MercadoLibre, Inc. (NASDAQ:MELI) Q3 2023 Earnings Call Transcript

MercadoLibre, Inc. (NASDAQ:MELI) Q3 2023 Earnings Call Transcript November 1, 2023

Martin de los Santos: Hello, everyone. I am Martin de los Santos, MercadoLibre’s CFO. For those of you who haven’t met me, I have been at MELI since 2007. First as a Board member and since 2012 as a public management team. For the past seven years, I have led the credit business and the last August when I took the position of CFO. I look forward to meeting as many of you as possible in due course. I am pleased to report a strong set of results in my first quarter of CFO with a strong successful third quarter across geographies, 2023 continues to show an attractive combination of growth and profitability with a record in income from operations, with strong momentum across geographies in both commerce and fintech MELI’s revenues growth accelerated.

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Mexico was particularly strong with revenues growing above 60% year-on-year, while Brazil also posted a greater performance with around 40% growth. These two countries have again increased their contribution to our total revenues. This strong business growth combined with cost discipline led to OpEx and SG&A dilution as the business continues to scale. Income from operations more than doubled year-on-year for the fourth consecutive quarter with margins expanding once again. Brazil was the largest contributor to our profit growth, representing a significant portion of it. During Q3, in the commerce business, we saw acceleration in GMV and items sold growth in the three main geographies where we operate with higher items provider. This higher user engagement come from continued experience improvements, especially on the logistics front where we reached 48% of fulfillment penetration and offer better delivery promises, improving conversions and further development of categories to technology.

As a result, we have a record of 50 million buyers and market share gains, especially in Brazil and Mexico. Mercado Pago off-platform TPV accelerated in all main countries. We saw an increased number of users and higher engagement metrics as we position Mercado Pago as a comprehensive financial service provider. On the digital account, we are particularly excited about engagement with more people using the remunerated accounts and other asset management solutions in Brazil and Argentina and better NPS in Mexico from U.S. improvements. In payments, the highlight for Q3 has been online payment solutions represented strong growth across the region. The great business continues to perform within our expectations through very healthy spread levels.

As we saw NPLs improving, particularly in Brazil, we have accelerated originations in all of our products. During Q3, we issued over 1 million credit cards and surpassed $1 billion for the first time. As our underwriting models continue to improve, we can tap into new opportunities offering larger credit lines with longer durations with the best offers of consumers. Overall, in Q3, we achieved a combination of rapid growth, scale gains and margin improvements, showing the strength of our economic model. To deliver these results, we have invested in technology and that provides a world-class user experience and enables us to be more efficient in terms of our cost structure. This results give us confidence to continue investing in future growth opportunities.

And now let me get back to Richard with business news.

Richard Cathcart: During Q3, MercadoLibre we launched our loyalty program as MELI Mas, an important step to enhance our loyalty value proposition with a simpler structure, more compelling shipping benefits and premium video and audio content. With MELI Mas we now have a brand in which we can invest to raise awareness and increase engagement with MELI’s ecosystem. MELI Mas gives users access to a world-class content bundle. Free shipping above R$29 and 12 months with free music from Deezer amongst other perks. Our content bundle for MELI Mas users includes Disney Plus and Star Plus and special discounts to subscribe to HBO Max, Paramount Plus, and Lionsgate Plus. Through Deezer, users are able to access a complete library of audio content and music, a service that we think users will be able to enjoy on a day-to-day basis.

Users see the MELI Mas offering throughout our apps and website, where the value proposition becomes clear as they shop with us, with the MELI Mas logo clearly highlighted, building the brand of the loyalty program. The shipping benefits are key to the program. MELI Mas users get free shipping on millions of items above R$29, versus the standard free shipping threshold of R$79, if the product is in one of our fulfillment centers and chosen for delivery on the user’s MELI delivery day. As consumers look for products on MercadoLibre, they will see the MELI Mas logo on the products that are eligible and they can filter their search for MELI Mas items. As a new delivery option, loyalty users can choose a specific day of the week to receive all of their packages.

This solution enables us to sell and deliver lower value items with the great experience that MELI is known for, whilst maintaining cost discipline in our P&L. Users still have the option for same and next day delivery if they want their item delivered quickly, if they are willing to pay for shipping on items below the free shipping threshold, or for free for items above the threshold. To access all of these benefits, users can subscribe or earn their way in organically by engaging with MELI’s ecosystem. Subscribing is quick and easy, and users can choose between a credit card, automatic charge from their MercadoLibre account, or a monthly invoice. So the subscription is accessible for different types of users. We’re able to offer buyers the full benefits bundle for just the equivalent of two to three paid shipping charges.

For users who earn points by shopping with MercadoLibre to get the MELI Mas membership, our credit card offers double points, enabling users to reach the loyalty status more quickly. In August, we launched a big marketing campaign to raise awareness of the program. And initial results give us confidence that MELI Mas complements our value proposition, bringing extensive benefits to even more MercadoLibre users. We’re confident in the program’s long-term potential because, as always, at MercadoLibre, the best is yet to come.

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Q&A Session

Operator: [Operator Instructions] And our first question this evening comes from Andrew Ruben from Morgan Stanley. Andrew, your line is open. Please go ahead.

Andrew Ruben: Hi. Thanks very much for the question and welcome again, Martin. Perhaps, Marcos taking advantage of your joining today. It’s been a period of strength for the business. We’ve seen a lot of past year’s investments flowing through to results. So as you look from here, say, over the next three to five years, I’d be curious to hear what the opportunities you see for MELI that you’re personally most excited about still. Thank you.

Marcos Galperin: Hi, Andrew. How are you? Good to be here. Yes, we are really happy with the way the business has been evolving last 24 months, at least, really growing very nicely, gaining market share and lately also gaining scale and increasing margins. As you know, we don’t guide, but there are many exciting things going on, particularly, obviously, AI. That hopefully will enable us to provide our users a better experience, enable us to launch innovative ideas, and also scale and gain efficiencies, whether it is in customer service, or whether it is in fraud prevention or whether it is in the way our developers, 15,000 developers, go about developing and performing quality control, et cetera. So obviously, looking forward for the next three years, I think that’s a key thing to look into.

Andrew Ruben: Thanks.

Operator: Our next question comes from Irma Sgarz of Goldman Sachs. Please go ahead.

Irma Sgarz: Yes, hi. Thanks for taking my question. Congratulations on the results. Marcos, also taking advantage of you joining the call. If you’re looking at the KPIs that determine compensation across the exact team or leadership team, how do you think these will evolve from here, again, thinking maybe over a multiple year basis? And asking the same question maybe in a slightly different way, are there any incrementally new KPIs to watch for as you go into this next phase of growth and investment or the Board feel should gain maybe perhaps more important to incentivize the right amount of investment versus risk taking?

Marcos Galperin: So, obviously, we try to compensate our – myself and the key employees based on long-term results, not in quarterly or even yearly – actually, our long-term retention program is a six-year program. And, obviously, we are in a very dynamic environment and a very dynamic business. If you look at MercadoLibre six years ago, both in terms of scale but also in the scope of things that we do and where we are today, extremely different companies. And I expect that to be the case in the next six years, whether it is in fintech that we are moving into, insurance that is already a business that has gained relevance and scale, whether it is assets under management that is growing so strongly across all of our geographies, whether it’s our credit card business that didn’t exist a few years ago and it’s a very sizable business, our overall credit business.

So, obviously, and there are new businesses that are coming along and that we expect them to gain scale and scope. And as they do, obviously, they will have a an impact in our results and in our compensation and in the KPIs, whether it is Mercado Play, which is our advertising supported streaming operation or whether it’s Clips, which is our short videos launch, both of which are really gaining, really nice traction. So, obviously, there are many things that we’re doing. And as they gain scale, they become important in terms of KPIs and also in terms of results and compensation. I don’t know if that answers your question, Irma.

Irma Sgarz: Yes. I think that partly answer that. Thank you.

Marcos Galperin: Thank you.

Operator: Standby for our next question. And our next question comes from Marcelo Santos with JPMorgan. Marcelo, your line is open. Please go ahead.

Marcelo Santos: Hi, good evening. Thanks for taking my question. I wanted to discuss a bit the profitability and margin. It was a very strong print that you had this quarter, above the previous one. And in the previous one, you were indicating that you might give some back to reinvest in growth. But actually things improved from the previous quarter. So I wanted to understand what happened so that the improvement came? And how do you see this trade-off going forward? There’s something new element that allowed the trade-off not to happen and you to grow and have margins at the same time. I just wanted to touch on this point.

Martin de los Santos: Thank you, Marcelo. It’s Martin here. Yes. In fact, we did have a great quarter in terms of profitability, reaching 18% EBITDA margin coming from last quarter of 16%. I would say that most of the businesses and countries performed extremely well during the quarter, particularly 3P marketplace that was the biggest contributor to margin improvements, but also the acquiring business, credit business, as well as the advertising business, in that particular order, also contributed to margin improvement. We look at by country-by-country, most of the improvement come from Brazil, where we improved 12 percentage points percentage points year-on-year, and Mexico six percentage points year-on-year. And also, we are gaining scale by growing as we did, we gained significant scale and were able to dilute part of our costs, which we obviously manage with a lot of discipline.

Having said that, we have been investing behind our business, which is the main goal. We think that we are in — we operate in an industry where we have a lot of investment opportunities that we need to make sure that we continue to look at the long-term prospects of the business. So we’ll continue to invest in logistics where we increased 6 percentage points fulfillment penetration. We also, in this particular quarter, as we launched MELI Mas, we invested behind the brand to promote the new loyalty program. We continue to invest in smaller countries like Chile and Colombia. We have a team of 15,000 developers that continue to build our product and we’re investing on our own product. So again, we are managing the business not to a particular target — margin target, but we’re managing for the long term.

But this quarter was a very good quarter, not only because we improved the margins, but also because we grew, gained market share, in particular Brazil and Mexico.

Marcelo Santos: Okay. Thank you very much.

Operator: Standby for our next question. And the next question comes from Maria Clara Infantozzi with Itau BBA. Maria Clara, your line is open. Please go ahead.

Maria Clara Infantozzi: I’d like to start a bit about the credit business in Brazil. You mentioned that you just accelerated the penetration in the longer duration consumer products here. Can you please elaborate on that? Should we expect a shift in MELI’s credit concession strategy in Brazil? And so far, how have you been receiving the evolution of the credit quality of those new cohorts, please?

Osvaldo Gimenez: Hi, Maria. Yes as we mentioned, saw an increase in the spreads we are seeing in Brazil and, therefore, felt confident to increase the pace of origination in our consumer business there. And we are — so far, we’re happy with the results we are seeing, and we continue to accelerate the pace of originations. And we have also increased the pace of issuing credit cards in Brazil. For the same reason, we are encouraged by the results we are seeing and how every time we create royal we have better, better credit scoring and solutions.