Mercado Libre reported solid operational and financial performance for Q1 2024, particularly in Brazil and Mexico, with approximately 30% year-on-year GMV growth.
Advertising business and Mercado Pago showed strong performance, with the acquiring business growing at an accelerated rate in both Brazil and Mexico.
The company issued 1.5 million Mercado Pago credit cards during the quarter, and TPV reached $1.9 billion, a 133% increase from the previous year.
Despite challenges in Argentina, such as a weak macro environment and peso devaluation, overall performance remained strong.
Financial Results and Outlook
Consolidated revenues grew significantly, driven by exceptional performance in Brazil and Mexico, which offset headwinds in Argentina.
Income from operations and net income both saw year-on-year increases, with lower FX losses in Argentina partially offset by lower operational income in that country.
The company introduced reporting updates this quarter, with a broadly neutral impact on net income.
Strategic Milestones and Future Directions
2024 marks Mercado Libre’s 25th anniversary, emphasizing its role in democratizing commerce and financial services in Latin America.
The company highlighted its potential for continued growth in e-commerce and financial services, areas still ripe for disruption in Latin America.
Mercado Libre aims to leverage its extensive delivery network, assortment, and UX to drive further engagement and penetration in the e-commerce sector.
In fintech, Mercado Libre is positioned as a leading platform, thanks to its rich data ecosystem and low-cost structures. The company also highlighted its profitable acquiring business and ongoing innovation in financial products.
The introduction of Melimize aims to build the largest and most valued loyalty program in the region.
Mercado Libre emphasized its diversified revenue mix, financial discipline, and commitment to low-cost structures for sustainable profitability.
Commitment to Impact and Growth
Reflecting on the past 25 years, Mercado Libre is proud of its impact on entrepreneurship and financial inclusion but acknowledges its mission is far from complete.
Looking ahead, the company is confident in its future growth prospects, given the vast opportunities in e-commerce and financial services in Latin America.
Question and Answer
Argentina Business Performance and Cost Mismatch
Question
Can you elaborate on the factors contributing to the decline in EBIT for the Argentina business, despite a relatively modest decline in units sold?
Answer
The decline in EBIT for the Argentina business was primarily attributed to the country’s economic and currency devaluation, which resulted in a smaller business size and decreased demand.
Additionally, there was a cost mismatch due to inflation in shipping costs in Argentina, which put pressure on the P&L.
Impact of Easter and Interoperability in Argentina
Question
Can you quantify the impact of the shift of Easter on marketplace and Pago volumes in Brazil and Mexico, as well as the impact in Argentina? Additionally, what percentage of GMV in Argentina is generated by sellers with low sales volumes and how would proposed tax cuts impact them? Lastly, what are the requirements for implementing interoperability in Argentina?
Answer
The shift of Easter had a slight negative impact on volume in March, estimated to be around 5-6 percentage points, which is expected to reverse in April.
The specific percentage of GMV generated by low-volume sellers in Argentina is not disclosed, but the company is monitoring and analyzing the potential impact of proposed tax cuts on these sellers.
Regarding interoperability in Argentina, the company has already implemented it for account-to-account transactions and is currently working on the technical and commercial requirements for credit card transactions, which constitute a minor part of the volume.
Argentina Profitability and Exchange Rate Impact
Question
Is the steep decline in EBIT contribution from Argentina a new ongoing level, or were there one-off factors in this quarter that could be reversed in the future? Why is Argentina’s profitability now similar to other regions, while it used to be more profitable?
Answer
The decline in Argentina’s EBIT contribution is primarily due to the country’s macroeconomic challenges and demand issues, as well as the exceptional growth in Brazil and Mexico.
The devaluation in Argentina and its impact on revenue, combined with the outstanding FX losses, contributed to the EBIT decline.
The company anticipates a more normalized EBIT contribution from Argentina going forward, with a focus on net income as the primary metric for evaluating results.
Melimize Program and TPV Growth in Brazil
Question
Can you provide an update on the Melimize program’s impact on logistics network efficiency and overall costs, as well as any differences in adoption between Brazil and Mexico? Additionally, what were the drivers behind the reacceleration in TPV growth in Brazil?
Answer
The Melimize program has shown positive results in terms of adoption, engagement, and incremental platform volume.
While it has increased shipping costs by approximately 20 basis points as a percentage of GMV, the incremental volume generated through Melimize has more than compensated for this.
The company is still in the early stages of optimizing Melimize, and as it continues to scale, it expects to lower shipping costs by optimizing product grouping and delivery routes.
The reacceleration in TPV growth in Brazil was primarily driven by the accelerated growth in online payments, particularly from larger merchants, and the positive impact of the changed go-to-market strategy in the point-of-sale business.
Mercado Envios Accounting Change
Question
What was the objective of changing the accounting treatment of Mercado Envios from agent to principal, and what are the practical implications for the business? Does this reflect a shift in risk profile?
Answer
The company clarified that this change in accounting treatment actually reflects the completion of a process that has been ongoing for the past 4-5 years, where the company has been gradually transitioning from using national postal services to building its own logistics network.
This adjustment is purely a formal and contractual change, with no operational or risk profile implications, as the company has already been assuming the risk for shipping operations, including last-mile delivery.
Fintech NPLs and Average Interest Rates
Question
Can you elaborate on the increase in early delinquencies in the credit business, attributed to a shift in the mix of business cohorts, and why the average interest rate for the loan book has declined despite moving into riskier cohorts?
Answer
The increase in early delinquencies is attributed to the shift towards riskier cohorts, which is a deliberate strategy based on the company’s improved risk assessment models and the ability to price these loans with appropriate spreads.
The decline in average interest rates on the loan book is primarily due to the seasonality of Q1, which typically has lower collections compared to Q4, as well as the accelerated originations of other products that generate more provisions upfront.
Fintech Credit Business Outlook
Question
Has the outlook for the credit business changed in light of the potential for a “higher for longer” interest rate scenario in Brazil and Mexico?
Answer
The company’s strategy for the credit business remains unchanged, focusing on cautious growth and expanding the credit card portfolio in Brazil and Mexico.
While higher interest rates are a consideration, they are a relatively minor factor compared to the spreads the company earns, and the short maturity of its loans allows for rapid adjustment to changing interest rate environments.
Monetization of Logistics Services
Question
Is the company considering charging for logistics services in the future, given the consistent improvement in average delivery times and the accelerated penetration of fulfillment services?
Answer
The company acknowledges the long-term opportunity to increase monetization on its shipping infrastructure but currently remains focused on capturing efficiency gains and driving down costs, improving fulfillment penetration, and managing inflationary pressures.
While there is potential for future monetization, the company believes it is not the right time to implement such changes.
Credit Origination and Meli Delivery Days
Question
Can you provide more details on credit origination growth, including the impact of Argentina, and the rationale behind the Meli Delivery Days program? Is this program primarily intended to lower network stress or does it also generate cost savings?
Answer
The acceleration in credit origination is primarily driven by Brazil, where demand for loans has increased, while the company remains cautious in Argentina and sees stable growth in Mexico.
The Meli Delivery Days program has led to a significant share of shipments being delivered through slower methods, with a positive impact on costs due to increased consolidation of items and delivery routes.
Ad Penetration Rate and Seasonality
Question
Did the increase in ad penetration rate from 1.6% to 1.9% primarily result from the decline in GMV in Argentina, or was it driven by actual improvements in ad adoption?
Answer
The increase in ad penetration was not solely attributable to Argentina, as there was a consistent increase in penetration across all countries, with Mexico showing the highest growth.
The company highlighted strong performance in the ad business, with both penetration and revenues growing significantly, and no specific seasonality effects were mentioned.
Fintech Reporting Update and Mexico Strategy
Question
Can you explain the rationale behind the accounting reclassification in the fintech segment, and clarify the company’s strategy for the fintech business in Mexico, particularly in the banking sector?
Answer
The accounting reclassification reflects the evolution of Mercado Pago from a wallet to a digital banking business, with a focus on the time value of money and the recognition of interest income and cost of goods sold for float-related operations.
In Mexico, the company’s strategy is to become the largest fintech provider, offering a comprehensive range of products from acquiring and wallets to credit cards and remunerated accounts.
The company currently operates within the necessary licensing framework in Mexico but will evaluate potential future needs and make appropriate disclosures if any changes occur.
Argentina Revenue Growth and Gross Margin Compression
Question
Is the trend of FX-neutral revenue growth in Argentina lagging behind inflation expected to continue, or is this a new reality that investors should consider? Additionally, can you provide more details on the gross margin compression related to changes in shipping terms and conditions?
Answer
The company acknowledges the recent slowdown in Argentina’s revenue growth due to the economic recession and reduced consumer demand but highlights the marketplace’s resilience and the strong performance of the fintech business.
The company did not provide specific details on the gross margin compression related to changes in shipping terms and conditions but explained that it was due to higher rates and provided a normalization adjustment to facilitate understanding of the results.
