MercadoLibre, Inc. (NASDAQ:MELI) Q1 2024 Earnings Call Transcript

MercadoLibre, Inc. (NASDAQ:MELI) Q1 2024 Earnings Call Transcript May 3, 2024

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Richard Cathcart: Hello, everyone, and welcome to the MercadoLibre Earnings Conference Call for the quarter ended March 31, 2024. Thank you for joining us. I’m Richard Cathcart, MercadoLibre’s Investor Relations Officer. Today, we will share our quarterly highlights on video, after which we will begin our live Q&A session with our management team. Before we go on to discuss our results for the first quarter of 2024, I remind you that management may make or refer to and this present may contain forward-looking statements and non-GAAP measures. So please refer to the disclaimer on screen, which will also be available in our earnings materials on our Investor Relations website. With that, let’s begin with a summary of our results.

Martin de los Santos: Hello, everyone. I’m pleased to report another quarter of solid results with excellent operational and financial performance in Brazil and Mexico. Both countries posted GMV growth, approximately 30% year-on-year as we carry over a strong momentum from Q4. This above market growth is being driven by several factors, to improvement of user experience we minimized as a highlight, our strategic investment in chip infrastructure, which are driving faster growth in specific target regions and a well-executed marketing campaign that is leveraging on the awareness we generated in Q4 around peak season. In addition, our advertising business continues to grow nicely and reached regular levels of GMV penetration in all of the markets where we operate.

Mercado Pago also had a solid performance in Mexico and Brazil. Some of the highlights being the acquiring business growing at accelerated rate sequentially in both countries. We had a solid credit growth portfolio surpassing the $4.4 million and growing strongly from last year and a strong quarter for Mercado Pago credit card. We issued 1.5 million cards during this quarter. The TPV reached $1.9 billion, growing 133% from last year. In summary, in Q1, we delivered a strong operational performance in commerce and fintech both in Brazil and Mexico, which has offset the negative impact of a weak macro in Argentina, and the peso devaluation in the country. Before turning to our financial performance in more detail, I’d like to highlight that there are a couple of reporting updates that have taken effect in this quarter.

Investors can find a summary of the impacts on our financials in this quarter, shareholders letter and a full reconciliation in our earnings presentation. My comments today will refer to the numbers that are comparable to the figures we reported in Q1 last year. Consolidated revenues grew at a fast pace on the back of the strong operational momentum that I mentioned earlier. Brazil and Mexico, had an outstanding quarter and the revenues growth was sufficient to offset the impact of headwinds in Argentina. Income from operations grew strongly year-on-year, once again, with margin expansion being driven by Mexico and Brazil. This reflects the combination of growth, scale and cost efficiency that drives operational leverage. And our long-term ambition is to continue delivering both growth and profit, and we are confident in our ability to achieve that.

Net income grew at a faster pace than income from operation as lower FX losses in Argentina were partially offset by lower operational income in that country. Furthermore, the reporting updates I mentioned earlier have a broadly neutral impact on net income. Overall, we are very pleased with the performance of the business in Q1 despite the headwind from Argentina. And this is a great way to kick off MercadoLibre’s 25th anniversary. Now, I’ll pass over to Richard for more on the solid foundations we have built over the past 25 years, looking ahead for the next 25 years of MercadoLibre.

Richard Cathcart: In 2024, MercadoLibre will celebrate its 25th anniversary. And we look back on the progress we’ve made in the merchandise, commerce and financial services in Latin America. Today, MELI is the leading technology company in the region and a major tech company globally, and is being recognized for its innovation, growth and impact in the region. In addition to business growth and impact, MercadoLibre has a consistent track record of generating shareholder value since our IPO in 2007. We look forward to the next 25 years with great confidence and optimism as we still see plenty of opportunities to continue to grow and fulfill our mission in a region that provides us with a large addressable market. In Latin America, e-commerce is far from mature and financial services are right for disruption.

We are the leading e-commerce platform in the region, which has significant potential for growth from new buyer and higher frequency as engagement and penetration of retail rise. By building the fastest and most extensive delivery network in the region and by offering the widest assortment and the best UX, we have become a natural destination for buyers and sellers. This drives a uniquely powerful and self-reinforcing network effect as sellers invest to maximize their sales by capitalizing on our traffic while buyers receive an ever-improving value prop which drives more traffic and growth. We’re also building one of the largest retail media platforms in the region which leverages our extensive first-party data to offer advertisers unique audience targeting capabilities and complete full funnel strategies.

We are challenging the status quo in financial services and by offering a wide array of easy-to-use services for individuals and merchants in large markets underserved by incumbents, we have become one of the region’s leading fintechs. Our ecosystem is our competitive advantage in fintech services. Its data is uniquely rich and enables us to cross-sell. It also enables us to have a better view of credit risk and operate a business which matches the lowest cost to serve in the region. We have built a highly profitable acquiring business on the back of the technology and know-how developed for our marketplace. We are one of the largest fintechs in this market and are well-placed for market share gains across the region. We are also building Meli Mas with the ambition of being the largest and most valued loyalty program in the region by leveraging our ecosystem to offer unique benefits.

Technology is at the heart of everything we do and having one of the largest teams of engineers in the region ensures non-stop innovation and product development. We have a diversified mix of revenue with ample opportunities for growth monetization. Our scale financial discipline and tech-growth mentality mean we have low-cost structures with solid and sustainable profitability. MercadoLibre’s’s powerful intrinsic impact on the people we serve encourages entrepreneurship and promotes financial inclusion. We are proud of the achievements of the last 25 years but our mission is far from complete. As a leader in an e-commerce market that is far from mature and one of the leaders in a financial services market that is ripe for disruption, we are confident and optimistic in our future growth.

As we look forward to the next 25 years, we’re confident that the best is yet to come.

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Q&A Session

Operator: Thank you. At this time, we will conduct a question-and-answer session. [Operator Instructions] Joining us for the Q&A are Martin Delos Santos, CFO; Osvaldo Gimenez, FinTech President; and Ariel Szarfsztejn, Commerce president. Please wait while we compile our Q&A roster Our first question comes from Andrew Ruben with Morgan Stanley. Your line is open.

Andrew Ruben: Thanks very much for the question and congratulations on the 25 years. It’s helpful the table you provide in the relief that breaks down the peso-denominated and non-peso EBIT. Just thinking about the Argentina business, the unit is down five. It didn’t strike us as a major decline, but you had a big hit on EBIT. So I was hoping you could walk us through the situation during the quarter where you had mismatch between revenue and cost and perhaps if you could, even how the business evolved on a month-over-month basis within given how fast-moving the Argentina macro situation has been. Thank you.

Martin de los Santos: Hi, Andrew. How are you? Thank you for your question. This is Martin. Yeah, as you know, in Argentina, we face two things happen. The devaluation of Argentina, which reduced the size of our business, and as you know, Argentina is a high-margin, heavy-margin business operation. And then we have the macro situation that obviously puts some pressure in terms of consumption. We’ve seen reduced volume and demand, even though, as you know, we manage a marketplace which is very resilient to this type of situation. So I think we outperformed the consumption in general in the country, but we did suffer some loss of volume in Argentina in the commerce side of the business. In terms of cost mismatch, I think we saw some inflation in terms of our shipping cost in Argentina.

There was some pressure in that line of our P&L. And then to wrap up the situation in the country, on the fintech side, the business performed extremely well. We continue to have a very strong brand in Argentina. Assets under management growing 64% year-on-year. We doubled the number of users of our investment products. The acquiring business in Argentina growing 300% more than inflation, and then active users also growing at 31% year-on-year. So overall, I think that’s what you can – you see in terms of operating income. And then when you go below operating income and as the double effect – exchange rate situation in Argentina has been normalizing. We see significantly lower FX losses in Argentina. So that’s compensated in the net income line of the P&L.

So overall, I would say that Argentina was a headwind in terms of EBIT, partially compensated at the net income level because of the lower FX and lower taxes that we paid this quarter in Argentina. But obviously, we had an extraordinary quarter in Brazil and Mexico that I’m sure we’ll go in more detail later on the call.

Andrew Ruben: Great. Thanks, Martin.

Operator: One moment for our next question. Our next question comes from Bob Ford with Bank of America.

Bob Ford: Thank you very much. Happy anniversary and congratulations on a great quarter. Can you quantify the impact from the shift of Easter on the marketplace as well as Pago and Brazil and Mexico? And then in Argentina, what percent of GMV is done by sellers with less than 10,000 [indiscernible] per month? And how much would that – would the proposed tax cuts represent to those smaller sellers in terms of GMV. And what do you need before you’re willing to turn the key on interoperability in Argentina in terms of economics, security or any other issues? Thank you.

Martin de los Santos: Hi, Bob, it’s Martin here. Let me take the first part. I think you were asking about the effect of Easter on our volume. But as you know, we always see a reduced volume on those days because typically in our countries, it’s four consecutive holiday days. I mean this quarter in particular was a little bit stronger because last year Easter fell on Q2 and this year fell in Q1. So if you look at the numbers for March, there were affected by those four days. So there was a little bit of loss of volume which will eventually reverse next quarter because the opposite happens that will play in favor of April probably. So that’s in terms of the…

Bob Ford: 5% is that fair given the – is that what we should think about it?

Martin de los Santos: Let me sort them – the month-by-month numbers. But I’d say in March we probably lost five or six percentage points in that particular month. We’ll see what happens in April when we announce Q2.

Osvaldo Gimenez: Hi, Bob. Let me answer the part of the interoperate to question in Argentina. So as you know, we built a QR code network that is extremely successful in Argentina and a few years back we were required to interoperate in account-to-account transactions which we have been doing for a few years – two or three years now and that is working very well. And now what – there’s a mandate that we need to also interoperate for credit card transactions which are a minor part of our transactions in Argentina and the majority are account to account. So this is a minor part of that volume is credit card transactions. And the way we built the network is there was not a – when we built it a few years back there was not a standard for credit card transactions.

We do those transactions in a way with our process as online payment transactions. And so to be able to interoperate we need two things. On the one hand there’s a technical requirement that those transactions need to be tokenized for the network to be secure. And on the other hand is we need to agree on commercial terms with the counterparties which are likely to be – will be banks and other wallets. We are in that process. We have – already on our side we are able to process tokenized transactions, but we have not yet received those. Meanwhile, we are negotiating with the banks about, if there will be some sort of interchange or fee for the wallets involved in these interoperable transactions.

Martin de los Santos: Bob I think to answer your last question regarding Argentina, obviously we are observing and analyzing the reform that’s going on right now to see what the impact would be on our merchants. And then the number of merchants, I think you are referring to smaller merchants is a number that we don’t disclose, specifically. Thanks.

Bob Ford: Thank you, and again, congratulations.

Operator: One moment for our next question. Our next question comes from Marcelo Santos with JPMorgan.

Marcelo Santos: Hi. Good evening. Thanks for taking my question. I wanted to ask you about the profitability of Argentina. There was a very steep decline in the EBIT contribution of Argentina versus what you reported last year. I just wanted to understand, is this kind of a new ongoing level, a new level for Argentina given this new currency reality? Or was there something more like, one-off in this quarter that could be reversed in the next couple of quarters? Just because today Argentina is the way you disclose almost the same profitability as the rest, why it used to be much more profitable? So I just wanted to understand that. Thank you.

Martin de los Santos: Hi its Martin here, Marcelo. Thank you for your question. I think we mentioned before Argentina had some tough macro situation. The devaluation also didn’t help, because when you look at the revenue books of Argentina because of the devaluation by definition strong relative to the other countries. sAlso had some tough macro and demand issues that affected in particular the commerce side of the business. But then also Brazil and Mexico grew extraordinarily high — sorry high rate. Just to put it in perspective, the EBIT of Argentina decreased year-on-year as you mentioned, but the EBIT outside of Argentina grew by 185 percentage points. So almost double the EBIT coming from other countries. So as a result of that, you can see the current — the share of EBIT coming from Argentina now is at 19%, compared to a year ago that was about 60%.

So I think Argentina, again, the devaluation is behind us, that we see macro effect in Q1, and we’ll have to see how the rest of the year plays out. But again we think that in terms of the EBIT contribution, it’s a little bit normalized for the other reasons that I mentioned earlier today. That as we have the exchange rate higher than it used to be with the devaluation is more normalized, because of its lower FX losses, but on a net income level the variance is not so high, okay? So I will focus a lot more on net income as the main metric to evaluate the results of MercadoLibre. As we have been saying in the past, we were mentioning there was a little bit of a distortion in the EBIT because of the FX in Argentina now is behind. So I think in terms of the FX distortion, I could say that it’s something that is a new normal and now we have numbers that are more normalized in terms of EBIT results.

Marcelo Santos: Perfect. Thank you very much.

Operator: One moment for our next question. And your next question comes from Irma Sgarz with Goldman Sachs.

Irma Sgarz: Yes. Thanks for the opportunity. I’d like to ask about Meli Más and logistics. Thank you for the use for commentary in the shareholder letter. Now as you get further into the rollout of the Meli Más program. Where are you in terms of logistics network efficiency gains from the uplift to overall volume and units per shipment? And are the costs from greater free shipping subsidies that you provide there now more than offset or by those efficiencies? Or will that take more time as you adjust the flow of the network and the overall engagement still rises. I’d also be curious if there’s, any notable differences in take-up and engagement with that program between Brazil and Mexico. Thank you.

Martin de los Santos: Hi, Irm, its Martin, here. Yes, we have seen very good adoption of Meli Más both in terms of adopting the MELI Delivery Day for those members that, for those users are enrolled into the Meli Más program. But also we have seen incremental engagement and volume on our platform. So the results that we are expecting in terms of growth driven by Meli Más we are seeing them there. And we are super excited with those results. Obviously that increases a little bit the cost of our shipping operations. We estimate that year-on-year have the number here to share with you. It does put some pressure on margin. I think it adds 20 basis points as a percentage of GMV, of course, but it’s more than compensated value — incremental value that we’re generating through Meli Más.

And then in terms of your first part of the question optimization, we think we are still at very early stages of optimizing Meli Más. Remember Meli Más comes with MELI Delivery Day, which is day in a week that the user chooses to get their products. So as we continue to scale the Meli Más, we will be able to lower cost of shipping by optimizing the way we group certain products and the way we optimize the delivery cost of getting the products to our users. So it’s early stages, but very optimistic and very encouraged by the results of engagement and adoption so far.

Irma Sgarz: Yes. That’s very exciting. And may I just ask about also the reacceleration in TPV growth in Brazil. You highlighted new devices and we know that you’ve been shifting up a market, but I was hoping to just get a bit more detail on the drivers of this acceleration and the direction of the incremental margin that comes attached to the revenues on this? Thanks.

Osvaldo Gimenez: Hi, Irma. So there were two components to the acceleration of TPV in Brazil. I would say the most relevant one, the more relevant one, is online payment. We have been able to, I think there are several quarters in a row now where we have been able to accelerate the growth of online payments in Brazil, mostly by adding several larger merchants, big merchants and increasing the share of wallet we do with them. And there are several drivers for this, but definitely better performance and better approval rates. We are very encouraged by how we see these operations continuing. And then on the point-of-sale business as we mentioned in prior calls, we have been changing a go-to-market strategy and that is having a good effect and we are seeing that business growing at an accelerated rate on a quarter-on-quarter basis. So both mostly online payments, but also to some degree the point-of-sale business are accelerating in Brazil.

Martin de los Santos: And just to complement that in terms of monetization as we disclosed on the investor presentation, you can see that we continue to increase the cross-selling of credit to our acquiring users. So that continues to improve the profitability of that business.

Irma Sgarz: Very helpful. Thank you.

Operator: [Operator Instructions] Our next question comes from Geoffrey Elliott with Autonomous.

Geoffrey Elliott: Hello. Thanks very much for taking the question. The change in Mercado Envios from agent to principal the accounting impacts of that are all very clear. So thank you for that. But from a business point of view what was the objective there? What does this mean in practice for the — what does it mean in practice on the business side? And why you’re doing it? Why you made this change in terms of conditions?

Ariel Szarfsztejn: Hey, Geoffrey this is Ariel here. So we see the process on the opposite. So over the last four or five years, we’ve been switching from operating purely with national post offices and carriers across Latin America into building our own logistics network. And basically that process has already occurred. So what we’ve done now is adjusted our terms and conditions bearing ourselves the responsibility for the execution, which is something we’ve been already doing. So there’s nothing new in terms of the way we operate. I think that process has occurred already and we are just now adjusting contractually and formally the way we’ve been operating for quite some time.

Geoffrey Elliott: Okay. So it reflects you taking the risk rather than a national postal service taking the risk?

Ariel Szarfsztejn: Say that again?

Geoffrey Elliott: So, essentially you’re taking the risk on the shipping rather than the national postal service in the different countries and that’s why you’ve made this change.

Ariel Szarfsztejn: We already had the risk. So this is what we’ve been doing since we launched our own last mile operation in 2019, since which have been taking over warehouses operations, our line costs, et cetera, et cetera. So, nothing new, no risk profile changes. Right now, it’s just formalizing something that has been happening already.

Martin de los Santos: I would say that, there’s no change operationally. There’s no incremental risk. This is just an accounting adjustment that we make. And it reflects better the way the business is running.

Geoffrey Elliott: Got it. Thank you.

Operator: One moment for our next question. Our next question comes from Neha Agarwala with HSBC.

Neha Agarwala: Hi. Congratulations on results, and thank you for taking my question. Just quickly on the credit business. We saw a continued decline in the 90-day NPL, but there was an increase in the early delinquency, which you mentioned is partly because of the shift in the mix of business cohorts. Could you please elaborate on that as to why the early delinquencies have increased? And what do you mean by a shift to riskier cohorts. Thank you so much.