as a result of lower financing revenues and to more favorable interest rates compared to those of Q1 of 2009. Processing fee revenues as a percentage of TPV remained constant vis-à-vis Q1 of 2009.

Returning to our finances, gross profit grew 40% to $36 million, representing 78.5% of revenues versus 79.5% in Q1 of 2009. The slight loss in margin is due to the fact that our payments business with its lower gross margin gained share over the marketplace. Operating expense for the period totaled $20.5 million, a 9% increase, while decreasing as percentage of sales to 44.7% from 58.5% in Q1 2009. Specifically, sales and marketing remained the largest line item expense growing 9% for the quarter and $11.1 million flow as a percentage of revenues of sales and marketing on target significantly to 24.2% versus 31.6% for the same period last year, illustrating some of the efficiencies gained through our optimized investments in traffic.

Product and technology remains a principal focus for us. Expenses were 22% to $3.2 million, compared with $2.6 million for the first quarter of 2009. We continue to build our payment in this area as crucial for our growth.

G&A rose 2% in Q1 of 2010, showing our continued commitment to cost management and our periodic survey of the most cost-efficient providers available to meet our needs. The resulting operating income for Q1 2010 was $15.5 million, 129% higher than in the same prior-year period. Below operating income, other relevant lines were $0.8 million of interest income mainly from conservative fixed income investments; $3 million of interest expense and other financial charges mainly derived from our discounting of MercadoPago credit card coupons in Brazil; and $0.4 million of foreign exchange gains mainly driven by the depreciation of local currencies, which impacted our cash and investment balances held by our subsidiaries in US dollars.

Pre-tax income was $13.7 million, 94% higher than in the same quarter of last year. Tax expense was $4.1 million in Q1 of 2010. This represented a blended tax rate of 29.8% versus 23.7% in Q1 of 2009, our first year, we registered some one-time benefits. Bear in mind that we still have some tax credits related to previous acquisitions in Portugal and Brazil that we will try to use in the next three quarters.

Net income for the three months ended March 31st, 2010 was $9.6 million, reflecting an increase of 78% when compared with $5.4 million during the same period of 2009, a 20.9% net income margin and resulting in a basic net income per common share of $0.22. Net income grew 85% versus Q1 of last year when measured in local currency.

Net cash provided by operating activities for the three months period ended March 31st, 2010 was $11.5 million or 24.9% of net revenues. We continued to generate strong operating cash flows in our marketplace segment and we continue to fund working capital requirements in our payments segment by discounting credit card receivables, being cash flow positive in this segment as well.

CapEx for the quarter was 1.4 million. Consequently, for the three-month period ended March 31st, 2010, net cash provided by operating activities less CapEx and non- GAAP measure of free cash flow totaled $10.1 million. Cash, short-term investments and long-term investments at the end of the quarter totaled $96.6 million. In the meantime, Q1 also saw a completion of our tele-market [ph] monthly payment. The final installment was for $3.2 million [ph]. And we register no remaining debt in our balance sheet, except for that pertaining to the ordinary course of business.

The performance of all these metrics is what encourages us to believe we're in for another excellent year in terms of our growth prospects and efficient management of our business. We are aided by a strong micro-context and even a stronger Internet prospects in the visual horizon as overall Internet penetration continues to grow at a very healthy pace highlighted by increased broadband adoption, which is also driving e-commerce growth for the region.

All this combined with the synergies that the comprehensive ecosystem we're building will bring, provide MercadoLibre with limitless possibilities for growth. Needless to say, we are eager in keeping and managing our business in the light of upcoming opportunities in addition to our extremely sound business execution. With that, let's take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question comes from Marianne Wolk from Susquehanna.

Marianne Wolk – Susquehanna

Yes, thank you very much. Can you discuss the rollout of free classifieds more broadly, and also the introduction of free listings and how that might affect your marketplace's take rate as we head into the second quarter? And then, another question on the payments business, I know you have been talking for a while about introducing MP3 in Brazil. Can you talk a little bit about the timing for that and what might be delaying the rollout there? And yes, that would be it. Thank you.

Marcos Galperin

Hi. Hello, this is Marcos. So, with respect to the first part of your question, we launched free listings in classifieds in Brazil and Chile last year, late last year. And in that case, we did have an impact in take rate. We did not have the upgrade mechanisms to access paid listings to free listing centers. We corrected some of those things, and we launched free listing in our core marketplace, not in classifieds.

So, in all our categories, except for cars, real estate and services in Argentina and with proper upgrade mechanisms in place. And we are very happy with the results we have seen so far, even though it's early. We have seen all the right responses in terms of listings, and also, very good to see good response in terms of positive take rate developments. So overall, we're very satisfied with our results so far of our experiment in Argentina. And we feel it's very likely that we will roll out this to other markets throughout the year.

Marianne Wolk – Susquehanna

So, just to confirm, the rollout of the further three listings has not put any negative pressure on the take rate?

Marcos Galperin

It has not, and we don't expect that it will.

Marianne Wolk – Susquehanna

Great.

Marcos Galperin

With respect to your question regarding payments in Brazil, we are also very pleased to announce that we have opened the off-platform payment solution MP3 in Brazil during Q1. It's now available to every seller who wants to use it or who wants to put it on their site. Initial results are also very encouraging. The off-platform volume of payments we are processing in Brazil is already larger than the one we are processing in Argentina, which have had the resolution for a much longer period of time. And we will be introducing MP3 on-platform, which involves a migration sometime, hopefully during 2010, and we are making no commitments with respect to timing.

Marianne Wolk – Susquehanna

Thank you.

Marcos Galperin

Thank you.

Operator

Our next question comes from Imran Khan from JP Morgan.

Imran Khan – JP Morgan

Yes, hi. Thank you so much for taking my questions. A couple of questions, first, starting with it seems like your successful (inaudible) growth slowed down a little bit, and you are going to have some tough comps through the rest of the year. How should we think about the ability to maintain the growth of the successful listing items and the GMV growth over the next couple of quarters? And secondly, in terms of just to better understand the seasonality, I know the World Cup Soccer is an important sports event in Brazil and Argentina. How do you think that may or may not impact your business given that time? Thank you.

Marcos Galperin

So with respect to the growth rate in the operating metrics successful items and gross merchandise volume, 40% in terms of items and roughly 49% in terms of gross merchandise volume in local currencies, so with a very, very good growth, even though it implies a slight deceleration after eight quarters of successive acceleration. Clearly, some of the improvements have led to an acceleration outside the year-on-year process. And we expect to continue executing and improving our platform and our practices to continue maintaining our accelerated growth rate as we move along.

Overall, we operate in an environment of high secular growth rate in terms of Internet users, broadband penetration, PC, and mobile smart phone penetrations, and now netbooks and iPods, so all these devices clearly continue to help our industry to grow, our Internet users to grow and broadband to grow. So, we continue to rely on these secular growth trends, in our leadership position, our leading brand, and in innovations that would perform to our marketplace to continue growing very healthily. With respect to the soccer tournament, we'll see how it goes. In the past, clearly, when there is a game going along, there is not much trading going on. But it’s too early to say if that would have an impact or not, we always catch up after the games. So, we'll see how it goes.

Imran Khan – JP Morgan

Okay. Thank you, Marcos.

Marcos Galperin

Thank you, Imran.

Operator

Our next question comes from Scott Devitt from Morgan Stanley.

Scott Devitt – Morgan Stanley

Hi. Thanks for taking the question. The first one is, on the Pago business, the fee business, yes, it's great that credit is much more accessible to your customers today, and I know that that's been a – that has actually been a negative drag on take rate for the Payments business for at least a few quarters now. Within that segment of Pago, do you believe that the take rate there has stabilized, going forward, just from a modeling perspective? And then, the second question would be, what do you think about the competitive landscape from a payment standpoint in Brazil in terms of the opportunities for an alternative payment platform to emerge, and would you ever allow an alternative on the MercadoLibre platform? Thank you.

Hernan Kazah

Well, Devitt, this is Hernan who will take your first question. Regarding take rates of MercadoPago, as you all said, the decline in interest rates has shown a decline in total payment take rate. Though honestly, we believe that it is positive given that we've had some declines in interest rate. We are passing along the benefits with the buyers. And we are able to have access to credits at a cheaper rate. What will happen in the future? It's hard to say. We believe interest rates (inaudible) in Brazil where we do local financing, so having the negative Forex. It's important to highlight that most of the margins of our payments business come out of processing fees. And those fees as a percentage of total payment volume have remained constant throughout the last few quarters. So, we don't see a fall in (inaudible) of profitability and margins. So, we might continue to see a decline as interest rates continue to go down and again, that would be good for the buyers.

Hernan Kazah

With respect to the second part of your question, Scott, we obviously operate in a competitive environment and have operated in that competitive environment for the past 11 years. We have done very well in a competitive environment. We believe we will continue to do well. We see a future opportunity with various strong secular growth rates as I was mentioning earlier. And obviously, this encourages other people to enter the field. That's good. That's positive for the industry. That's positive for us. And on the payments, as Hernan said, I think we have done very well in competitive environments. We have excellent competitive advantages. We have a market business, which is growing very healthily. We have very good technology, have a very good team, and great payments brand as well. And we look forward to continue to grow both on-platform and off-platform in the next several years.

Scott Devitt – Morgan Stanley

Thanks and congratulations on the results.

Marcos Galperin

Thank you.

Operator

Our next question comes from Gene Munster from Piper Jaffray.

Gene Munster – Piper Jaffray

Good afternoon and I will add my congratulations. And Marcos, in the prepared comments, you talked and you have referenced a couple of times about changes in pricing the platform. I think it was Colombia that you had said, and a comment that you had is that you are making aggressive changes to the platform. Can you talk a little bit about what the gives and takes are as far as what the impact could be on take rates, for example, in that region particular? I mean, should we be thinking that some of these aggressive impacts are going to have positive or negative, just directionally can you give us some guidance on that? Thank you.

Hernan Kazah

What we did with the final part of Q1 was add price increase in some of the caps as the pricing structure that we have in Colombia. We saw positive – actually low impact in terms of volume and positive impact in terms of revenue. So, we are rolling that out to other markets. We have done in the first quarter of Q2. So that will help us improve the take rate of our core marketplace though it is just in caps in some market, so maybe it should go up, but don’t expect a big change.

Marcos Galperin

It’s just fine-tuning and something that we continue doing as we see good opportunities within our pricing structure.

Gene Munster – Piper Jaffray

Okay, so that should hopefully have a positive impact on take rate?

Marcos Galperin

Coming out of that, certainly. Then you have to have into consideration many other things that might be moving throughout the course.

Gene Munster – Piper Jaffray

And then you anticipate you are saying you are going to make those changes and other geographies as well?

Hernan Kazah

Yes. We have had that in some of the geographies at the beginning of Q2, and we expect to do that in most countries.

Gene Munster – Piper Jaffray

Okay. One just quick follow-up question regarding the margin, it was better than what we were looking for. It looks like you have had some good, as you mentioned, cost control on the G&A in some of the sales and marketing. Is that generically kind of how we should think about operating margin going forward? I know you don't give guidance specifically, but was there anything that was an anomaly, I guess, in some of the – on the expense items last quarter that may reverse, again higher in the June quarter?

Hernan Kazah

We continue to see scalability in most of the expense line. We are going to investing more aggressively in product and technology, but we do see leveraged marketing and G&A. You have to have in mind when you look at consolidated margins, that MercadoPago revenue share of growth, that could come quicker and our margins (inaudible) margins.

Gene Munster – Piper Jaffray

Okay. Great, thank you.

Hernan Kazah

Thank you.

Operator

Our next question comes from Steve Weinstein from Pacific Crest.

Steve Weinstein – Pacific Crest

Great, thank you. Got a couple of questions on MercadoPago. Now that you have more experience with the pricing model you are using in Argentina, I am wondering if you think that, that is the best model for you to be using, going forward, and how we will see – how the 3.0 rolled out into the other markets? And do you think you have the right kind of systems in place to be able to manage the pricing on the system with the increasing adoption of Pago as it happens? That would be one. And then two, you are talking about Pago being used off-platform now. And I was just wondering if we could get some color around what kind of transactions are occurring off-platform? Are they MercadoLibre sellers that are just – have sales going on their own site, or is this a new market or new types of products or services that are occurring using MercadoPago?

Marcos Galperin

Hi Steve, this is Marcos. So, with respect to the second part of your question, it’s both, we are seeing on all sorts of transaction going on in the off-platform market rates. With respect to the first part of your question, we are very happy with the approach we have been taking in Argentina and with the one we continue to take. So in Argentina, we have eliminated the MercadoPago fee. And there is only one fee in our marketplace, which covers success fees and payments processing.

And MercadoLibre fees and MercadoPago have an inter-company fees. This has enabled us to dramatically increase adoption, and later on what we have done both in Argentina and Brazil is to make MercadoPago adoption compulsory for all centers. We see other marketplaces around the world that make payments an integral part of the marketplace experience. Very successful marketplaces around the world are doing this, and we believe that’s the right way to go. Clearly, it brings many benefits to the marketplace experience, it reduces friction. It makes all payments flow through the market sector and accelerates trading. It provides significantly more safety both to the buyers and to the sellers as the payments flow through MercadoLibre and MercadoPago, and therefore, we will continue to experiment in making the usage of MercadoPago more and more, to increase penetration of MercadoPago on our marketplace. So, we believe we have the right systems to cope with the increasing adoption. Already adoption is basically 100% in Brazil and very close to it in Argentina as well.

Steve Weinstein – Pacific Crest

Well, as I understand it, right, so on the final value fee, all sellers are paying a final value fee that's the same whether or not Pago is used to complete the transaction or not, which would imply that, if the transaction's completed and not paid with Pago, that transaction is subsidizing the Pago expenses for the listings that do use Pago. So, I mean, that would indicate that as more – as a higher percentage of the transactions close with Pago, do you need to continue to raise the final value fee? I mean, how do you model that out to stay in front of it so it doesn't come back to you as an expense? And then, did you say this was now happening in Brazil, as well, that you made the switch in Brazil?

Marcos Galperin

So, the first part of what you stated is correct. That’s exactly the case. Eventually, we aspire to have 100% of the transactions flowing through our payments gateway as we see other marketplaces around the world doing. In Brazil, we have 100% adoption, but in Brazil on-platform, we still have a buyer phase model. So, we still don’t have the MP3 version of our payments mechanism in place. We have made adoption compulsory, but it’s still higher phase in Brazil.

Steve Weinstein – Pacific Crest

Thank you.

Marcos Galperin

Welcome.

Operator

Our next question comes from Stephen Ju from RBC.

Stephen Ju – RBC

Hi guys. As you continue to tweak the takeaway from MercadoPago to drive adoption, at what usage level, as a percentage of GMV, would you feel that you are comfortable to start thinking or start walking up the take rate, granted this may vary from region-to-region? Thanks.

Hernan Kazah

Marcos was saying when he answered the prior question, it's something that we are monitoring constantly. The idea of this bundling of MercadoPago and MercadoLibre is great for the user. It’s a way of driving with addition that we have of 100% penetration of MercadoPago on the marketplace, but is not intended to reduce our take rate. So, as we see the penetration of MercadoPago growing, we will make some adjustments on the fees that we charge to sellers. But one clarification that everyone has (inaudible) following up on the payer question and also complementing when they are asking. When there's a transaction in Argentina and that transaction is not using MercadoPago, in that case, 100% of the revenues are allocated to the marketplace. When we do have a transaction which MercadoPago is used, that transaction will allocate roughly 60% of both revenues to MercadoPago and 40% of the revenues to the marketplace.

Operator

This concludes our question-and-answer session for today. I would now like to turn the conference back over to management for any closing remarks.

Pedro Arnt

Thanks everyone for your time and for the questions, and we look forward to our next conversation when we report our Q2 results. Thank you very much. Bye-bye.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This concludes our program for today. You may all disconnect and have a wonderful day.

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Source: MercadoLibre, Inc. Q1 2010 Earnings Call Transcript
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