MercadoLibre SA Q2 2010 Earnings Call Transcript

| About: MercadoLibre, Inc. (MELI)

MercadoLibre SA (NASDAQ:MELI)

Q2 2010 Earnings Call

August 04, 2010 04:30 pm ET


Pedro Arnt - IR

Marcos Galperín - President and CEO

Hernán Kazah - EVP and CFO


Imran Khan - JPMorgan

Gene Munster - Piper Jaffray

Marianne Wolk - Susquehanna

Robert Ford - Bank of America

Jordan Rohan - Stifel Nicolaus

Steve Weinstein - Pacific Crest



Good day, ladies and gentlemen, and welcome to the MercadoLibre's Q2 2010 Earnings Conference Call. At this time, all participant lines 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 is being recorded.

I would now like to turn the conference over to company management. Please go ahead.

Pedro Arnt

Welcome, everyone, to MercadoLibre's earnings release conference call for the quarter ended June 30, 2010. Company management presenting today are Marcos Galperín, Chief Executive Officer, and Hernán Kazah, Chief Financial Officer. This conference call is also being broadcast over the Internet and is available through the “Investor Relations” section of our website.

I remind you that during the course of this conference call, we will discuss some non-GAAP measures. The reconciliation of these measures to the nearest comparable GAAP measures can be found in our second quarter 2010 earnings press release, available on our Investor Relations website.

In addition, management may make some forward-looking statements relating to such matters as continued growth prospects for the company, industry trends, and product and technology initiatives. These statements are based on currently available information and our current assumptions, expectations and projections about future events.

While we believe that our assumptions, expectations and projections are reasonable, in view of the currently available information, you are cautioned not to place undue reliance on these forward-looking statements.

Our actual results may differ materially from those discussed in this call for a variety of reasons, including those described in the “Forward-Looking Statements” and “Risk Factors” sections of our 10-Q, 10-K and other filings with the Securities and Exchange Commission, which are available on our Investor Relations website.

Now, let me hand the floor over to Marcos.

Marcos Galperín

Thank you and welcome, everyone, to today's conference call. I would start us off today by discussing our second quarter performance, including some insights into market trends and how they compare to our business growth.

I will also provide additional detail on certain product and service enhancements that we carried out during the quarter as part of our ongoing efforts to continuously improve online buying and selling experience. Then, I will hand the call over to Hernán, who will take you through our financial performance in greater detail. After Hernán's comments, we will open up the call for questions.

Overall, we turned in a solid performance, despite Q2 being affected by softer demand as a result of the FIFA World Cup and no major launches on our platform that could have served as growth catalysts for our business. I will discuss these two items in more detail shortly.

During Q2, we added $2.5 million new users to our community of buyers and sellers, ending the quarter with $47.4 million total confirmed registered users, representing approximately one quarter of the total Internet population in the region. This also represented a 25% increase in our registered user base over the previous year, outpacing Internet audience growth for the region, which comScore recently estimated at 23%.

Gross merchandise volume for the quarter was $798 million, a 22% increase year-over-year and 35% higher than last year when measured in local currencies. Putting this in market context, this is an excellent rate of growth even within Latin America quickly evolving e-commerce space.

Importantly, many of the underlying drivers behind the positive evolution of e-commerce in the region remain strong as broadband penetration, business per household, and mobile penetration are all growing at double-digit rate. As new users come online they also choose to use MercadoLibre for their online shopping. Our second quarter results reflect the positive impact these trends are having on our top line.

Notably, our core business sustained an excellent rate of expansion. In MercadoPago, our payments business grew even faster, maintaining its growth and growth dynamic as it continues to penetrate our marketplace business as well as growth of platform. To further illustrate all this let me highlight some of the key operational metrics. In the second quarter, we generated a following year-on-year comparisons, 34% growth in items sold, 91% growth in number of payments made to MercadoPago, 35% growth in gross merchandise volume in local currencies, 74% growth in total payments volume in local currencies.

Importantly, we were able to post these growth rates despite the negative effect of the Soccer World Cup on our second quarter volume. In terms of our business, there were four dates in June when each of the three largest economics in the region showed transaction volumes close to about half their normal volume corresponding with the days in which those countries played the World Cup matches. Additionally, in anticipation of the adverse impact on user attention and increased rates for TV advertising during the World Cup, we postponed our outline cable TV campaign for 2010 until August, whereas our 2009 campaign started to run in May. Last year we saw measurable increase in the initial traffic when this campaign launched.

Despite these factors we are extremely pleased with our growth momentum for the quarter. Turning to our financial results, net revenues for the quarter were $52.5 million an increase of 28% year-on-year, income from operations grew 52% with an operating income margin of 35.8%. Net income reached $11.7 million, a 75% improvement over last year.

This solid Q2 performance is further proof of MercadoLibre consistently solid execution in a rapidly growing region and of its focus on technology and innovation in an industry that does not fit still.

Now turning to a review of each business unit, looking at our marketplace business, the second quarter marked a healthy continuation of the positive momentum we have been witnessing for several quarters. During Q2 our marketplace reached an all time high of $8.1 million live listing, a growth of 87% year-over-year. This prompt supply is matched by what is by far the largest traffic of potential buyers in Latin America with an impressive level of unique visitors that approximate $30 million.

We believe that there are two critical drivers to the sustained performance of our marketplace on both the demand and supply side. First the internet transfer I mentioned earlier on. And second, our constant focus on upgrading our platform to offer an ever-improving user experience to our community.

Regarding this last point, let me add color on some relevant market based platform upgrades. These product initiatives highlight, although by themselves not as impactful as some other upgrades we have announced in past quarter, are nonetheless relevant steps in our efforts to deliver an undying shopping experience that combines the value, selection and uniqueness of our marketplace with the efficiency, trust and consistency of traditional retail channels.

Our new pricing system, which adjusts with insertion fees in favor of a simple, tiered structure of final value fees and optional placement fees, is now available in our six largest markets. And we'll continue to be rolled out everywhere during the course of this year. The decision to complete the roll out everywhere was a direct result of sustained marketplace business momentum over the past three quarters under this system, while improving value to different seller segments.

The fact that we continue to generate strong upfront fees despite having replaced our previous insertion fees for optional placement fees gives us a strong sense of the value our high volume sellers perceive in our premium selling options. In other words, we have moved from a pay-to-live paradigm to one where sellers pay for placements without having sacrificed on the top line. High volume sellers have clearly understood that.

In our marketplace with the liquidity of ours, paying for placement provides a great ROI, particularly when we are talking about large inventories of quality articles to sell. Simultaneously, by eliminating insertion fees, we have been able to make the marketplace more attractive to low volume sellers and low rotation items as they only pay us if they are successful in selling their items, capturing a higher amount of their inventory.

In the second quarter, we also increased the relevance of buyer's feedback ratings in our sorting algorithms. In doing so, we have effectively raised the bar and driven more volume straight to the merchants who have been showing the strongest track record of customer satisfaction.

Also during the quarter, we began restricting seller who are not in the higher tiers of feedback rating from using our gold and diamond selling options, which offer the best placement on our site. This restriction further ensures that the most visible supplier on the site is also that being offered by the best sellers.

Importantly, since our product supply level is tremendously healthy, in large part, due to the improvements made around listing formats, we can safely promote excellent at no detriment to choice on the market place. Even by restricting the exposure of less exhaustive seller, buyers are still finding what they are looking for on MercadoLibre.

As we are learning from the comments we have been receiving throughout the quarter this improved filters are being well received among our top seller base. The sellers who have the highest ratings of buyer satisfaction are finding this dynamic particularly rewarding as their exposure improves on the platform.

It is a self-fulfilling cycle where we create a nurture and important base of professional merchants, small and medium size businesses a like, that achieve their critical mass on our site and therefore take an active interest in maintaining their reputations at the highest levels at all times.

I am convinced that these initiatives are what keep us ahead of the game in all respects, ensuring that our market place adheres to the highest standards of quality at all times and providing the best level of service within the entire e-commerce space.

Finally, regarding our Marketplace, all of these pricing feedback and sorting improvements were executed, while we continued to thoroughly work on an entirely new site architecture, one that we internally call “Ground Zero” and which is designed to make our Marketplace platform more open, flexible and dynamic.

It will allow us to take more advantage of various new form factors such as tablets and phones, better enable third-party developers to use our Marketplace as a business platform, and continue to increase the speed of execution of our product enhancements and geographic rollouts. We expect to have made substantial progress in our new Marketplace architecture by year-end.

Moving on to Payments, let me start out with a brief recap of our key goals for MercadoPago. As we have stated many times previously, we are very excited with the evolution of MercadoPago. Our growth plans for MercadoPago are aggressive, which we believe is consistent with the size of the opportunity and the privileged position we occupy in the space.

We believe that the Payments segment of our business will eventually surpass the Marketplace segment, as online payment takes off in Latin America, creating a vast merchant services market for us to operate in.

We also believe our Marketplace business provides the best possible runway for a Payments business, allowing us to become the largest payment player of our type as we continue to grow the adoption of MercadoPago in our marketplace, a key competitive advantage.

Therefore, we feel we are still successfully pursuing the Payments opportunity on those two fronts, growing our penetration within MercadoLibre and in the wider space of e-commerce merchant services.

Turning to our platform performance in the quarter, the most recent incentives we put in place to drive adoption of MercadoPago and our marketplace continued to ramp up the growth of MercadoPago in Argentina. The combined pricing mechanism that we have been operating there, since late last year has driven penetration from below 5% at the beginning of this initiative to 12% at the end of Q1 to above 15% at the end of Q2.

The positive results led us to pursue a similar initiative for our largest market Brazil. On June 26, we raised marketplace each in Brazil as part of our combined pricing for the launch of our new payments platform called MP3. We have also worked diligently with sellers to communicate how the new fee structure will work. Remember that up until now, Brazil was under our MP2 platform which charged buyers for the usage of MercadoPago.

As of the launch of MP3 on July 16, this cost is incurred by the seller through a single marketplace fee. The new system has been well accepted by sellers and we expect to see similar improved adoption by buyers throughout Q3 as they can now use MercadoPago without paying any additional fees. In a country where payments penetration measured as total payment volume over gross merchandize volume was already in the high 20s. We see a high potential for further usage on the part of buyers from this point on.

The benefits of increased usage of MercadoPago are multiple and included. Frictionless and CD settlement of transactions, a better and safer buying experience for buyers, improved commercial and volume for our sellers as well as more efficient operations for them as buying becomes faint.

Clear online record of payment for buyers and sellers and the possible building of stored balance facilitating and encouraging future operations through our payment system and or our marketplace. All of this ultimately leads to better overall operational and financial metrics for the company.

In terms of the merchant services front side, during the second quarter we took a very important step that laid the foundation for the business we are building out. We officially launched our off platform MercadoPago service in Brazil on April 20 with a press conference.

Starting off from a very similar base at the beginning of the quarter, this initial push has already doubled the number of adhered merchants in Brazil compared to those we have in Argentina. Brazil's off platform PTV still a marginal proportion of total PTV grew at approximately 90% quarter-on-quarter showing the potential of the Brazilian market.

The off platform business is also growing through the increased usage of MercadoLibre shops, our comprehensive eCommerce solution for small merchants that was launched in Argentina during Q1. We look forward to running out MercadoLibre shops to Brazil and other markets in the coming quarters, generating further synergies.

Going forward, we expect this nascent merchant services business to take on an ever increasing importance within our company as we deployed sales people, new products, marketing campaign and partnerships to expand this key strategic initiative.

Before banding things over to Hernán, I would like to provide some additional color to put the size of the e-commerce opportunity and MercadoLibre's potential role in two sharper perspectives.

We are already the recognized leader in an e-commerce market that is only at the threshold of what it will become, a market which in 2009 was just over 15 billion based on the best available estimates and of which we already represent an important portion, even as we continue to gain market share.

This market represents less than 1% of the region's retail sales today. It is an unmistakable trend that more and more of the retail volume will continue to move online, as has been the case globally. Payment solutions such as MercadoPago, which are key enablers for this entire market, are at an even earlier stage, promising greater upside.

These secular trends should provide sufficient momentum for MercadoLibre to continue growing at a solid pace for many years to come. Everyone at MercadoLibre is working to ensure this happens through the value of the service and user experience we provide our community. I am extremely confident that the progress we are making will solidify us as leaders in this incredibly attractive market.

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

Hernán Kazah

Thanks, Marcos. Let me go over our financial metrics and the drivers supporting them. After that, we will be happy to take your questions.

Q2 was a great quarter for MercadoLibre. Once again, our financial results reflect the strong strength of our volume metrics, starting with very strong top line growth in U.S. dollars despite a foreign exchange headwind versus last year. The strong and expanding margins make this flow directly to our bottom line growth.

Let me briefly review our financial metrics. Please remember that all growth rates are year-over-year unless specified. During the second quarter most of our key financial metrics evolves positively. Specifically net revenue grew 28% to $52.5 million, a 39% growth in local currency. Gross profit margin was healthy at 78.3%. The income from operations was $18.8 million with an operating income margin of 35.8% and net income was $11.7 million a 22.2% net income margin versus a net income margin of 16.3% a year earlier growing 74.8%. Revenue growth was driven primarily by two factors.

First a 34% increase in items sold taken marketplace gross merchandise volume to $798.1 million this is a 22% increase in US dollars and a 35% increase in local currency. Within this total Brazil with a 28% growth in successful items grew local currency gross merchandise volume by 13% in the quarter versus US gross merchandise volume growth of 13% as the local currency prices of import intensive or competitive products were adjusted downward year-over-year even as the US dollar crisis increased. This applies to consumer electronics for example which are an important part of our gross merchandise volume.

Second a total payment volume of $147.8 million, 86% growth in US dollar or 74% in local currency. Segment revenues broke down as follows. Our marketplace revenues grew to $37.2 million, a 20% increase in U.S. dollars and a 37% in local currency. Payments revenues reached $15.3 million, a 55% growth in U.S. dollars and a 42% in local currency. Brazil continues to be the most significant Payments business.

Overall, marketplace accounted for 71% of our total revenues and Payments for the remaining 29%, representing an impressive increase in the share of total revenue of our Payments business relative to the 76-24% breakdown for the second quarter of 2009.

This follows directly from the growth in penetration of total payment volume of gross merchandise volume in all our countries where the Payments business currently operates, enhanced by the pricing initiative in Argentina that Marcos mentioned earlier.

In local currency on a country basis, consolidated net revenue growth, including both marketplace and payments businesses was 26% for Brazil, 62% for Argentina, 19% for Mexico and 69% for Venezuela. In U.S. dollars consolidated net revenue grew 45% for Brazil, 55% for Argentina, 26% for Mexico and minus 41% for Venezuela. These growth rates reflect how our strong volume growth extends throughout all countries.

On a consolidated basis take rate rose to 6.58% from 6.27% in Q2 of 2010, as payment continues to gain share of total revenues. They can independently Marketplace segment take rate fell to 4.6% from 4.76 in Q2 of last year and Payment segment take rate fell to 10.37% from 12.43% a year ago, remarkably take rate declined versus last year was driven primarily by lower revenues coming from classified mostly due to the change in the exchange rate that we will bought Venezuela's revenues at.

Since we have sizable classified in Venezuela, particularly after the acquisition of Tucarro, this change had a considerable impact on classified revenues. Having in mind that we reported Q2 2010 results at the average parallel exchange rate of VEF6.35 to the US dollar while we reported Q2 2009 as a previous official exchange rate of 2.15.

Quarter-on-quarter Marketplace take rate improved from 4.51% to 4.66%. Core Marketplace take rate improved year-on-year and remained steady quarter-on-quarter. This positive effect on take rate was mostly due to the favorable impact of pricing adjustment we continue to carry out, primarily raising maximums on all of our placement fees during the quarter.

Payment take rates versus Q2 of 2009 fell from 12.43% to 10.37% mostly as a result of lower financing revenues due to more favorable interest rates compared to those of Q2 2009.

Gross in fee revenues as a percentage of TPV fell to 5.87% from 6.09% in Q2 2009. Financing revenues as a percentage of TPV fell to 4.50% from 6.34% in Q2 2009.

In both of these cases, market cost lines related to these revenues dropped by similar levels sustaining the kind profit margins on both the processing and financing fees. In other words, the decline in tax rates are accountable of us passing on cost savings to our users in the form of lower prices.

While on the subject of marketplace and payment revenues; let me further explain how we're performing and reporting the combined pricing strategy between payments and marketplaces that has been implemented for more than two quarters in Argentina and as Marcos mentioned that we have recently launched in Brazil.

As we stated the objective of this initiative is to remove price barriers for the adoption of MercadoPago for both buyers and sellers, thus maximizing adoption and penetration of MercadoPago.

Additionally, we'd like to be able to carry this out in a way that does not negatively effect consolidated revenue growth in our business. The mechanism that we have revised to accomplish these goal is twofold. We will be offering MercadoPago as a payment option on the platform for no added fee.

Using MercadoPago to pay for transaction, we have no added cost to either buyers or seller. We will cover the revenue that we're no longer charging to MercadoPago fees by raising MercadoLibre Marketplace fees. The amount, which we will raise those fees, is determined by how much total Payment volume is growing and what is starting penetration over gross merchandise volume is.

The greater the increase in Payments volume or the higher its initial penetration, the higher the price increase. So we have to totally or partially make up for this Payment fees not being directly charged. As you are aware, the mechanism I have just described has been in place in Argentina since Q4 of last year. In that market, we initially increased the final value commission on premium listings by 50 basis points.

More recently, as Argentina's total Payment volume penetration over gross merchandise volume advanced from 12% to 15% during the second quarter, we increased our final value fees in those listings by another 100 basis points to cover the processing fees corresponding to this new level of TPV.

In a similar fashion, as of Q3, our Brazilian operation has also bundled Payments into its Marketplace fees. The initial increase in premium listings' final value fees in Brazil was 150 basis points higher than the initial increase in Argentina, since Payments penetration in Brazil starts from a higher base.

In terms of segment accounting, for the time being, we will continue to report the Payments segment independently from the Marketplace segment despite the combination of the processing fees.

The Payments segment revenue will be comprised of all consumer financing revenue plus an intercompany revenue allocation, whereby a portion of the Marketplace fees will be reported as Payments revenues to reflect the combined pricing of both services.

For Argentina we are allocating 6% of total payment volume as payment segment revenues and in Brazil the accounting will occur using 3.5% of total payment volume. We are confident that these new pricing scheme will work just as seamlessly in Brazil as it has in Argentina and we are very eager to see a growth of this business considering the add-in incentive to buyers who as of now pay no additional cost whatsoever to use MercadoPago.

Of course, we are aware that there are multiple moving pieces involving user dynamics which means an essential part of this process will continue to be monitoring this evolution as it plays out, making sure that we shape the business in accordance with what users' behavior describe.

As MercadoPago keeps growing we will make sure that our reporting of this segment continues to be an accurate reflection of who this business evolves.

Returning to our P&L for the second quarter, gross profit grew 27% to $41.1 million representing 78.3% of revenues versus 79% in Q2 of 2009. A slight decrease in margin is due to the fact that our payments business with lower gross margin gained share within marketplace.

Operating expenses for the period totaled $22.3 million, a 12% increase while decreasing as a percentage of sales to 42.4% from 48.6% in Q2 '09. Specifically sales and marketing remain the largest line item expense growing for 10% for the quarter to $11.5 million. So as a percentage of revenues sales and marketing contracted significantly to 21.8% versus 24.6% for the same period last year, illustrating the advantages we've been able to derive from optimizing investments in traffic.

Product and technology remains a principle focus for us. Expense grew 29% to $4 million compared with $3.1 million for the second quarter of 2009 as we continued to build our team in this area, as crucial to our growth.

G&A rose 2% in Q2 of 2010, showing our continued commitment towards the management and our periodic survey of the most cost efficient providers available to meet our needs.

Resulting operating income for Q2 2010 was $18.8 million, 52% higher than in the same period last year. Other relevant items from the quarter were $0.9 million of interest income mainly from conservative fixed income investments. $3.4 million of interest expense, and other financial charges, mainly derived from our discounting of Ricardo power credit card coupons in Brazil and a 35,000 foreign exchange loss driven by the effect of currency fluctuations on the cash and investments variances that our subsidiaries held in the U.S.

Let me take a moment to describe the foreign exchange situation in Venezuela, which many of you have been asking about. On May 14, 2010, pursuant to certain foreign currency exchange relations, the Venezuelan Central Bank suspended all trading of foreign currencies through parallel market transactions.

Prior to that decision and up until May 13, 2010, our Venezuelan subsidiaries had been buying U.S. dollars in a freely traded parallel market and had used the average parallel exchange rate to be measure our Venezuelan account.

Trading on foreign currencies was reopened as a regulated market on June 9, 2010 with the Venezuelan Central Bank as the only institution for which foreign currency denominated transactions can be brokered.

Under the new system, foreign currency securities transaction system, called Sigma, entities domiciled in Venezuela combined U.S. dollar denominated securities only to banks authorized by Venezuelan Central Bank.

Additionally, the Sigma imposes volume restrictions on entities trading activity, leaving sales activity to a maximum equivalent $50,000 per day, not to have received $350,000 per month. This limitation is not cumulative meaning that an entity cannot carry over unused volume from one month to the next.

As a consequence started June 9, 2010, we have transitions from the parallel exchange rate to the Sigma rate and we'll continue re-measuring our Venezuelan account for these new weighted average exchange rate published by this Venezuelan Central Bank, which is the same rate roughly 5.3 bolivar to the dollar at which we could convert our bolivars into U.S. dollar in June and July.

For the period beginning on May 14, 2010 and ending on June 9, 2010, during which no open foreign currency markets operated, we applied U.S. GAAP guidelines that clearly state that if exchangeability between two currencies is temporarily lacking at the transaction date or balance sheet's date, the first subsequent date on which exchanges could be made shall be used. Accordingly, the June 9, 2010 exchange rate published by the Venezuelan Central Bank has been used to re-measure transactions during this blackout period.

And now, returning to our P&L, pre-tax net income was $16.3 million, 96% higher than in the same quarter of last year. Tax expense was $4.7 million in Q2 of 2010. This represented a blended tax rate of 28.6% versus 29.8% in Q1 and 19.8% in Q2 of 2009, as last year we registered some one-time benefits.

Going forward, also bear in mind that we still have some tax credits related to previous acquisitions, particularly in Brazil, that we will try to use in the next few quarters.

Net income for the three months ended June 30, 2010 was $11.7 million reflecting an increase of 75% when compared with $6.7 million during the same period of 2009, a 22.2% net income margin, and resulting in a basic net income per common share of $0.26. Net income grew 95% versus Q2 of last year when measured in local currency.

Net cash provided by operating activities for the three months period ended June 30, 2010 was $14.6 million or 27.9% of net revenues, we continued to generate strong operating cash flows in our Marketplace segment. And we continued to fund working capital requirements in our Payment segment by discounting credit card receivables being cash flow positive in this segment as well.

CapEx for the quarter was $2.5 million, consequently for the three months period ended June 30, 2010 net cash provided by operating activities less CapEx, a non-GAAP measure of free cash flow totaled $12.1 million.

Cash and short term investments and long-term investment at the end of the quarter totaled $109 million. These results reflect a great momentum our business is gaining and we eagerly anticipate this to continue through the second half of the year. The tailwind to our growth are multiple, ranging from secular trends that accompany internet growth in the region to excellent shares of microeconomic and retail indicators in particular, spud by accessible credit and growing demand for it.

All of this combined with the continuous improvement we planned to incorporate to our technology, favors our market base business, while our payments, operation supports this underlying growth and build on top of it as our users begin to see the advantages of paid through our platform. These combined factors provided MercadoLibre with the solid possibility for growth. Needless to say, we are eager to keep managing our business with the prospect of what is to come.

With that let's take your questions.

Question-and-Answer Session


Thank you. (Operator Instructions) Our first question is from Imran Khan with JPMorgan. Go ahead please.

Imran Khan - JPMorgan

Yes. Hi, it's Imran Khan from JP Morgan. Thank you so much for taking my questions. Couple of questions, gross merchandise volume per item was down 8%, obviously foreign exchange had an impact. Can you talk about what else drove that decline? And secondly, as a payment business mix shift towards processing and away from financing, should we expect take rates to go down and can you talk about the cross sell opportunity on financing as more people use Pago on pay on the Brazil site. Thank you.

Marcos Galperin

Hi, Imran how are you? This is Marcos.

Imran Khan - JPMorgan

Hi, Marcos. How are you?

Marcos Galperin

Very well. Thanks. With respect to the first part of your question, successful items which is perhaps some more pure measure of vibrancy on the marketplace has decelerated slightly. We believe mostly caused by the factors we mentioned on the call which were the World Cup. The fact that we did not have our cable and TV campaign during Q2 of 2010 whereas we did have it in Q2 of 2009 and the cable and TV campaign during 2009 had an impact on traffic and transactions. And the fact that many of improvements we did over a year ago to our platform have cycles, and we are focusing in our ground zero architecture. And therefore the upgrade that we did here in Q2 are not as significant as once that we did over a year ago, so mostly those were the causes of the deceleration.

With reference to, that take rate part of your question, complement here that we will continue to have a financing part of the business in (inaudible) and the financing will continue to be paid for by the buyers.


Thank you. Our next question is from Gene Munster with Piper Jaffray. Go ahead please.

Gene Munster - Piper Jaffray

Good afternoon and congratulation. Question on the World Cup, you mentioned four dates, back to envelop, is that had 2% negative impact on revenue, is that math seems consistent, are you guys are calculating the impact?

Marcos Galperín

Yes. That's more or less exactly what we are calculating, its around 2% negative impact, because of those days with lower activity than usual.

Gene Munster - Piper Jaffray

Okay. And then second is, you mentioned the new grounds, zero marketplace by year end, from the user perspective you talked about phones and tablets and other business applications or usage that will be a different marketplace from the user and will that be kind of one time, flip the switch or is it going to be a migration through different product categories? Thanks.

Marcos Galperín

This is going to be a major transformation in our architecture both for the Marketplace and the Payment platform be noticeable on that market place platform first and the objective is to be more open, more flexible and more dynamic so that we can enable third party developer to develop, on top of our platform through the API and that we can better be present in the multiple new format that are increasingly popular and the mobile phones, the smartphones, so this will be on a phase by phase approach, it's not going to be a one time event, it's going to be a one-time change, but it's going to enable multiple changes going forward and it's also going to enable us to execute more rapidly and to do our rollout of the product upgrade more rapidly.

Gene Munster - Piper Jaffray

And from a unit perspective will they be or they just go to the typical Mercado site on a computer will they be able to see the difference?

Marcos Galperín

Well, they would be able to see many difference, it's in the sense that many of their product upgrade that we would like to be doing take us today more time to do and to roll out. So the space of change on our market place on the web will be significantly factored on what it is today.

Gene Munster - Piper Jaffray

Okay, one just final quick question. Growth in Argentina at 34% versus 47 in Q1, is there anything going on there, anything related to probably in the Pago anymore insight on that trend?

Hernán Kazah

MercadoPago in Argentina is growing very rapidly and we are very excited with how it is going and the feedback we are getting from sellers and buyers. So clearly probably it is having a positive impact on the business overall. The overall growth going from 47 to 34%. Is there anything, in particular, in Argentina that we should be aware of?

Marcos Galperín

No. In terms of transaction growth, that wasn't the case. I mean we are happy with the way that the business is evolving in Argentina.


Thank you. Our next question is from Marianne Wolk with Susquehanna. Go ahead, please.

Marianne Wolk - Susquehanna

Yes. I want to understand the seller economic changes related to the Pago rollout in Brazil a little bit better. It sounded like you were raising the cost to the seller by about 150 basis points.

I want to understand, is that true in each category? And that's a much bigger step-up in cost than the step-up you had I think; you said 50 basis points in Argentina over the last few quarters. So just wondering how the sellers are reacting to that big step-up in cost, and are you seeing the same sort of favorable reaction to that?

And then my second question with regard to the spending for the new Marketplace's Ground Zero architecture. You've had flat R&D for the last few quarters. Can you talk about how much money you're going to have to invest in this architecture, and where we are in the rollout of the platform? Thanks very much.

Hernán Kazah

Hello, Marianne. Yes, all you've mentioned around MercadoPago is true. What we've done in Brazil was basically we eliminated the MercadoPago processing fees that buyers were paying, and now we have only one single fee that is a Marketplace fee.

To compensate for the revenue we are not getting any longer from MercadoPago fees, we increased MercadoPago, MercadoLibre's marketplace fees by 150 basis points. As you pointed out that's more than what we've increased fees in Argentina because payments in Brazil has a much higher penetration, so as to compensate those revenues we needed to increase those fees at a higher level.

This fees that we are getting from sellers, this is very early. We launched this mid-July; its positive and we made this change because we think this is the way for us to expand MercadoPago's penetration on the marketplace and also for us to improve buyers and sellers experiences on the site. So we are definitely happy with the results we saw in Argentina.

We think that we are going to replicate those results in Brazil and that going forward we will do more of this, expanding the penetration of MercadoPago in the countries where today we have it and also running out this branded model into new countries.

With regards to your second question about ground zero initiatives and how much we are investing in technology, in R&D, that's an area where we are investing ahead of revenue growth. So we are increasing the percentage of money that we allocate there in terms of revenues and we will continue to do that. So far we are happy with how that is evolving and we think that within the investments we are currently doing we will be able to accomplish the changes we want to have in the platform.

Marianne Wolk - Susquehanna

Can you just give us a sense of where you are in that investment cycle? Have you been investing in this for some time or is this is a new investment that we should expect in the third quarter and how long should it last?

Marcos Galperín

This is part of the continuous investment that we do in technology and the most significant expense items there is people, basically engineers. So as we've been saying in the last few releases, we'd be investing in having more engineers, we've been growing the size of that team and that's why it's allowing us to get into this big initiative that we're doing now.


Thank you. Our next question is from Robert Ford from Bank of America. Go ahead please.

Robert Ford - Bank of America

Good afternoon everybody and congratulations on the quarter. Marcos I had a question, maybe Hernán with respect to the transfer pricing for the Pago. You know I was just curious as to why your transfer price in Brazil 3.5% of total payments volume and Argentina at 6%?

Hernán Kazah

Hi Bob, this is Hernán. Basically, what we're doing is bundling pricing as you will note. So we have to make decision how to allocate those revenues between the marketplace and the payments business. What we're doing is on the one hand, all the revenues that we collect as financing fees are definitely allocated 100% to MercadoPago and the other fees that today is bundled fees; we're allocating them between the two segments based on cost basis and also on margin. And given that Argentina has smaller operation, obviously it cost their have a higher impact than in Brazil where we have a larger operation. And also in Brazil MercadoPago makes some money out of financing fees that we do not have in Argentina. So part of this saving the MercadoPago is providing, is one reason why we didn't move the combined fees even higher was that we were able to able to compensate a little bit of that by increasing this lightly the margins that we have on the financing side of MercadoPago.

But you're right that we will move prices on the one hand 6% and on the other hand 3.5%, part of that is volume, part of that is MercadoPago in Brazil had a financing business and part of that is because what we think is right pricing point for this.

Robert Ford - Bank of America

It's great. Thank you. And then my second question has to do with your fees in Argentina and I understand that you're penetration information on transactions with them effective May 1st, if I am not mistaken? And I was curious as to whether or not this new (inaudible) goes into effect in November would be something that they expect from you or is that expected to come from your Pago service.

Marcos Galperín

No that is moving along and its information that we are providing to tax authorities and we are connected to them through this electronic invoicing system and we don't anticipate any issue in that regard.

Robert Ford - Bank of America

And then just to confirm, you've been exchanging information effect May 1st, right, in Argentina?

Marcos Galperín

No, it's going to be September.


Thank you. (Operator Instructions) our next question is from Jordan Rohan with Stifel Nicolaus. Go ahead please.

Jordan Rohan - Stifel Nicolaus

Congratulation on the quarter guys. If I heard correctly, you are talking about a take rate being higher despite the elimination of insertion fees and it move to paid placement. It seems really promising. Can you comment on the coverage ratio or the percentage of your listing's pages where merchants have already used paid listings, isn't this something that can expect to go up from a very low number today to something pretty significant in the future, so that it would way more than offset the insertion fees that have been eliminated? Thank you.

Marcos Galperín

All right Jordon, it has been long process, it's not something that has changed one quarter to the next. We've been removing listing fees by introducing, fine value the only listings more recently in some countries completely free listings. And in those listings where we still have some upfront fees, those fees are in the form of placement fees that they pay to have those listing with more prominence on the site and not so much just for the write off of listing.

So, we still have lots of outcome fees as Marcos mentioned in his remarks. A significant part of our portions, our revenues are still coming from that. It just to be 50-50, so 50% of that is coming from fees and 50% from final value fees, now its more like 70-30, 75-25. So more fine value fee loaded. But still with some significant portion of our revenue is coming from these upfront fees.

Jordan Rohan - Stifel Nicolaus

And one follow up…

Marcos Galperín

In terms of listing Jordan approximately 20 to 30% of the listings based on sort of placement fees and they make up approximately 70% of the GMV.

Jordan Rohan - Stifel Nicolaus

Great. I have one follow-up on you talked directionally and maybe I just missed this when you were discussing the MP3 change in Brazil but have you seen the penetration of Pago in Brazil start to hitting to the 30% level since you shifted the model to merchant pay, it has to be in 20 some trying to just get some directional commentary on where its headed already?

Marcos Galperín

Yeah, MercadoPago in Brazil was penetrated, they were close to 30% we've just launched the new product we are happy with the results we're seeing there. So we do expect that penetration to grow up but we will talk in more detail about that in our next earnings release.


Thank you. Our next question is from Steve Weinstein with Pacific Crest. Go ahead please.

Steve Weinstein - Pacific Crest

Hi, thanks. Just got a couple questions on Pago, the first one is understanding to try to increase the final value fees they compensate for the great adoption of Pago, first how often are you evaluating that and realistically how often do you think you can raise fees I assume you don't want to be raising fees every month and so there is some exposure to the model as that occurs, but I would like to get your feedback on that? And then I have a little difficulty hearing parts of call so forgive if I have heard this wrong but it sounded like the financing part of revenue is declined to 1.5% I wasn't sure if that was reflective of things that you were doing to try and pass more value to consumers or if that was just a function of things happening in the market via lower interest rates or fees from the vendors that allowed you to pass that through. If I can get some clarification there, I'd appreciate it.

Marcos Galperín

Hi, Steve. So with regards to your question about how often we will be able to move final value fees to keep on compensating for the growth that we expect to have in MercadoPago plant, so far we can tell you that in Argentina, we first increased prices when we launched the bundling MercadoPago with Mercado delivery system and recently we did the second move in that direction within that. As long as we are increasing fees because we're offering a better alternative about its service to buyers and sellers we are going to be able to do that.

If you look at what other market place in the world charge for these combined solution of offering a market place with payments, we think that we still have lots of upside there, but we will be doing that carefully as you know, our most important target is to keep on growing our business, we're still in a very initial phase of the internet in the region of e-commerce in the region. So want to make sure that first, we grow and then we will take a look at our debt rate, but we think that we do have lots of upside there and with the move we also did in Brazil, we are happy with the result we're seeing. So we do think that we are going to be able to maintain very healthy margins going forward with this combined pricing strategy. With regards to financing fees, we have mentioned that in the last quarter there were 4.50% versus 6.34% in the same quarter last year, so financing fees have gone down, mostly because we are getting better rates from the institutions where we go and we lay a discount, the critical coupons to get cash in advance and those savings that I will show in that rate will pass on to buyers and we maintained more or less the same margins we had last year.


Thank you. I am showing no further questions at this time. I would now like to turn it back over to management.

Marcos Galperín

Okay. Thanks everyone for your time and for your questions and we look forward to speaking to you in the next quarter. Thank you very much. Bye-bye.


Ladies and gentlemen, thank you for your participation. That concludes the conference. You may disconnect and have a wonderful day.

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