Hello, everyone, and welcome to the MercadoLibre Earnings Conference Call for the quarter ended March 31, 2017. I am Federico Sandler, Head of Investor Relations for MercadoLibre. Our Senior Manager presenting today is Pedro Arnt, Chief Financial Officer. Additionally, Marcos Galperin, 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 broadcasted 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 under our current assumptions, expectations and projections of our future events. While we believe that our assumptions, expectations and projections are reasonable in view of the current available information, you are cautioned not to place undue reliance on these forward-looking statements. Our actual results may differ materially from those discussed in this call for a variety of reasons, including those described in the forward-looking statements and risk factors sections of our 10-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 those measures to the nearest comparable GAAP measures can be found on our first quarter 2017 earnings press release available on our Investor Relations website. Now, let me turn the call over to Pedro.

Thanks, Federico. Hello to everyone, and welcome to our first quarter conference call for 2017. We've kicked off the year with a strong first quarter sustaining the momentum from 2016, which was one of the best years in history. The consistent pace of execution this quarter is a direct reflection of our relentless drive to deliver disruptive technology solutions to our users across platforms, devices and countries where we operate. We remain focused on transforming commerce and financial services through product innovation, fostering entrepreneurship and delivering best in class user experiences. And thus, cementing our leadership position in technology, online payments and ecommerce throughout Latin America. We're excited to see how the business has continued to outperform market growth rates in a consistent manner, as we render the value proposition of our enhanced marketplace more complete in terms of quality, quantity and reach of value added services available both on and off our marketplaces. Before I dive into financial results, let's quickly take a look at some of the KPIs that underscore our strong performance during the first quarter of 2017. Units sold grew 38.6% year on year to $53.2 million. Maintaining the strong momentum in unit volumes, we observed all through the four quarters of last year. Gross merchandise volume reached $2.3 billion accelerating by 20 percentage points, sequentially, to 31% year on year in U.S. dollars. While on an FX neutral basis, gross merchandise volume accelerated for the third consecutive quarter to 61.4% year over year. Total payment volume grew 81.3% on an FX neutral basis, reaching $2.6 billion, while total payment transactions grew 60.1% to $44.1 million payments processed. All this led to solid revenue growth both on an FX neutral basis and in U.S. dollars, growing 78.3% and 73.8%, respectively. The latter is the fastest pace…

[Operator Instructions] Our first question comes from Robert Ford with Bank of America.

With respect to Mexico deceleration there, Pedro, can you talk a little bit about the margin pressure? And given the growth that you're seeing, how do you expect the business in Mexico to scale as we go forward?

Bob, so the focus right now is on continuing to deliver the service that we've been delivering to our users, continue to drive top line growth and sustain our leadership position and not focus so much on short-term margin. We're pretty convinced that if we continue to roll out the kind of services we're rolling out, that do generate margin pressure in the short term. These are mid- to long-term scale-sensitive services, particularly, shipping. And if we continue to grow the business, eventually, we'll be able to start focusing more on scaling and on margins. Right now, that's not where the focus is.

And you made some changes in terms of shipping, right?

So I think, right now, we haven't made any significant changes. We are obviously -- we're seeing very, very strong results of the shipping initiative. I would say, across the board in terms of customer satisfaction, in terms of driving acceleration, repeat usage. And so there is a lot of dynamism around what we're doing with shipping, operationally, in terms of pricing. So I think it's constantly in flux. There hasn't been anything significant over the last quarter that comes to mind right now. And -- but I think, you will continue to see us significantly involved and aggressive on the shipping front.

Our next question comes from Stephen Ju with Crédit Suisse.

This is Chris Ford on for Stephen. Two questions, if I may. Any further update on the rollout of free shipping in Brazil? And should we expect this rollout kind of gradually with certain higher-priced items coming first? And then secondarily, any high-level commentary on what you guys changed in the customer acquisition strategy in Mexico that was effective?

So we communicated to our community that we will start our free shipping program in Brazil in early May, so over the course of the next few weeks. And remember that, with shipping and this is what I was referring to before and that it's fluid and dynamic, we control a lot of the levers in terms of prices, at which you get free shipping, seller profiles, buyer profiles. So this is something that we can launch it one way and then see what kind of returns we're getting and how the business is performing. And it's something that we can dial up or down -- dial down levers according to what we think is best for the business and for our users. And just adding on to the previous answer, I think, also part of the way we're trying to manage the financial model, is not focusing too much on specific segment, profitability, but rather looking at the business as a whole and understanding what our consolidated financial models would look like. And then based on that being very aggressive investing in regions or in businesses that we think require faster pace of investment right now and maybe in other segments we will have more long-term investment approach and derive more margin for those short term. Second part of your question was customer acquisition strategy in Mexico. I would say that, as we've seen improving engagement and returning metrics from our users, I think, we're increasingly more comfortable investing more behind user acquisition, lifetime values are improving. And we're just more confident that long term health of newer cohorts that we're acquiring, look increasingly better. So I don't think that there necessarily has been a change in execution, but rather just incremental investment because we are able to feel comfortable about both mid to long term return of those new user cohorts.

Our next question comes from Deepak Mathivanan with Barclays.

Two questions from me. So first, it looks like listings for seller, if you can do the math is up like 40%. Is that because you're bringing in more high volume sellers recently over the last few quarters and bringing in more selection to the platform? What would you call out as a reason for that? Is it in any specific category? Is it across the board? And then second question on OpEx. The leverage in 1Q was pretty strong, seems like sales and marketing and then you called out, buyer protection cost savings into it. Is that something we can expect as a trend to continue for the rest of the year?

So on the selection front, I think it's a continuation of a trend that has been going on for quite some quarters now. As sellers are able to sell more on the platform, they grow increasingly comfortable, lifting more and more inventory. API integrations are becoming more and more frequent. So it's also -- sellers also are more efficiently uploading larger catalogs. And I think in overall, it's part of the virtuous cycle that you begin to generate when your demand metrics continue to grow as healthfully as ours have and supply will follow that. We also think it's part of strengthening the network effect of a marketplace business. So essentially, it's the continuation of a friendly business for quite some quarters now. And I think it's very positive. We believe that we continue to be by far, the deeper selection of inventory across Latin America online. And then in terms of margin going forward, as you know, we don't guide. And again, I think we're focused on delivering a healthy consolidated financial model with priority right now being placed on top line growth and continuing to drive scale gains and continuing to defend the leadership position we have in terms of GMV and size among e-commerce players in the region.

Our next question comes from Marcelo Santos from JP Morgan.

Two of those. First, just wonder if you could provide us some updates on the logistics front? How are you're cross-docking initiatives ramping-up? And the second question is just to explore a little bit better the Argentina situation. So just if you could explain a little bit more the drivers of the deceleration are, the buyers, a few not accepting that well to Pago [ph] adoption? Or is it more deceleration on financing front? So just some comment on there would be good.

So cross-docking still continues to be very important to us going forward. It's still small a portion of shipped units in most countries, Argentina is still the one that has the highest penetration of cross-docking. And that's about 1/5 of total shipped items. We're beginning to focus in Brazil and growing our number of cross-docking points. So hopefully, going forward, that will drive increased penetration of cross-docking, but it's still very small. And in Mexico, the focus is more on fulfillment by MercadoLibre and also on cross-docking, that's also a still relatively small but also trending very well. And it's, a lot of our focus over the next few years will be on scaling out those fulfillment and cross-docking initiatives that are still quite early stage. Argentina, I think when we look at the Argentine business, there are probably a few drivers behind it not reaccelerating. Argentina, we believe it's still growing at a healthy pace when you look at revenues, but it certainly has decelerated. In one area, in one aspect, Argentina continues to have some of the longest shipping delivery times. And so as we improve and focus more and more on the efficiency of our logistics, that could potentially be a catalyst for reacceleration. There have been changes on the financing front, driven by some changes in regulation that have also made us change how we offer financing. And that's probably also generated some negative demand elasticity. We think our eco-space [ph] is already something that's been a few quarters now and probably most users have become increasingly accustomed to that. So I think, we're attributing more of the current deceleration than the other 2 factors at this point.

Our next question comes from Irma Sgarz of Goldman Sachs.

Two questions. One a little bit more philosophical and one more short-term and practically oriented. Firstly, on the competitive mode, there has been little bit more noise or interest in the potential uptake of competition from both local as well as international entrance and it's something that you're already battling with in Mexico obviously, but that's obviously concern that something similar could be replicated in Brazil and in Argentina. Could you just talk a little bit without having to comment directly about these competitors or potential competitors? Could you just talk a little bit about how you see the competitive mode? What you see sort of as the three key areas? And I think you -- earlier you mentioned, it's big platform of deep inventory and sellers, obviously, this is networking effect but what else could you mention in terms of the key competitive drivers that you feel are really hard for any other company to replicate and where you're already seen that local competitors are struggling to sort of get into the business? And then second question. On the Brazil business, in terms of just an update on the situation with Correo [ph], I think this recent strike that may be impacting your operation. Can you just talk about them? Sort of how you're seeing this quarter shape up in terms of logistics and whether that's been any disruption in your Brazilian business?

Great. So let me get the short term one out of the way first. We haven't seen any significant impact from last week's strike. I think, it hasn't been prolonged enough to really disrupt being significantly. In terms of competition, I think, if we continue to focus on what we're doing and on many, many levers we still have to improve the user experience in our business. I think, we'll be in great shape, and we're seeing that in Mexico where regardless of what's happening. And at a competitive level, I think we've been investing in the right areas and executing quite well and we're seeing the results in many aspects. We do have a business that does have network externalities. So I think as we continue to scale that works to our advantage, we build out pipelines and we build out relationships with financial institutions with carriers over 17 years and that's not necessarily something that's easy to replicate short term. These integrations are not easy to do efficiently. We continue to think that on the technology and products front, we have an outstanding world class team, and we believe more than ever that this is about great products and really focusing on technology. And I think finally, when you look at the scale we're beginning to reach and the margin structure that we have, we really are investing very significant amounts of money back into the business in Latin America year on year. If you look at what our revenue run rate for this year could be, and what our margin structure is looking like, you'll realize that the investment back into the business is quite substantial for an annual period. So I think scale also is something that will help us very much going forward.

Our next question comes from Richard Cathcart with Bradesco.

Just a couple of questions. First one, you mentioned the cross-docking centers in Brazil. Could you just give us bit of an update on where you're up to regarding the fulfillment center, kind of where it is in the stage of development and when that might come online? And then the second question is you mentioned the rise in NPS score and some of that being driven by the improvements in customer service. Can you just give us a bit more information on kind of what exactly has driven those improvements? Then you mentioned a lot of right times, has this been function of kind of hiring more people in the contact center or is it primarily new technologies? And also can you just give us a little bit of color on whether that Net Promoter Score is coming through across the board? Or is it just a particular country doing well within that?

Great. So on the fulfillment piece in Brazil, we're still building the [indiscernible] of that service. So we're still building the WMS working with our warehouse provider partner to build-out the actual on-site warehouse and the technology that will run it. So it's not a product that's live yet. It's something that we'd like to launch this year, but we haven't announced any specific date either. In terms of Net Promoter Scores, I would say that, foremost, what's driving the improvement is the combination of shipping, payments and being able to control the purchase and sale experience end-to-end. When we look at the Net Promoter Scores on transactions that use the full ecosystem, there are significantly higher than those that don't use any of the services or only partially uses the services. So that's the biggest driver. I think incrementally, we've also opened more channels, particularly, phone and live chat, which tend to help in terms of speed of answering. And for certain queues are more efficient than traditional e-mail. We've done more and more work around automation. So the remaining tasks that consumers or users could actually do for themselves if we provide the right tools for them. And that's immediate solution of the problem rather than having to interact or wait for a back-and-forth with the customer service rep. So those automation efforts are also yielding very positive results. And then, finally, I think it's just better execution, better tools, better training of our existing people and we are growing that business. I mean, with revenues growing the way they've been growing, they still scale. But when we look at incremental headcount and incremental investments behind customer experience and customer service, they are very, very solid in year-on-year growth and how much we are investing behind that area.

Our next question comes from Tom Champion with Cowen.

I'd like to pick up on previous logistics questions. I'm curious if you could comment on what the asset footprint will look like by year-end in terms of fulfillment centers and sortation centers? And perhaps if you could talk about the longer-term objectives? And then second, you've got about $740 million in cash on the balance sheet. I'm curious if you could just update us on your thoughts about the use of cash?

Great. Again, I think conceptually, what we're doing is we're moving from feeling increasingly comfortable with the drop-ship solutions that we've rolled out to most markets, but still need to grow penetration of those. There are many markets where it's still sub-50% and we'd like to get those to as closer as 100% as we can. And now we're increasingly beginning to focus on how we can also build-out sortation center capabilities for drop-ship. So picking up inventory at our merchants, warehouses, and then sorting at these cross-docking stations and having them on their way to the consumer with utmost an overnight stop at the DC And also a fulfillment product where we will actually store the inventory for our merchants. That's the vision that we were building out over the next many, many years. And depending on different product types, buyer, seller types or geographies, we will have one of those 3 flavors of delivery in place. We also believe that the combination is what allows us to scale out the logistics operation most efficiently and quicker, given how rapid our business has been growing. On specifics of where we intend to be by yearend, I think, we'd rather update you on a quarterly basis on what we build out rather than give any forward-looking guidance. And then in terms of use of cash, I think, remember that part of that cash is cash that is stored balance that has a matching liability, which is the user's interest in withdrawing that cash from their public accounts. Still significant amount of that cash is not stored balance. And no short-term commitments on how to use that. I think there are a lot of areas we can invest, fulfillment, financing is a business that's growing very nicely as well. And we also run a cash positive and cash generative business for now when we like it that way. But as we grow out logistics and as we grow out our FinTech services, we will have areas in which we can invest that cash.

And I'm not showing any further questions at this time. I would like to turn the call back to our hosts.

Great. Thank you, everyone, as always, for attending, and we will speak again, in a few months when we announce the next quarter. For us it's back to work. Bye-bye.

Ladies and gentlemen, that concludes today's presentation. You may now disconnect, and have a wonderful day.