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MercadoLibre Inc. (NASDAQ:MELI)

Q4 2013 Earnings Conference Call

February 27, 2014 16:30 ET

Executives

Martin de Los Santos - Head, Investor Relations

Pedro Arnt - Chief Financial Officer

Marcos Galperín - Chief Executive Officer

Osvaldo Gimenez - Executive Vice President, Payments

Analysts

Gene Munster - Piper Jaffray

Jordan Rohan - Stifel

Ross Sandler - Deutsche Bank

Mark Miller - William Blair

Bob Ford - Merrill Lynch

Marcelo Santos - JPMorgan

Michel Morin - Morgan Stanley

Chad Bartley - Pacific Crest

Stephen Ju - Credit Suisse

Luiz Carvalho - Tree Capital

Operator

Welcome, ladies and gentlemen to the MercadoLibre’s Fourth Quarter 2013 Earnings Conference Call. At this time, all participants on the phone are in a listen-only mode. After our prepared remarks, there will be 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 management.

Martin de Los Santos - Head, Investor Relations

Hello, everyone and welcome to MercadoLibre earnings conference call for the quarter ended December 31, 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, Chief Financial Officer; additionally, Marcos Galperín, Chief Executive Officer; and Osvaldo Gimenez, Executive Vice President of Payments 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 those 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 fourth quarter 2013 earnings press release available on our Investor Relations website.

Now, let me turn the call over to Pedro.

Pedro Arnt - Chief Financial Officer

Welcome everyone to our earnings call for the first quarter of 2013. Wrapping up another successful year for Latin America’s e-commerce ecosystem I would like to recap some of our strategic priorities financial results and key initiatives for the upcoming year. We ended the year on a good note with solid performance across our marketplace and payments businesses both closing the fourth quarter with accelerated revenues despite FX headwinds that continue to impact our consolidated results. Revenues in local currencies also accelerated across our largest countries showing a trend across the board that was led by our largest markets Brazil.

I would like to start this off by taking a step back and briefly looking at the full year so as to recap the advantage we have made during the past four quarters. During 2013, registered users on our platform grew by 22%, items sold grew 23%, gross merchandise volume grew 44% in local currencies and 28% in U.S. dollars, total payment transactions grew by 34% and total payment volume grew 60% in local currencies and 40% in U.S. dollars. We believe these growth rates directly results from our execution against the set of ongoing strategic objectives which we have identified and stated for our business over the past quarters.

These broadly involved the promotion of our payments and shipping solutions as strategic facilitators for e-commerce helping to eliminate friction points and enhance our user experience on and off our platform. The ongoing development of mobile and vertical category specific, capabilities that allowed for ubiquitous and customized trading, trends that are both in their early stages in our region and represents huge upside potential going forward. The promotion of our open platform making our services increasingly accessible to third parties be they outside developers building new solutions or retailers requiring technological integration and support for those businesses. Through this approach we strive to be the technological partner of choice for anyone looking to trade online in Latin America.

And finally all of this necessarily is underpinned by our ongoing efforts to deliver a consistently improving overall customer experience. We are devoted to innovation on this front coming up with new solutions for the growing functionalities and features that we offer and anticipating rather than the active to the needs of our users through investments in our technology products and customer service operations.

With e-commerce still accounting for less than 3% of Latin America’s total retail volume, we think these are the key areas of focus which will help us accelerate the pace at which online retail penetrates offline retail thus accelerating the rate of growth of our own business. We have built our key business plans around these priorities and will continue to do so during the upcoming year. Let me therefore walk you through the progress we have made on each of these throughout the past year stating with payments. Total payment volume closed the year reaching 35% of gross merchandise volume as MercadoPago extended its benefits including financing options and a comprehensive buyer protection program to a growing number of buyers.

Brazil and Argentina each saw more than 10 percentage points of on platform penetration growth December to December while off platform payments accelerated in the same period maintaining the highest growth of all our businesses. Financing volume also accelerated, obviously, benefiting by payments growth on both of these fronts and a growing segment of the region’s population that is willing and able to buy on credit. We have also made important strides with our initial forays into shipping and logistics.

Our MercadoEnvios program went live exactly a year ago growing at an accelerating pace throughout 2013 as we released it to a broader base of sellers during the year. Our initial success with trial users encouraged us to rapidly expand beyond Brazil with a quick rollout to Argentina in the first quarter of 2013 and subsequent plans to extend the program to Mexico soon. Recapping a very successful first year for this initiative, in 2013, we grew shipping penetration significantly shipping over 5% of our Brazilian and Argentine combined sold items in the final quarter of the year and exiting the year with more than 10% of sold units in Brazil already being shipped through our MercadoEnvios platform.

Let’s move on to mobile, another fast paced initiative that has definitely surpassed our expectations this year topping 12% of our GMVe by year end. Android followed by iPhone account for more than half of total downloads and we are closing in on 10 million native app downloads across all countries. More impressively, mobile keeps expanding its share of our new users ending the fourth quarter at 15% of total new registrations. This rate rises to above 20% in certain countries, where mobile adoption is more advanced than in other parts bolstered by better infrastructure and cheaper connectivity costs.

Our vertical and open platform initiatives went hand in hand in 2013. With continued positive trends on both of these fronts, MercadoLibre keeps consolidating its position as a virtual shopping mall with the most varied selection. Category such as apparel and sports grew more than twice as fast as average GMVe in the year resulting from our dual approach of offering vertical formats to all sellers and attracting big brands to sell directly through our platform. Brazil and Argentina added a total of 17 new official stores from brands and branded retailers in the fourth quarter alone underscoring the growing presence of large retail on our marketplaces. With the volumes from these preferred partnered on the rise, we are looking on rolling out more official stores throughout the upcoming quarters significantly improving the depth and quality of selection of items available to our users.

Finally, our work on customer experience has also paid off during 2013. With healthy metrics indicating, we are responding faster and more efficiently to customer needs resulting in positive evolution of our net promoter score throughout the year. Fourth quarter NPS ended at the highest level of the year both for the marketplace and payments businesses. In the meantime, we are constantly looking for ways to innovate currently trying out new customer service tools and channels that would allow us greater ubiquity and faster resolution times.

Wrapping up these initiatives, despite all that we have accomplished in the year, we still believe that this is the tip of the iceberg for most of these projects and we expect sustained solid advances and increasing adoption of each one during 2014. We will achieve these advances by continuing to drive payments growth through product and technology innovation and by leveraging our increasingly recognized payments brand both on and off our marketplace. Alongside payments, we will accompany the considerable secular trends pushing our mobile and vertical initiatives by further deploying mobile apps in category-specific features that allow shoppers the best possible shopping experience whatever the product and whatever the screen.

On the logistics front, we will continue to drive penetration of our new shipping platform in our major markets and also continue to get more involved with other aspects of the fulfillment chain so as to better serve our buyers and sellers needs on this front. Our open technology will continue to provide a bridge to large retail and outside development while we accelerate the pace at which we partner with integrators or brands requiring a nexus to the online world. We will be greatly aided in these efforts by our growing track record and portfolio of brands that have already been on-boarded to our platform. And finally we will continue to invest in our product development and customer service efforts so as to sustain the cycle of removing as much friction from our trading platforms as possible. We trust these efforts will be reflected in continued improvements to our net promoter scores and other user service satisfaction indexes.

It’s clear to us that MercadoLibre executes a business model that is increasingly more than sum of its parts. All of the initiatives covered had the common theme of expanding our reach and ubiquity as well as perfecting the value we bring to our users. They are all transformative turning us into an e-commerce operating system of sorts on top of the marketplace, which is already unmatched in product value and selection. We look forward to keeping you updated as our ecosystem grows to new levels throughout the upcoming quarters.

With that let’s now take a detailed look on our fourth quarter results, beginning with our consolidated highlights for the quarter. All growths I mentioned are year-over-year unless I specify otherwise. In the fourth quarter of 2013, units sold grew 20%, gross merchandise volume grew 49% in local currencies and 30% in U.S. dollars. Total payment transactions grew by 34% and total payment volume grew 66% in local currencies and 42% in U.S. dollars. All this resulted in solid financial for which I will now breakout the highlights additionally quoting growth rates that excludes Venezuela for our main P&L lines.

We are also providing additional disclosures on Venezuela in our 10-K allowing for a better understanding of how different scenarios on exchange rates for that country might continue to affect our financials. Additionally, certain of these scenarios are calculated using the new SICAD exchange rate in Venezuela. It is our current understanding that this new floating rate currently at VEF11.8 to the dollar will be the rate we will use to re-measuring our bolívars denominated costs, revenues and balance sheet positions as of January 24, 2014. To relay a sense of the one-time impact of such devaluation we had estimated that at such a devaluation occurred on December 31, 2013 we would have incurred a ForEx loss of between $1.5 million to $2.5 million as a consequence as this re-measurement of our Venezuelan subsidiary’s non-U.S. dollar denominated monetary assets and liabilities.

Moving on for the fourth quarter net revenues were $134.6 million accelerating the local currencies and also the U.S. dollars despite foreign exchange headwinds. Revenue grew 50% in local currencies and 30% in U.S. dollars. Excluding Venezuela net revenues also accelerated to 39% growth in local currencies and 22% in dollars. Income from operations was $52.1 million, 33% growth and 56% growth in local currencies. Excluding Venezuela income from operations grew 36% in local currencies and 18% in dollars. Net income before income and asset tax expenses were $55.8 million growing 32% in U.S. dollars and 55% in local currencies. Net income was $40.8 million for the quarter growing 35% year-on-year and 58% in local currencies. Excluding Venezuela net income grew 42% in local currencies and 23% in dollars. All this resulted in earnings per share of $0.93 for the quarter.

With that, let me now dive into our top line growth quarter. Marketplace revenues saw solid performance practically in line with sales volume growth. Most operations continue to see similar unit growth to last quarters with the exception of Venezuela, where sold items decelerated to 12% year-on-year impacted by political challenges in that country. Brazil, our largest market on the other hand posted very solid unit growth of 28% year-on-year for the fourth quarter with its marketplace revenues in local currencies slightly outpacing that on improved monetization. Non-marketplace revenues accelerated to a growth rate of 47% year-on-year in local currencies, very solid performance from our payments business drove this acceleration and compensated of what was actually slower growth in our classifieds and advertising businesses during the quarter.

Looking to classifieds specifically, revenues from real estate and services saw some deceleration across our top countries though still posting solid double-digit growth. Revenues from vehicle classifieds, however, were practically flat year-on-year mainly due to lower listing volumes in Venezuela sequentially and also year-on-year. With regard to our payment business unit, revenues accelerated as I just mentioned on two key drivers. Off-platform transactions posted a strong sequential jump. Total payment volume accelerated to 55% year-on-year growth as key accounts are performing well and have led to larger average transactions than a year ago. Financing volume also saw an important pump up this quarter. Lower spreads for the year ago were more than offset by growth in installment purchases, which even outpaced our total payments volume growth. This means that a higher share of users opted to purchase on financing versus a year ago as our turns have remained very competitive despite higher interest rates.

On the basis of these revenue streams, consolidated net revenues accelerated in the fourth quarter also on a per country basis. Local currency revenue growth during the fourth quarter year-on-year was 29% for Brazil, 69% for Argentina, 20% for Mexico and 104% for Venezuela. Revenue acceleration response to the performance of the underlying business metrics at all of these countries, except for Venezuela, where inflation obviously offset the deceleration in unit volume that I have already mentioned. This is a good moment to remind you that our Venezuelan operation remains profitable and more importantly self-sustaining requiring no investments from the brand. It is a business that primarily earnings and spends in local currencies while leveraging the same centralized product development and customer service operations that we run for the rest of our businesses. In this context, we continue to manage our Venezuelan business for the long run, confident that in a more favorable future our commitment to that market will offer the right returns despite the current challenging conditions.

Advancing down our P&L, gross profit grew 29% in the fourth quarter to $98.4 million. Our gross profit margin was 73.1% of revenues versus 73.6% during the fourth quarter of 2012 and 72.3% in the last quarter. Year-on-year higher payments processing fees resulting from growth in MercadoPago account for approximately 90 basis points of margin contraction and another contraction of 45 basis points result from our investments in our fraud prevention efforts. Both of these are offset by approximately 90 basis points of scale primarily in customer experience, posting costs and certain efficiencies on taxes.

Operating expenses for the period totaled $46.3 million, 24% higher than in the same period of 2012. Operating expenses as a percentage of revenues were 34.4% in the fourth quarter versus 35.9% in the same quarter last quarter and 41.9% in the third quarter of this year. The end of last year saw particularly good scale, but this year’s fourth quarter surpassed it.

Let’s review this line item by line item. Sales and marketing which remains on largest expense line grew 21% to $23.1 million or 17.2% of revenues versus 18.5% for the same period last year. Improvements in fraud loss provisions on MercadoPago transactions were the most noteworthy positive effect, explaining 130 basis points of improved margins. As our fraud prevention to manage to bring charge backs as percentage of credit card volume substantially lower year-on-year. Sales and marketing compensation costs also scaled by 54 basis points, grow this was offset by online marketing expenses and residual effect from our offline brand in campaign which ended early in the fourth quarter.

Product development expenses grew 40% to $9.7 million representing 7.2% of revenues in the fourth quarter versus 6.7% in the same period last year. As ongoing investments in this crucial aspect of our business will partially offset by scale and compensation paid to engineers. Finally, G&A grew 21% year-over-year to $13.5 million in the fourth quarter or 10% in revenues versus 10.7% a year ago. Salaries scaled 100 basis points in G&A and this was partially offset by higher fees pay for outside services. As a result operating income margin for the quarter was 38.7% versus 37.7% million in the fourth quarter of 2012.

Below operating income, we benefited from $2.3 million of interest income down 20% year-on-year as a result of lower units on our invested assets versus the prior year period. We saw a $2.3 million gain in ForEx line, from the increase in both amount and appreciation in value of U.S. dollar balances held by our subsidiaries versus $488,000 for the same concept last year. During the fourth quarter income tax expense was $50 million resulting in a blended tax rate of 26.8% versus 28.4% in the fourth quarter of 2012. Consequently net income margin was 30.3% in the fourth quarter versus 29.2% for the same quarter of 2012, resulting in a basic net income for common share of $0.93.

Purchases of property equipment and intangible assets during the quarter total $37.9 million, driven by the purchase of commercial real estate, mainly in Venezuela as a strategy to preserve the value of our aspects today. Consequently, for the period ended December 2013, free cash flow was negative $18.7 million versus positive $51.1 million last year. Cash short-term investments and long-term investments at the end of the quarter totaled $262.6 million. This wraps up our financial review for the last quarter of 2013which ended the year on a note of solid top-line growth, benefited from scale to our business and consequently delivered which we believe continue to be industry leading profits and prospects for sustain future financial health.

We are very pleased with this accomplishment of growing both our top and bottom lines consistently, particularly when they consider how we are achieving which will buy investing in the creation of long-term value for our users, all while preserving strong profitability in our business. This is not a minor point in the competitive markets where we operate, where top-line growth of income with the expense profit generation. Furthermore, we are confident in our ability to continue delivering profitable growth, such as the financial model and network externalities of the unique e-commerce ecosystem we are building. During 2014, we will continue constructing this ecosystem, innovating on our key initiatives and striving to offer our users a consistently improving user experience. I look forward to keeping you updated over the next few quarters on our progress.

And with that, we will take your questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question in queue is from Gene Munster of Piper Jaffray. Your line is open. Please go ahead.

Gene Munster - Piper Jaffray

Good afternoon and thanks. Real quick, I guess we are just about two months into the first quarter of 2014 and I was wondering if you could give us some color on some of the trends we are seeing specifically from Brazil and also from Venezuela has any of the turmoil impacted transactions there?

Pedro Arnt

Hi. So, I think we have always said that we would rather comment on the existing quarter when we give the results to the quarter and we rather focus the questions right now on the quarter that just passed. So we can talk at length on Q1 Brazil and Venezuela once we released the numbers for that quarter in May.

Gene Munster - Piper Jaffray

Okay, thanks. And then I guess just real quickly, you talked a lot about some of the OpEx improvements that we saw during the quarter, I am just wondering is there any – whether you can kind of quantify how some of that was impacted by currency – by some of the currency weakness in Argentina, did that have any impact on some of the OpEx improvements?

Pedro Arnt

Yes. So as we have always said we have a significant portion of our OpEx in Argentina and so any devaluation in Argentina does help. However, it would be misleading to assume that the scale is coming primarily from the deval. I think if you run the numbers, there is much more that’s actually coming from operational improvements and not just from the devaluation of the peso. So, it’s less than 100 basis points are actually coming from currency and the rest is simply scale in the business year-over-year.

Operator

And our next question in queue is from Jordan Rohan of Stifel. Your line is open.

Jordan Rohan - Stifel

Thanks, guys. I have two questions. The first is on the translation of revenues within Venezuela back to I think U.S. dollars for the purposes of reporting, are you still – I guess you still use the 6.3 rate in the financials that you given us today? I believe the answer is yes. Second is so just clarify that and how think about it, since the parallel rate on Venezuela and perhaps this is not all that helpful, but it’s still over 80, maybe closer to 90. Even if the government moves towards an ‘11 SICAD rate, how do you expect to translate those revenues back to your sellers in the future? And then finally without the foreign currency gains on U.S. dollars held within non-Venezuela subsidiaries, what was your earnings, I think I heard $2.5 million was the extent of that upside. Is that right? Thanks.

Pedro Arnt

Great. So, let’s see. First one thanks for asking so we can make sure we are crystal clear on this. The fourth quarter still is reported at the official rate of 6.4 Bolivars to the dollar. Consequent events in Venezuela have led us to disclose that we will use a new official rate that has been announced, which is the SICAD rate, which is a floating rate, which currently at the last auction that determines that rate was 11.8 Bolivars to the dollar and that will start occurring as of January 24 of this year. And so when you look at Q1 numbers, the rate will be this new floating rate. And then the third point is if you look at the disclosures in the 10-K that we just pointed investors to, we run a couple of sensitivities analysis to give people a sense of what the Venezuela and P&L looks like. One of the sensitivity analyses that we run uses a rate that is closer to what we believe is the implicit exchange rate of the actual transactions that occur on our platform. And then there is some others sensitivities. So, there is a lot of additional disclosure together sense of how exchange rates are playing out with our Venezuela numbers. As we’ve always said the rate of nearly 90 is a rate that’s illegal, illiquid and obviously because of that also has significant distortion built into a just as the official rate one could argue had leading up to this new SICAD rate.

Jordan Rohan - Stifel

Alright, thanks.

Pedro Arnt

Question number – sorry, question number two, FX gains ForEx impact we just called out that, the ForEx gains generated by our subsidiaries holding of U.S. dollars were $2.3 million that standard U.S. GAAP accounting to re-measure and book those gains in the ForEx line. Great. And I don’t know if you had a third question but...

Jordan Rohan - Stifel

I think that’s it and thanks. Nice quarter.

Operator

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

Ross Sandler - Deutsche Bank

Thanks guys. Look like Pago was the real bright spot again in the quarter, can you, Pedro or Marcos, talk about off MELI Pago, what categories you feel like you’re well penetrated in, which ones represent a good future opportunity? And then as we kind of go out a couple of years and look at the strategy for mobile Pago, how does mobile Pago work in tandem with carrier based billing systems and then a follow-up just on Venezuela. I hate to kind of keep going back, but on it looked like the unit growth has been very elevated, 26% last quarter, I think 12% you said this quarter. So it feels like we’re kind of stabilizing. Where do you think of that unit growth? Are we at the point of macro concerns are equal with under penetration of e-commerce or do you think that still a couple more quarters out? Thanks.

Marcos Galperín

So, let me take this one. With respect to Pago, it’s growing our platform very strongly as well. So, we are very happy with where Pago is evolving overall with very healthy improvements in our approval rates and our chargeback rates. So, we are seeing very strong growth both on platform and off platform. Clearly, we believe mobile payments, is a huge trend and is one of the opportunities that we see for Pago going forward. So we look forward to providing greater details of this opportunity as we continue – as we go along and continue to release new products and there is more information to give, but at the time I would say we are very focused on it in mobile in general both for MercadoPago and for MercadoLibre and we will be probably announcing more stuff this year around mobile payments. And with respect to Venezuela, obviously with all the events that occurred in Q4, the growth in units was impacted and we continue to have a very healthy operation there. Obviously, when there are massive events and people are not going to work etcetera, that is impacted and that will happen during certain extended periods of Q4. As situation gets back to relative normalcy, we see again good growth rates on when that doesn’t happen, again our operation is impacted. So I think that’s what we have been seeing going forward. We prefer to talk about that after the facts. Okay, next question?

Operator

Our next question in queue is from Mark Miller of William Blair. Your line is open.

Mark Miller - William Blair

Hi. I think a strong quarter overall, I guess the one number that kind of jumps out though in terms of not as robust as the unit growth. So part of that’s coming from the deceleration in Venezuela, can you give us overall unit growth for the enterprise third quarter and fourth quarter without Venezuela because you are also lapping an easier comparison there?

Pedro Arnt

Sure. Hi, Mark so if we look at the quarter excluding Venezuela, the fourth quarter it would have given us slightly higher number of 21% unit growth excluding Venezuela. I don’t think we disclosed that for the previous quarters. I don’t have that off the top of my head right now.

Mark Miller - William Blair

Let me come at a little different way, do you have any sense for what growth in items sold across Latin America e-commerce, I mean what’s your confidence level that you are gaining share of unit volumes?

Pedro Arnt

If we look at annual growth for units, right. And again units, is a metric that we point a lot to because it strips out any currency or ASP issue. So the usefulness of excluding Venezuela when looking at units is somewhat more dubious than if you are looking at numbers. If we look at unit growth for the year we did about – we did exactly 23%. I think our overall sense of general e-commerce growth in the region we have always said is somewhere in the mid to low 20s for the year. So I think what we’ve been characterizing the unit growth is at market growth for our marketplace business. When you tack on the growth in the payments business and you tack on the other businesses and you look at revenue growth for the year we would believe that the revenue growth numbers are coming in slightly above what the overall e-commerce numbers are coming in. But so in units that’s probably in line with somewhere around where the market is, low 20s.

Mark Miller - William Blair

Pedro, that’s helpful. On the shipping solution it sounds like you are getting nice traction from this, can you give us further perspective around the benefits to the organization, I mean what the profitability of those transactions is for example and the customer feedback or loss rates it seems like those will be positive, but anymore you can share on that?

Marcos Galperín

So shipping for us is a strategic initiative, that’s a long-term initiative. What I mean long-term is five to ten years initiative. We are in the early stages. We are very happy to have ended the quarter with over 10% of the units in Brazil using our shipping product and the reason why we are happy is because these transactions have a lower contact rate, have a higher NPS. Overall, it provides a better experience to both buyers and sellers. Sellers have lower shipping costs, buyers have more clear and unified shipping cost across products and we have a better information of what is going on with the transaction in general and we also have a better information about handling times etcetera. But this is just a first step. This is a multistep process and we look forward to continuing to make progress in terms adoption of our shipping solution and also getting deeper into the fulfillment on logistics. So this is just the beginning of a long-term process.

Pedro Arnt

And from a financial aspect just for clarity what I would complement there is because what we are running is an agent or a marketplace model where we are joining the demand that exists for shipping solutions from our buyers and sellers with the existing logistic solutions providers and carriers. The way that we book that business is net of cost. So if we are able to negotiate prices because of our aggregate demand of 100 and the actual cost to us of that is 100 then we would be booking zero revenues, if the cost is 90 we will be booking 10. So it’s net of the pass through cost. So as Marcos was saying because this is a strategic initiative right now we are essentially trying to run this as close to breakeven as possible and passing on all the savings that are coming from the demand aggregation back to our users, which is the ultimate goal right now, better and cheaper shipping across the platform. So the financial impact should be easy to manage.

Mark Miller - William Blair

Okay, that makes sense and that seems pretty important for the long run. A final question for me. Could you give us a rough sense of the category sales mix, just to help us understand the changes taking place with verticalization, so CE, apparels, sporting goods, whatever you would be comfortable talking about? Thanks.

Pedro Arnt

So we have continued to see the trend that is in large part by design as we have gotten consistently better at verticalizing certain key categories such as apparel, sports – sports apparel and apparel auto parts, home and garden. And those categories have been growing at above average rate and obviously the average is very much influenced by customer electronics. I think overall maybe we are at a point, where the apparel category, plus sports apparel is closing in on 10% of GMVe already. Some of the other categories I just mentioned are slightly below that, but in that range. Consumer electronics continue to trend downwards into the low 40s now. If we had looked at that number last year that was in the mid 40s to high 40s and two to three years ago was closer to 55%. So the trend continues to be consistent and that’s also part of what has been driving our ASP down in some of the countries.

Mark Miller - William Blair

That’s helpful. Thanks.

Operator

Thank you. Our next question in queue is from Bob Ford of Merrill Lynch. Your line is open.

Bob Ford - Merrill Lynch

Thank you and good day everybody. Peter, I was hoping you guys could comment on the regulatory developments eCommerce in Venezuela and Argentina. But before that, I just wanted to go back to the FX because there’s the SICAD 1 and soon the SICAD 2. And my understanding is that not too many corporates are able to access the SICAD 1, that 11 for the 1680 FX rate. And the SICAD 2 is expected to be the more liquid FX market, which one do you expect to use between – because now we’ve got four FX rates, right? We’ve got the 630, we’ve got the 1, we’ve got the 2 and we’ve the border rate, which is ludicrous. But I was curious if the SICAD 2 turns out to be the more liquid of the two SICAD rates, is that the one that you use for reporting and translation purposes?

Pedro Arnt

Right. Great, Bob. So, right now what we need is we need to have a fair amount of confidence in the sustained reporting of the rate by the government so as to move towards that rate. And then obviously is any of those rates become more liquid for liquid enough that we can access it and that would obviously be the rate that we would be using. Under the current conditions the rate has been consistently reported on greater frequency has been SICAD. We have not access SICAD 1or SICAD 2so under current thinking SICAD 1 the 11, 8 last time. I saw I don’t know if there was an option today. I don’t think so would be the one. When we would be using for the first quarter…

Bob Ford - Merrill Lynch

It hasn’t even started.

Pedro Arnt

Yes. I think you are accurate in anticipating that SICAD 2 for whatever reason is more liquid for more in line with the rate that we would be able to access and we could going the direction. But just to be very, very clear here under current thinking and understanding the rate being used for the first quarter is SICAD 1 for the one that at the last option was 11.8. It’s obviously a fluid realty and Venezuela I think an additional SICAD rate with the greater liquidity that would actually allow us to access hard currency would be very welcome. But let’s wait and see for that actually happened.

Bob Ford - Merrill Lynch

Yes, and for power sellers as well. And then with respected to Argentina, just to confirm the comment earlier, you’re suggesting that your contribution margins for Argentina would go up in the event of greater peso weakness. Is that correct?

Pedro Arnt

I think the comment earlier was actually in terms of looking at the overall cost distribution of the company, I think what we’ve said consistently is of total cost, Argentina as roughly 40% plus of total cost. Most of those Argentine cost are peso denominated and so further weakening of the Argentine peso actually dilutes our cost basis more than it does a revenue base because Argentina is only mid 20% of revenues over periods of time. And so the comment and we consistently said this is the devaluations of peso are actually at the margin somewhat positive to us, because they dilute more cost and they do revenue and so our exposure to peso devaluation is somewhat hedged by that allocation of cost.

Bob Ford - Merrill Lynch

Got it. And then there have been some regulatory developments in Argentina and Venezuela in terms of e-commerce, now in terms of some of the cross border things, the limitations in terms of hard currency for Argentine buyers as well as some of the listings for classifieds in automotive that I am aware of and I was wondering if it was limited to that or if there’s more behind it. And then maybe if you could expand a little bit on how much of your business in Argentina is maybe – or how much of the platform is cross border that might be affected by the constraints now in Argentina?

Marcos Galperín

So, not much of our platform today is cross border. We have just started to experiment with some cross border trade where we see a lot of potential moving forward, but currently it’s insignificant on our business. So we don’t see these changes in regulations affecting our business at all.

Bob Ford - Merrill Lynch

And with respect to Venezuela, Marcos, the listings changes or the – yes, the classifieds changes appear to be related to price controls for cars and I was curious if there are other categories or maybe power sellers that might be at risk to price controls, there was not too long ago that the nationalization of a small consumer electronics and white lines retailer in the country that made the press here and I was curious if you see additional risks to some of those categories of goods?

Marcos Galperín

Well, I don’t want to speculate about the what can or cannot happen in general and particularly in Venezuela, but this was related to cars that you mentioned, it’s a category where the government is very, very focused and there were official prices for cars and obviously there were no cars at the official prices. So there was a lot of control about cars being sold at unofficial prices. So in a marketplace as big as (indiscernible) combined, which basically dominate classifieds in the country, it was very hard for us to understand exactly what price each different model has to have. So it was result basically to scrap away the prices from our side and therefore not run the risk of having any particular car or any particular model, not being listed at the official price.

Bob Ford - Merrill Lynch

Not good for you. Thank you very much. I appreciate it.

Marcos Galperín

You’re welcome.

Operator

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

Marcelo Santos - JPMorgan

Two questions actually. First, I would like to understand a little better the sequential gross margin improvement, so you talk about the year-over-year, but when you see the third quarter versus fourth quarter gross margins improved nicely, so just some color on that if possible. And the second question is if you could comment your perception is on competition in Brazilian e-commerce, so if it has changed, how it has changed, anything would help? Thank you.

Pedro Arnt

Great, Marcelo. So sequentially we have obviously also seen a very strong gross margin improvement. I think a few drivers on that to point out. The first one is fourth quarter obviously has top line strength and traditionally is a strong quarter. On top of that if you look at this year specifically, we had been running an open TV, cable TV campaign during the first three quarters of the year primarily focused on the second and third quarter. We typically don’t do television in the fourth quarter where the ROIs and the rates because the rates go up, change significantly. And so there is some significant marketing leverage that occurs from the suspension of the open TV campaign. In general beyond that there has been some significant scale around compensation costs. We call that out in the prepared remarks, some of that is associated to the way we accrue for the long-term retention plan, which is tied to capital market performance. So salaries and wages also scaled nicely. And then probably the third area is as we mentioned fraud loss provisions that both on a year-on-year basis, but also on a sequential base generated some additional leverage.

Marcos Galperín

Sorry, you continue with second question.

Pedro Arnt

Yes. With respect to competition in Brazil, I would say competition in Brazil continues to be very strong, we have lots of players willing to spend very large amounts of money in media and it continues to be a very intensively competitive market and we expect that to remain the case for the foreseeable future. It’s a market that is growing very healthily. We continue to have a leading position there and we grew transactions at 29% year-on-year. So we are happy the way our business is evolving and we see many opportunities ahead.

Marcelo Santos - JPMorgan

Okay, thank you very much.

Pedro Arnt

You are welcome.

Operator

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

Michel Morin - Morgan Stanley

Thank you. Pedro, I was wondering if you can expand a little bit on your comments about the Argentina cost structure and the fact that you have 40% of your costs in pesos, because I guess the expectation is that following devaluation, inflation would likely accelerate. So, I was wondering if you could parse out for us kind of the big categories of costs and how quickly some of those costs could potentially adjust two different FX environment?

Pedro Arnt

Yes, sure. So correcting your point, I think when we look at Argentina what we are looking at is what is the actual devaluation ex-inflation, what we had been seeing in Argentina over the previous I would say two years had been a country where inflation had certainly been beating the rate at which the peso was devaluing and so implicitly we were exporting some of that Argentine inflation to our overall cost structure. Over the last few periods, we have seen a reversal of that, where obviously with the acceleration in the rate of devaluation of the peso and that is significantly stronger if we look at the first quarter of this year has been outpacing inflation. So that’s real improvement in our cost structure because of that devaluation. The largest cost item particularly for the Argentina cases salaries and wages.

So, I think if you look at that game, that’s a bit of game of cat and mouse that we do not adjust salaries on the monthly basis we typically do it in our annual basis with some minor adjustments at a six month period. So, there is a significant lag there in terms of the salary and wage cost actually catching up to the devaluation. So, that works to our advantage and then most of the other cost probably going in line with the overall rate of devaluation of inflation in Argentina. And again what we’re seeing right now is devaluation outpacing inflation. And so the comment stands that we would believe that the current devaluation of the Argentine peso is actually pretty well edged and dilutes enough cost that it’s at the margin actually accretive to earnings.

Michel Morin - Morgan Stanley

Great. And on just a change of topic, I think you mentioned in your prepared remarks that you’ve seen the pickup in financing as your lower spreads have been enticing more activity, with interest rates rising still, especially in Brazil, how much more are you prepared to take in terms of spreads narrowing? Does there come a point where you’re prepared to start increasing those spreads or protecting them?

Pedro Arnt

The theoretical answer is obviously there could come a point where the interest rate increases begin to step out enough profitability of the business, that we chose pass on some of those additional cost of capital to consumers. That hasn’t been the case so far and it is in our current thinking. So, were prioritizing access to attractive credit that also has the additional benefit of driving more volume to the marketplace platform, albeit at a tighter spread for us. So, there hasn’t been any pricing on what were charging our consumers refinancing despite the fact that are spreads have been taking because obviously we’re paying somewhat more for that capital.

Michel Morin - Morgan Stanley

Alright, okay. And then finally from me on Venezuela, there was also a comment of the government capping profit margins at 30%. Have you – has there been any more communication on that and how do you see that impacting your business there?

Pedro Arnt

Yes, so there has been more communication that the government has issued further attempt at clarification and how that regulatory framework works. We are still working through that with our internal teams and external teams to understand exactly how that plays out. I think there isn’t any level of clarity yet within Venezuela. It seems to be a law that really isn’t very sort out for service companies. So we will comment more on that I think once there is greater clarity on exactly how that plays out.

Michel Morin – Morgan Stanley

Okay, great. Thank you very much.

Operator

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

Chad Bartley - Pacific Crest

Hi, thanks very much. Last couple of quarters, we have seen an acceleration in GMVe and revenue if you adjust for currency, so some of that was a function of easy year-over-year comps. So looking forward when comparisons get a little bit more difficult, I was hoping you guys could share your thoughts or give us some color on maybe how growth trends might play out this year I think similar to comments you made back in early 2012? Thanks.

Pedro Arnt

So as you know we will be very happy to talk about our growth rate in 2014 after we close into one of the quarters. So right now we feel comfortable talking about our growth rates during 2013 and prior to that.

Chad Bartley - Pacific Crest

Okay. Yes, I just thought I would ask because you had talked about the difficult comparison of the new world order platform and the impact it would have on growth in the back half of 2012. So that’s the context of the question, but I understand if you don’t…?

Pedro Arnt

No. So I think fair enough. I think the way I would say that is we had a significant comparison issue that impacted our business as you just mentioned because of a launch of a new platform about 2.5 years ago. And so that generated a significant step function in our growth rate that impacted the readout from the business for the two ensuing periods. I think we are at a point now where we haven’t had any sort of step functions since then. And so I think we are at a much more normalized pace of growth if you look at the last few quarters. And so I think the whole issue of the difficult comps to tough comps becomes much more normal and less relevant than it was three years ago when we saw spikes at 20% plus in our growth rates from one quarter to the other.

Chad Bartley - Pacific Crest

Okay, that’s helpful Pedro. Thanks.

Operator

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

Stephen Ju - Credit Suisse

Did you guys win any listings promotions during the fourth quarter to help you on your items show growth at all? And also, can you summarize how much you have spent on commercial real estate in Venezuela during all of 2013 so we could pull apart CapEx in the normal course of business versus extraordinary? Thanks.

Marcos Galperín

When you ask about listing promotions specifically what type of promotions do you have in mind?

Stephen Ju - Credit Suisse

Like what you did in the second quarter of this year, that accelerated your volume.

Marcos Galperín

What we had in Q4 was Cyber Monday and Black Friday, which were very successful as large retailers and branded stores have increase their listings on our platform we saw relative to prior years stronger growth in those specific dates. So that’s kind of the thing that I would single out in Q4 with respect to special promotions.

Pedro Arnt

In terms of the investments in commercial real-estate, just a very quick recap, Venezuela is as we said a profitable and strong business for us. It generates cash. It’s also a hyper inflationary country and one that has capital control. And so because we are unable to pursue our standard treasury policy, which is to remit cash generation from our Latin American operations into US dollars, into U.S. bank accounts in the case of Venezuela what we have to pursue is investment in alternative assets that best preserve value against inflation and also against devaluations. And the choice there that we have been pursuing in most U.S. companies that have operations in Venezuela have to an extent followed suit is to buy commercial estate. We bought roughly 450 million Bolivars worth of commercial real estate last year. So at the official exchange rate, that’s about $75 million of property, plant and equipment on our Venezuelan balance sheet.

Stephen Ju - Credit Suisse

Okay, thank you.

Operator

Thank you. Our next question is from Luiz Carvalho of Tree Capital. Your line is open.

Luiz Carvalho - Tree Capital

Yes, hi. Thanks for taking my question. So in your recent – in the numbers you just published you mentioned US denominated assets in Venezuela. So now can you please just give us a little bit more color as to what you mean by US denominated assets in Venezuela? That’s the first question. The second question is can you please – so, and I’m sorry to go back to Venezuela and Argentina, but how do the devaluations affect your dollar growth going forward?

Pedro Arnt

So the first one is again, once again standard U.S. GAAP, Venezuela is a hyperinflationary regime, therefore the functional currency is the U.S. dollar, when we purchase commercial real estate that goes into the balance sheet. The balance sheet is in dollars and therefore, that’s what we referred by U.S. dollar denominated assets in Venezuela. It’s essentially the commercial real estate. In terms of the impact of the devaluation on revenues, that’s fairly straightforward calculation. It’s grabbing the reported local currency revenues and discounting it by whatever the devaluatory amount was to get to dollars. So, that’s just a straightforward impact whatever your assumption of further devaluation for those two countries is just to go back to the Argentina case and that’s why the issue of cost comes up is because Argentina is 25% of revenues but 40% plus of total cost that means that you are devaluing more cost percentage than revenue percentage in that builds in an implicit natural hedge to earnings of any devaluations of the Argentina peso. That’s not the case for Venezuela. Venezuela obviously doesn’t have nearly as much cost as Argentina does.

Luiz Carvalho - Tree Capital

Okay, okay. Thanks.

Pedro Arnt

Thank you.

Operator

Thank you. (Operator Instructions) And with that, I am showing no further questions in queue. We like to thank you ladies and gentlemen for joining today’s conference call the MercadoLibre’s fourth quarter 2013 earnings. You may now disconnect. Everyone have a great day.

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