MercadoLibre, Inc. (MELI) Q4 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to MercadoLibre Fourth Quarter 2014 Earnings Conference Call. At this time, all participants 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 call is being recorded. At this time, I would like to hand the conference over to Mr. Martin de los Santos. Sir, you may begin.

Hello, everyone, and welcome to the MercadoLibre earnings conference call for the quarter-ended December 31, 2014. I am Martin de los Santos, VP of Finance and Head of Investor Relations for MercadoLibre. Our senior management presenting today is, Pedro Arnt, Chief Financial Officer. Additionally, Marcos Galperín, Chief Executive Officer; and Osvaldo Giménez, Executive Vice President of Payments will be available during today’s Q&A session. This conference call is also being broadcast over the internet, and is available through the Investor Relations section of our website. I remind you that management may make forward-looking statements relating to such matters as continued growth prospects for the company, industry trends and product and technology initiatives. These statements are based on currently available information and our current assumptions, expectations and projections about future events. While we believe that our assumptions, expectations and projections are reasonable in view of the currently available information, you are cautioned not to place undue reliance on those forward-looking statements. Our actual results may differ materially from those discussed in this call, for a variety of reasons, including those described in the forward-looking statements and Risk Factors sections of our 10-K and other filings with the Securities and Exchange Commission, which are available on our Investor Relations website. Finally, I would like to remind you that during the course of this conference call, we may discuss some non-GAAP measures. A reconciliation of these measures to the nearest comparable GAAP measures can be found on our fourth quarter 2014 earnings press release available on our Investor Relations website. Now, let me turn the call over to Pedro.

Thanks Martin. Good afternoon, everyone, and welcome to our fourth quarter and fiscal year 2014 earnings call. As we close out fiscal 2014 and report fourth quarter earnings, I’d like to start by once again outlining the sizable business opportunity that the digital landscape in Latin America represents for our company. As MELI continues to perform, both, financially and operationally, leading or exceeding our key performance indicators, we do so void as a way in which e-commerce continues to develop throughout our region. According to Forrester Research, many of the large markets where we operate grew at about 20% in dollars in this past year and our forecast to sustain similar levels of growth over the next five years. That level of compounded growth rapidly scales into a sizable addressable market for e-commerce throughout Latin America in the near future. Moreover, as shown by those numbers, e-commerce growth remains strong both, short and long-term, thus generating not only the appropriate tailwinds that explain the results I will walk you through now, but more importantly, sustained new opportunities for us to pursue, always as an industry that shows healthy signs and ample room to expand and to have many profitable years ahead. Secular trends such as the adoption of mobile internet, increasing demand for online financial services, growing interest on the part of traditional retailers and brands to find technology partners to aid them in their strategies and increased consumer familiarity and preference for shopping online, all advanced the cause further and they’re all common seen trends, which deal with the growth in the region I am referring to. And as an early-mover in Latin America, we remain the leading brand and the premier e-commerce destination within the markets that we serve, positioning us incredibly well to capture significant portions of this multi-pronged opportunity. As such, we are excited that our company is already benefiting from these secular trends and continues to perform and grow at positive levels, and we are even more excited about the opportunities that lie ahead in 2015 and beyond. Before going into detail on the quarter, I’d like to quickly mention a few major highlights for 2014 overall that underscore how the market potential I just referenced has translated into strong business results for the company. Registered users surpassed 120 million by end of the year 2014. For the first time, our total units sold in one year crossed the 100 million mark, driving $7 billion of gross merchandize volume. Total payment transactions surpassed $46 million, leading to total payment volume above $3.5 billion, which amounts to half of the gross merchandize volume transacted on our platform. Items shipped through MercadoEnvios reached $15 million. All of these effects translated to a top line that, for the first time, exceeded $0.5 billion, experiencing local currency growth of 81% year-over-year, or 54% year-over-year excluding our Venezuelan operations. This success points to the sustained momentum of our business and to the success we are having in transforming our marketplace to meet the increasing sophistication and needs of our users around liquidity, service, reliability and mobility. More specifically as we have been making advances in enhancing the quality, a number of services we offer our growing user base in the areas of payments, shipping, logistics and advertising, our users are quickly adopting these solutions at an increasing pace, confirming that we are pushing our ecosystem in the right direction. With that in mind, let's take a look at how we ended 2014 with positive momentum in the fourth quarter that carries over into 2015. These upcoming key performance indicators represent quarterly results versus the same prior-year period. Registered users were up 22% now at 120.9 million, adding 5.7 million new users during the period. Successful items grew 27%, reaching 29 million items sold. Gross merchandize volume grew 85% in local currencies, reaching US$1.8 billion. Total payment transactions grew 58% to $14.2 million. Total payment volume grew 107% in local currencies to $1.1 billion. Revenue growth, in local currencies, was 109% year-on-year. Excluding our Venezuelan operations, revenue growth in local currencies came in at 70% year-on-year. Despite currency devaluations, revenues in U.S. dollars grew 20% year-over-year. And excluding our Venezuelan operations, revenues in U.S. dollars, grew 40% year-over-year. Such strong growth, despite tough macro conditions in most of the region, reinforces the continued success of our enhanced marketplace model. We are confident that our focus on aggressively promoting transactions that use at least one of our value-added services is resonating with our users, who think of our ecosystem as the de facto means of participating in e-commerce in a safe and trusted manner. As a consequence of this, we exceeded advances in the adoption of enhanced marketplace features in larger markets with payments, shipping and financing solutions making significant strides in Brazil, Argentina, and more recently, Mexico. We have also invested more aggressively in marketing, given our increased confidence in the optimized experience we can offer users and the trends we are seeing in longer term customer value. During the fourth quarter, we saw the positive effects of increased marketing spend on both, customer acquisition and engagement from existing customers, improvements, which have had an immediate impact on our top line results. We also continue to maintain our dedication to product development, since we are a technology company first and foremost. In that spirit, in Q4, we purchased BVision, a 131% Argentine software solutions provider focused on software development services in cloud and mobile, as well as business services. This welcome addition grows our development headcount over 25% by adding a talented additional pool of engineers. Now, let's take a look at some of our strategic initiatives and how they had advanced during the quarter. As I mentioned earlier, our vision of an enhanced marketplace is coming to fruition, especially in our largest, not to mention most competitive market, Brazil. Our initiatives around payments, shipping, user experience and customer experience are all paying up, helping to drive major growth across the platform. Payments penetration on the MercadoLibre platform continues to see significant growth, with Brazil leading the way with MercadoPago accounting for nearly 80% of all GMV in that market. That’s a 30 percentage point jump year-over-year, and 7 percentage point increase since the third quarter of 2014. Continued growth of payments penetration on our platform was thanks to a number of factors, perhaps none more important than the success of our interest-free financing initiative. As a reminder, this initiative consists of a new interest-free listing type that we began to offer earlier this year. The response has been overwhelmingly positive from both, sellers and buyers, given that Brazilian consumers have become increasingly accustomed to interest-free financing in the world of offline retail. During the fourth quarter, this new interest-free listing type already represented 18% of our listings, and one-third of all growth merchandize volume in Brazil, demonstrating its high adoption and conversion rates. We have been so pleased with the success of this format and its ability to drive MercadoPago adoption, that during the last quarter, we launched the same listing type in Mexico. Also driving MercadoPago adoption in Brazil has been an increase in the number of listings required to use it to make a purchase. As you recall, during the third quarter, we required that all items listed above R$500 be paid for using MercadoPago, and we continue to see the positive effects of this policy during the fourth quarter. This requirement in turn helps guarantee a safe, seamless and more efficient transaction for buyers and sellers of these higher ticket items. Another key component of our enhanced marketplace is our shipping solution, MercadoEnvios, which continues to grow at an incredibly faster pace, demonstrating how this service, combined with MercadoPago, helps a truly differentiated buying and selling experience in our major markets. In the fourth quarter, MercadoEnvios accounted for 35% of items sold on our platform in Brazil and 14% in Argentina. We are pleased to report that during the fourth quarter, we launched Envios in Mexico and that it is already gaining traction. The success of MercadoEnvios also helps drive MercadoPago penetration on our platform, given that it is the only available way in which an item can be paid for through MercadoPago and shipped through MercadoEnvios. Therefore, users elect to pay through MercadoPago in order to take advantage of the convenient transparency and lower prices offered by MercadoEnvios. With both of these services, we are eliminating friction and improving the user experience for both, buyers and sellers. We also continue to enhance our marketplace by improving vertical experiences for our users across category like fashion and auto parts, increasing diversification of product mix away from consumer electronics. Among those vertical experiences, we also include our classifieds pages, which remain an important part of our business and a major driver to traffic to our site. We are also pleased to report that another important component of the enhanced marketplace we are building, our official stores initiative continued to grow at a fast pace, enhancing the selection of quality products on our platform, as well as the MercadoLibre brand. By the end of the fourth quarter, we had 545 active official stores across seven different countries. While these stores currently account for a small portion of our GMV, their success is proving the value of MercadoLibre as a sales and distribution channel for other large retailers and brands, as we continue to prioritize and support such sellers on our platform. A final component of the enhanced marketplace is a differentiated customer service experience. With our investments and efforts in this area, we once again saw NPS rise and our contact rate fall during the fourth quarter, both to record levels. With payments, shipping, vertical experiences, official stores and best-in-class customer service, our enhanced marketplace combines the user experience of a third-party online retailer, with the price and selection of a marketplace business. We look forward to continuing to build out this enhanced marketplace in Brazil, Argentina and Mexico, while expanding these features to other markets in which we operate. Now, let's take a look at some of our other initiatives beyond the enhanced marketplace. From a technology standpoint, we continue to see positive momentum as we transitioned from a desktop-centric to a multiplatform company, with greater emphasis on mobile and tablet usage. These days, fewer than half of our users access the site only through desktop. This is a promising trend, as conversion is higher for users who access MercadoLibre through more than one platform. Mobile continues to penetrate our platform and bring new users. Looking at more than just the numbers, we have made significant strides towards being a successful mobile company, equipping all of our development teams with mobile developers during the past quarter. Included in this focus on mobile is MercadoPago. During the quarter, we took several big steps forward with new initiatives in the mobile payment space, including our MercadoPago digital wallet mobile app, an in-app SDK that allows native apps to charge users through MercadoPago and the pilot of our mobile POS solution in Brazil, similar to credit card processing and business solutions available in the U.S. Innovation from MercadoPago was not limited to mobile however. During the quarter, we also launched a new platform, in which, MercadoPago is seamlessly integrated with other e-commerce sites. In other words, MercadoPago processes the payment, but the user never realizes it. We also continued to grow our off-platform payments processing businesses by continuing to onboard large clients, such as Sony Store and AliExpress in Mexico. In addition to successfully executing across all of our major strategic initiatives, we drove growth in the fourth quarter through more traditional routes. Pricing adjustments in Brazil, Argentina and Chile led to better monetization, as we capture some of the added value we are generating for our sellers. We also helped drive Q4 growth through successful execution of Black Friday and Cyber Monday sales, working with large retailers to offer promotions across the site. Finally, our advertising business experienced high growth, thanks to great results from the new ad format we have called the product ads. These ads are more contextual and have more interesting content for users browsing the site, serving as a direct product listing for advertisers that lead to better conversion and therefore better monetization for MercadoLibre. That wraps up my review of our strategic initiatives. With that, let's take a look at our consolidated financial highlights for the fourth quarter. Let me remind you that our year-over-year results continue to be affected by the devaluations of the Venezuelan currency during Q2 ’14. Due to this, I will call out all results on an as-reported consolidated basis in local currencies, so as to exclude the impact of foreign exchange fluctuations and also excluding our Venezuelan operations. Net revenues were $161.4 million, accelerating to 109% growth in local currencies, with 20% growth in U.S. dollars. Excluding Venezuela, net revenues grew 70% in local currencies and 40% in U.S. dollars. Income from operations was $45.2 million, down 13% in U.S. dollars year-over-year, but increasing 107% in local currencies, and 4% in local currencies excluding Venezuela. Net income before income and asset tax expense was $50 million, down 10% year-over-year in U.S. dollars, but growing 105% in local currencies and 8% in local currencies excluding Venezuela. Net income was $34.2 million, falling 16% year-over-year in U.S. dollars, growing 76% in local currencies, and falling 7% in local currencies excluding Venezuela, resulting in earnings per share of $0.76. Taking a look at our top line. Total revenues saw year-on-year acceleration in local currencies, while sustaining the growth rates delivered in prior quarters in U.S. dollars despite currency headwinds. Marketplace revenues accelerated to 150% growth year-over-year in constant dollars due to improved monetization, higher local currency ASDs [ph] in some markets and an acceleration in items sold. Excluding Venezuela, marketplace revenues also accelerated, growing 60% year-over-year. Brazil, in particular, posted strong growth in underlying metrics, accelerating items sold growth to its highest level in the past two years, a year-on-year growth of 33% versus 29% in the third quarter, driving Brazil marketplace revenue growth of 46% in Brazilian reals. Likewise, non-marketplace revenues also experienced some of its strongest growth in the last couple of years, accelerating in both, U.S. dollars and constant currencies, for the third consecutive quarter. This growth was driven by a number of factors, including, financing revenues accelerating the local currency growth north of 90% year-on-year, driven largely by our new interest-free financing listing type in Brazil. MercadoPago processing revenues, which posted close to 60% year-on-year growth in local currencies, thanks to a greater number of clients on-boarded and increased usage of MercadoPago in existing off-platform clients. Particularly strong growth in advertising revenues, classified revenues, which accelerated to 53% year-on-year growth in local currencies, including our recent acquisition of Portalinmobiliario in Chile and Mexico and revenues from MercadoEnvios, our shipping solution. As a consequence of the strong marketplace and non-marketplace revenue growth I just outlined, total revenues showed the strongest year-over-year constant dollar growth for the quarter in several years. Total revenues grew 109% in constant dollars and 70% in constant dollars, excluding Venezuela. In dollar terms, much of this growth was offset by currency devaluations, with total revenue growth in U.S. dollars remaining flat at 20% year-over-year and accelerating slightly to 40% year-over-year, excluding Venezuela. Total revenue local currency growth was strong across all our major markets, reaching 61% for Brazil, 97% for Argentina, 21% for Mexico and 253% in Venezuela. Before I walk you through the rest of our P&L, I’d like to remind you that foreign exchanges drive margin changes. These effects were particularly prominent during the fourth quarter, especially due to the strong devaluation of Venezuela, as well as devaluations across all of the other currencies in which we operate. In fact, EBIT margin would have remained almost the same year-over-year if measured in constant currencies. With that clarification and moving down our P&L, gross profit grew 16% year-over-year in the fourth quarter to $103.7 million. Gross profit margin was 70.5% of revenues versus 73.1% in the fourth quarter of 2013 and 70.7% in the third quarter of 2014. Lower gross margins year-over-year were driven primarily by 194 basis points contraction, primarily related to tough comps in sales tax for our Brazilian operations, since last year we were benefiting from changes in tax planning strategies that drove efficiencies in this line item. Additionally, another 162 basis points of gross margin contraction relates to collection fees for MercadoPago, as payment volume continues to show strong growth, both, on and off our platform. These effects were somewhat offset by 65 basis points of scale in customer support and 20 basis points in site operations. Operating expenses grew 48% year-over-year reaching $68.5 million, representing 42.4% of revenues versus 34.4% in the same quarter last year, and 38.8% in the third quarter. Several effects compounded to drive such a big difference in OpEx margins, including the major devaluation of Venezuela, tough comps from the year before and an increase in long-term retention plan compensation due to the recent positive performance of our stock price. Let me break down OpEx for you. Sales and marketing grew 44% year-over-year with $33.4 million or 20.7% of revenues versus 17.2% for the same period last year and 19.9% last quarter. This 349 basis point contraction in margin year-over-year is due primarily to 389 basis points of marketing expenses as we focus more aggressively on customer acquisition, given our increased confidence in lifetime value of our users and our shifting focus towards lower ROI mobile and special events promotional marketing activities. It’s worth noting, that in 2014, our marketing costs were especially weighted towards the fourth quarter and distributed less evenly and across the entire year than they were during 2013. On a full-year basis, the contraction in these marketing costs was only 102 basis points of margin. We also experienced an 84 basis point margin contraction in costs related to our buyer protection program, as we offer buyers increased coverage on their purchases as one of our fundamental trust-building and seller retention tools. All of these effects were partially offset primarily by an improvement of 98 basis points in charge-backs, thanks to improved results from our fraud prevention efforts. Furthermore, we experienced a 51 basis point improvement in bad debt expenses, aided by the penetration of payments throughout our platform. Product development expenses grew 66% year-over-year to $16 million, representing 9.9% of revenue during the fourth quarter versus 7.2% in the same period last year and 9.2% in the third quarter of 2014. Contraction in product development is largely attributable to a contraction of 173 basis points of margin coming from salaries and wages, as we continue to hire talent for our engineering pool, having organically grown the number of engineers by nearly 60% last year. Another 75 basis points of margin contraction are attributable to our long-term retention plan compensation. In addition to salaries and wages, there were 91 basis points of contraction related to technology consulting and third-party technology-related services. General and administrative expenses grew 41% year-over-year to $19.1 million, representing 11.8% of revenues versus 10% a year ago and 9.7% in the third quarter of 2014. This growth was almost entirely attributable to salaries and wages, where we had 141 basis points of margin contraction, which were due to long-term retention plan increments as our stock appreciated from approximately $105 to $128 over the accountable period. As a result of all this, operating income for the quarter was $45.2 million or 28% of revenues versus 38.7% in the fourth quarter in 2013 and 31.9% in the third quarter of 2014. The low operating income we saw $4.9 million in financial expenses, a majority of those corresponding to interest approval on our convertible bond. Further down, interest income was $4.4 million, up 90% year-on-year, due to higher interest rates on larger invested amounts, which came from proceeds from our convertible bond and our increased store balance in MercadoPago. Our forex line is positive $5.3 million due to the appreciation of U.S. dollar balances held by our subsidiaries, the majority of which took place in Brazil. Net income before taxes totaled $50 million, down 10% year-over-year and representing 31% of revenues versus 41.5% during the fourth quarter of last year. Income tax expense was $15.8 million in the fourth quarter, representing a blended tax rate of 31.6%, up from 26.8% in the fourth quarter of last year. The year-on-year increase results mainly from a higher tax rate in Argentina due to the expiration of the Software Development Tax Law in September. I’d like to note that we’re booking the quarter as if the software law is not applied to us, though we have presented our applications for similar benefits under the new law. At this moment, ourselves, as well as a majority of the software industry in Argentina, are in conversations with the government to clarify whether the tax holiday will apply retroactively, if and when granted. If that is the case, we will recognize those benefits during future quarters. The year-over-year change in the tax rate was also affected by our convertible bonds financial expenses, which are only deductible in the U.S., where we do not generate, as of today, significant revenues, as well, an increase in the Venezuelan tax rates [ph]. Net income after all this, came in at $34.2 million or 21.2% of revenues versus 30.3% during the fourth quarter of 2013. This resulted in basic net income per common share of $0.76. Purchases of property and equipment, intangible assets and payments for businesses acquired, net of cash acquired, during the quarter totaled $19.1 million. For the period ended December 31, 2014, free cash flow, defined as cash from operating activities less payment from the acquisition of property and equipment, intangible assets and acquired businesses net of cash acquired, was $39.4 million versus negative $18.7 million in the same period last year. Cash, short-term investments and long-term investments at the end of the quarter totaled $577.2 million. Wrapping up, we declared our quarterly dividend of $4.5 million or $0.103 per share payable on April 15, 2015 to shareholders of record as of the close of business on March 31, 2015. That concludes my financial review of the fourth quarter. But before wrapping up, I’d like to provide a brief update on the current foreign exchange situation in Venezuela. Earlier this month, the Venezuelan government announced a unification of the SICAD 1 and SICAD 2 foreign exchange systems into SICAD, with an initial public foreign exchange price of 12 bolivares per U.S. dollar. In addition, on February 10, it created the Sistema Marginal de Divisas or SIMADI, a new foreign exchange market, whose rate is published daily by the Venezuelan Central Bank. The first foreign exchange rate was published on February 12 at 107 bolivares per U.S. dollar. At this moment, we are in the process of evaluating the implications of these new regulations on our results and the financial position of our Venezuelan segment during the first quarter of 2015 and beyond. In order to assist investors in understanding the impact of the Venezuelan devaluation to these rates, in our 10-K, we will include a foreign currency sensitivity analysis that considers an exchange rate of 170 bolivares per U.S. dollar for the full-year 2014. In conclusion, looking back at a successful year, we remain committed to executing on the same strategy that we’ve laid out over the past few quarters and that we already see play out in early 2015, including a focus on the key elements of our enhanced marketplace, payments, financing, shipping, vertical experiences, official stores and exceptional customer service. Likewise, we will continue to drive payments and financing outside of our platform, as well as accelerate our transition from desktop to a multiplatform focus. Looking ahead to 2015 and beyond, there is so much opportunity in the Latin American e-commerce space that is still untapped by and large. While benefiting from the tailwinds of e-commerce’s underlying drivers, we must continue to innovate and execute at a fast pace. While maintaining focus on our largest markets, we will also work to launch the full ecosystem of MercadoPago and MercadoEnvios in other markets. We must also take the necessary measures to bring more large retailers and brands onto our platform, providing back-end technology and middleware solutions to improve seller integrations and generate greater lock-in of key customers that is necessary to create a critical mass of e-commerce customers that we are looking for. In that spirit, we must continue to build out MercadoEnvios, using it to pave the way for future solutions in fulfillment. We must maintain our focus on acquiring and retaining buyers, balancing short-term profitability for long-term investments in brand loyalty, customer retention and market share gains, and we must continue to innovate in the payment space on, and especially, off our platform, with a special focus on mobile. Given the success of consumer financing to-date, we also must siege the greater opportunities to generate P&L impact in this space. And with that, I’d like to end today’s call by stating our continued confidence that MercadoLibre’s 2014 results across key financial performance and operational metrics are a reflection of the resiliency of demand for our enhanced marketplace solutions. Facilitating e-commerce throughout 12 Latin American countries, we remain the leading operator in these markets, and our core focus during this new year will continue to be guided by the strategic goals we have consistently communicated; driving payment and shipping solutions, increasing adoption of mobile commerce, attracting new brands and vendors, tailoring vertical solutions, placing customer experience at the forefront of it all, all this, while generating a developer’s ecosystem on top of MercadoLibre’s open platform. We trust that as we execute on these fronts, our company will be in great shape for many years to come. We’ll now take your questions.

Thank you. [Operator Instructions] And our first question comes from Gene Munster from Piper Jaffray. Your line is open. Please go ahead.

Good afternoon and congratulations. A couple of questions. First is, across the board it seems that all the initiatives cumulatively are having a profound impact on the business. And I’m curious as we start to look forward, I know you don’t give any guidance, but if we start to think about the March/June quarter, are there any things that’s kind of changed whether it’s political or macro that would lead you - lead us to believe that something is fractionally changed in the momentum in the business? And separately, can you talk a little bit more about the developers that you acquired, the BVision developers. What some of their areas of focus would be? Is it just kind of continuation of existing developments, or are they going to be focused on new areas? Thanks. Marcos Galperín: Hi Gene, this is Marcos. With respect to the first part of your question, no, we believe our model is very resilient to political changes or even macro changes. As you said, the model is performing very well across the board, despite the fact that there are very different political and economic conditions in the various countries in Latin America where we operate. So we believe that the secular trends, Pedro was mentioning in the prepared remarks, are occurring across the board throughout the region. And as far as we can continue to implement our enhanced marketplace with all the additional services that we are implementing, such as greater penetration of MercadoPago, financing, shipping, etcetera, we will continue to grow at healthy rates hopefully for many years to come. And perhaps, Pedro will give you some light on the second part of your question.

Hi Gene. So just a continuation I think of Marcos’s statement, the company we acquired brings with an engineering talent that we will now deploy on building out this enhanced marketplace vision. Hopefully it will give us greater clarity in rolling out some of these things to new countries, and also to be able to push the countries that already have payments, financing, shipping rolled out with new features and enhanced and improved technology on those services. So it just allows us to carry out the blueprint that we’re seeing, be very successful in Brazil and Argentina, and to a lesser extent Mexico to other markets, and accelerate in those three large markets.

Okay. And just I guess a follow-up to the first part of the question, maybe itself I’ll ask slightly a different way. Is there any reason to think that the momentum in the business will continue into the March quarter or the June quarter? Marcos Galperín: Well, as you suggested, we don’t give any guidance, but we will be happy to discuss about the Q1 in May of this year.

That’s all. Thank you. Marcos Galperín: Welcome.

Our next question comes from Ross Sandler from Deutsche Bank. Your line is open. Please go ahead.

Hi guys. Can we talk about the interest-free listings in Brazil? How much is that changed from - I think it was 0% in middle of 2014 up to 18% of listings. How would you impact on conversion rates having? And I know that’s not available for all listings in Brazil, but what percent I guess of the total listings, where do we cap out at in terms of penetration, how high can that 18% go? And then second question is around take rates. So Pedro from what you’ve explained the merchants are paying higher take rate now that you’ve rolled out these interest-free installments. So can you just walk us through how the unit economics work under the several hundred dollar purchase under the old model versus the interest-free model, and is this one-time uptick in take rate? When do we start to level out? Will that be in 3Q of 2015 when we lap the rollout of interest-free listings? Thanks. Osvaldo Giménez: Hi Ross, this is Osvaldo. Regarding the interest-free financing in Brazil during the fourth quarter, 18% of the listings had the option of refinancing and also represented 33% of the growth merchandize volume in Brazil. So the conversion was nearly twice the average for the Brazilian side. And both these numbers, the listing number and the GMV number, those are averages for the quarter. And since we saw a positive trend in the quarter, we would expect those numbers to be higher in the first quarter.

Great. And on the take rate piece, Ross, I think conceptually what we said is, we’ve - on a marginal basis, so on a per transaction basis, the overall take rates in the new financing system versus the old system are not dramatically different. We’ve tried to price them marginally similar. What has happened is that the adoption of financing has grown significantly because in the new system, the merchant is bearing that cost, not the buyer. And so adoption has been tremendous. It’s driven incremental volume on the marketplace. And a lot of these take rate gains are actually coming from volume increases in financing, and not different unit economics, which is the way we like to drive take rate, not so much through pricing but more through volume.

Okay, great. And I guess just we should lap through that, I guess, once the interest-free listings are at a steady state in terms of penetration, four quarters ahead it will level out again. Is that the right way to think about it?

So I think we need to see what the cadence of that adoption curve going forward is. It’s grown very nicely, but hard to predict going forward whether the amount of finance transactions could approach most of MercadoPago, only half of that. So tough to tell when the run room for growth begins to peter out. I think we’ll have to accompany that quarter-by-quarter. And then we’re also beginning to launch this out in other markets. They won't necessarily have as rapid adoption as Brazil, but there is opportunity to replicate at least part of this success in some other markets. So we’ll have to wait and see.

Great. Thanks guys.

Thank you. Our next question comes from Michel Morin from Morgan Stanley. Your line is open. Please go ahead.

Thank you. So Pedro, I just wanted to ask about the balance sheet a little bit. If I look at your cash and short-term investments, the total there I think is around $370 million. So it seems to have come down since the convertible bond issue to the tune of about $120 million. So I was wondering if you could parse out where that’s gone. I know there was an acquisition a few months ago and then this most recent one, I don’t know if that’s in these fourth quarter results, I believe it is, but I’m not sure how meaningful that might have been. And also on that acquisition, whether or not there is any other operating impact either on the cost or revenue side this quarter? And then secondly, on Brazil, very solid top line growth there, but when I look at things sequentially, I don’t see a significant move in contribution profit. So I don’t know if it’s a lot of the same line items that you walked us through in your prepared remarks that are really impacting Brazil more specifically, or if there is something else going on there may be in terms of shipping perhaps? Thank you.

So just on the first one on the balance sheet position. To give you a general sense in terms of M&A spend, the number has been - the BVision acquisition is not material at all. It’s actually very cost-efficient acquisition in terms of cost per engineer. The Portal acquisition early on in the year was in the range of $35 million. So what you’re seeing in terms of the delta in the cash position is actually more driven by the payments business, either because of just a short-term holding on to more receivables than prior period. Additionally, we are beginning to use some of our cash for MercadoPago working capital, which improves the profitability of the Pago business slightly. So you might see oscillations on a Q-on-Q basis on the cash position, but that’s primarily driven by the payments business. There is some incremental CapEx in terms of office spaces, but the majority of that delta is going to be the payments business, and either just a short-term weekly dislocation in how many receivables we’ve factored versus prior period, or a decision to in some countries hold onto small portion of the receivables, not discount them and not take that additional P&L impact from the discounting. The second question in terms of the cadence or the evolution in profitability for the segment. By and large, a lot of the drivers that explain the consolidated OpEx and COG movements apply very much to Brazil. So the tremendous success we’re seeing in payments in Brazil drives gross margin compression. Some of the gross margin compression is also driven by taxes on shipping and that’s very pertinent for Brazil. And then the biggest drivers in terms of compensation costs and marketing costs also apply for our Brazilian segment. So in general terms, what we explained for the consolidated margin evolution, most of that applies for Brazil.

Great. Thank you, Pedro. And if I can just follow-up on that first - your first answer. How much - if you can tell us how much of that cash and investments is in Venezuela and Argentina at this point?

Okay. So very quickly, Venezuela in terms of cash holdings, if we look at balance sheet, it’s going to be roughly in the $10 million range at the Q4 exchange rate. So it’s not a very significant cash holding, and MercadoPago is not very large in Venezuela. So in terms of funds payable to customers on the balance sheet is not very relevant there. In terms of Argentina, we don’t really hold retained earnings or corporate cash. The entirety is going to be funds payables to customers. We have about - we don’t disclose the number, but roughly half of funds payables to customers we have matched and localized in Argentina. I can try to get back to you with the specific number. I don’t want to - I want to make sure that there is disclosure around that. But it’s not going to be a significant portion of that number again, because we don’t hold any of our own retained earnings, and all we hold are funds payable to customers, which we want to have locally, so that we don’t have currency mismatch. So really that’s the money that belongs to Pago users that we carry the yield on, but that they can withdraw.

That makes sense. Okay. Thank you very much.

Thank you. Our next question comes from Marcelo Santos from JPMorgan. Your line is open. Please go ahead.

Hi, good afternoon, and thanks for taking my question. The first one would be about the tax holiday in Argentina. So I understand that the previous one is over and you made a filing for the new one. Is there - could you give any color like how it’s going for you and for the other companies, has anybody received any authorization, and what would be a reasonable timeframe to think about this? This is the first question. And the second question is about Mexico and shipping in zero interest. Looking at this two new features, and looking at the Mexican e-commerce environment, the consumer, how they behave, how do you think will be attractiveness of this two features versus it is in Brazil where people are very used to paying zero interest and shipping is well accepted? Those are my two questions.

Great. Marcelo, so thanks for the questions. Let me just take advantage and give the answer I was owing to Michel. There is about $30 million in Argentina which are funds payable to customers. So again, it’s a small portion of the overall cash position. The tax holiday in Argentina, and just one additional clarification there, part of the compression that we’re seeing in margin driven by salaries and wages in the quarter is driven by the fact that we’ve accounted for the quarter as if we will not be granted the renewal of the tax holiday. That’s about 100 basis points of the margin compression. So if we are to be granted retroactively the holiday, the margin structure would have been better this quarter. In terms of where company stand? Most companies have not received confirmation yet, so we stand with the majority of the software development companies. Some began to receive. And I think there is an intent on part of authority to start replying to those applications. Conversations continue to be fluid, but that’s probably as much as we can comment right now. Marcos Galperín: And Marcelo, this is Marcos. With respect to Mexico, shipping is very strong, early starts. We are there partnered with DHL that has a really good service, and we think that the potential is great, but we’re just starting. We’re very happy with the early traction. Osvaldo Giménez: And with regards to free interest in Mexico, I would say that, we just launched it towards the end of the quarter. So it’s still early to tell. I think we’re encouraged by the early results, but since penetration in Mexico is lower than it is in Brazil, on the one hand, the results will have a less impact in Brazil, but it should help us to increase the penetration of payments of MercadoPago in the marketplace in Mexico.

Okay. Thank you very much.

Thank you. Our next question comes from Stephen Ju from Credit Suisse. Your line is open. Please go ahead.

Hi guys. Congrats on the quarter. This is Nick on for Stephen. Just a quick question on the higher marketing investment. Is this mostly brand or direct response, and is it - could you kind of break down the mix of, is it more offline marketing or is it kind of mostly online stuff? Thanks.

Yes. So in general terms, there hasn’t been any significant change in the investment channels. So it’s similar to what we had been doing with incremental spend. What we have done more this year than in the past and it has been successful, both MercadoLibre but also the e-commerce industry as a whole, are more concentrated investments around special days like Cyber Monday or Black Friday or certain specific industry events. And a lot of those happen to come in the fourth quarter holiday season. So that’s been incremental spend versus other years. And then in terms of mobile advertising, as we continue to grow mobile as a percentage of the overall business, our marketing spend in mobile is also going up. Now that’s not entirely incremental. Some of that is simply shifting of the portfolio, but there is more spend in the mobile space where the ROI is somewhat different than in previous years. Other than those two data points, by and large, it’s same old - the vast majority of its performance and online. There weren’t any significant offline investments during the fourth quarter.

Thank you.

Thank you. We have a follow-up question from Michel Morin from Morgan Stanley. Your line is open. Please go ahead.

Yes, thanks for the follow-up. I was just wondering if you can comment a little bit about the competitive environment in Brazil in particular. I think we’ve been seeing a little bit more headlines around AliExpress and their gains in the market. So, just a little bit of an update on what you’re seeing there, also considering that some of the traditional competitors are trying to move into the marketplace space. Obviously you’re posting very, very strong results, but any anecdotal comments you’d make on that would be very helpful. Thank you. Marcos Galperín: So with respect to competition in Brazil, I would say, it continues to be a market with lots of participants and we believe it will continue to be like that for many more years. As always, we look at everyone, try to imitate the things that we like about our competitors, but mostly focus on our model and our business plan. So I wouldn’t like to focus on any one particular competitor, but I would just like to highlight that some of the players you mentioned are focused in cross-border trade. That is not a market that today we are focused. We do trading mostly - the majority of our transactions are buyers and sellers, both located within each one of the countries that we cover. Although we think and we believe that cross-border trade is a huge opportunity, and if it continues to be unregulated and goods are allowed to flow from China to Latin America, in those markets where that is a possibility, it’s obviously also a huge opportunity for us to onboard Chinese sellers onto our platform. So we see that as a big opportunity, but that is not a market that we are focused on right now. And with respect to the other players, as you mentioned, there are many - everybody seems to be - everybody seems to want to create a marketplace these days. We are very happy with the way our marketplace is performing and the growth rates we’re having, particularly in Brazil. And we just know that we will continue to have lots of competitors and we will just try to execute as best as we can in the coming years.

So if I may just to paraphrase I think the first part of your answer, so essentially someone like AliExpress right now, you don’t really view them as being a direct competitor? That may change over time, but as of right now, it’s not that relevant? Marcos Galperín: Right now we are not focused in having Chinese sellers list on our platform for Brazilian buyers. That is not a market that we are targeting. If we see that this is a market that is growing very rapidly, and if it continues to grow and it remains unregulated, obviously it’s an opportunity for us.

Okay, great. And if I may squeak in a quick one. I didn’t - maybe I missed it, but I didn’t see the percentage of revenues that was from marketplace. Pedro, I don’t know if that was in there somewhere, either overall or for the different regions? I know it will be in the K later.

Sorry, just one second and I’ll give you the exact number.

Thank you.

So marketplace is at roughly 65% and the non-marketplace revenues are at roughly 35%.

Great. Thank you very much.

Thank you. I am showing no further questions at this time.

Great. So thanks, everyone, and we look forward to giving you another update in a quarter and share with you the progress on our business.