MercadoLibre, Inc. (MELI) Q1 2019 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and thank you for standing by. Welcome to the MercadoLibre First Quarter 2019 Earnings Conference Call. At this time all participants are on a listen-only mode. Later we will conduct the question and answer session and instruction will follow at that time. [Operator Instructions]. As a reminder this conference is being recorded. I would now like to introduce your host for today’s presentation Mr. Federico Sandler. Sir, you may begin.

Hello, everyone, and welcome to the MercadoLibre earnings conference call for the quarter ended March 31, 2019. I am Federico Sandler, Investor Relations Officer for MercadoLibre. Our senior manager presenting today is Pedro Arnt, Chief Financial Officer. Additionally, Marcos Galperin, Chief Executive Officer; and Osvaldo Giménez, Executive VP of Payment, 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 in 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 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 in our first quarter 2019 earnings press release available on our Investor Relations website. Now, let me turn the call over to Pedro.

Thanks Fede [ph]. Let me kick off this earnings call by stating that we are encouraged by entering this New Year with continued momentum in our business and are seeing our strategy delivering on multiple fronts in a sustainable manner. Case in point some of the key metrics for the quarter, net revenue that accelerated for the fourth consecutive quarter on an FX neutral basis to 93% growth year-on-year as our payments business continues to grow rapidly while we also have become more efficient in marketplace shipping spent. Operating income that was positive once again a $10.1 million and positive net income after five quarters of loss giving us confidence in our ability to dial up or down the profit levels of our P&L as we see fit. We continue to execute against the focus and strategic roadmap intended to capitalize on the secular trends of e-commerce and Fintech in the region that will allow us to extend our market leadership. We are transforming from a pure third-party marketplace building to building the leading e-commerce ecosystem and digital financial services platform in Latin America. In the process we are redefining our relationship with our customers increasing our touch points with transactions to logistics and financial service offerings, strengthening technology platforms and in doing all this increasing our addressable market as we are able to serve our users in a more expansive manner than in the past. So, let me begin our strategic progress report for the quarter with our Fintech business this time, a growing area of focus for organization. MercadoPago has kicked off 2019 on a very strong note. During the first quarter of the year total payment volume reached $5.6 billion, a growth of 83% year-on-year on an FX neutral basis. As we increasingly focus our efforts on expanding our online and off-line payment solutions in the markets where we are currently in and expanding the financial services we offer our merchants away from MercadoLibre's marketplaces, off-marketplace total payment volume already explained a 95% of the incremental payment volume during the quarter. Off-marketplace total payment volume reach $2.5 billion and continue to gain incremental share from total payment volume reaching 45% of total this quarter versus less than a third only a year ago. In line with that, in Argentina where we deploy our most complete payment ecosystem as of date off marketplace total payment volume represented more than half of TPB for the first time ever. Also during the first quarter of 2019 total payment transactions in number not in volume of the off marketplace segment on a consolidated basis represented over 60% of all payment transactions growing for the sixth consecutive quarter about 100% year-on-year and accelerating to 251% year-over-year. These aforementioned off marketplace data points that I have just called out give us increasing confidence that we are making meaningful inroads in growing and stealing her payments business well beyond our e-commerce marketplace and look to replicate the success we see in Argentina throughout other markets. Within that off marketplace segment we continue to be very encouraged with the results of our mobile POS business. As it is increasingly becoming a key driver of incremental off marketplace payment volume, a strong topline generator and perhaps most importantly a key distribution tool for our others Fintech offerings. The installed base of MPOS devices in our main countries keeps growing at a steady clip. A testament to this is the fact that payment transactions from MPOS devices alone already account for almost half of the off-platform payment transactions. In terms of MPOS payment volume, it surpassed the $1 billion mark for the first time during the first quarter growing on a consolidated basis a solid 171% year-on-year on an FX neutral basis and an even stronger 260% year-on-year in U.S. dollars. This growth of our MPOS business delivery during the quarter was driven for the most part by solid performances in Brazil and Argentina. The build out of our mobile wallet two-sided network also continues to scale and grow in size and frequency of use. During the quarter we’ve reached an important milestone as we crossed the 3 million active payer mark in a single quarter on our wallet, while active collectors accelerated to 420% year-on-year to over $0.5 million. Additionally, wallet total payment volume continues to grow triple digits both on an FX neutral and in U.S. dollars. While it also continues to gain share from off-platform total payment volume reaching almost 20% on a consolidated basis, a gain of 400 basis points versus a year ago. Continuing mobile wallet initiatives Argentina was also highlight as we begin to observe the powerful synergies present in our O-to-O payments ecosystem. During the quarter Argentina QR in-store payment share grew 40 percentage points versus last year coming to represent 43% of all wallet total payment volume. It's also important to highlight that QR in-store payments in Argentina are delivering meaningful customer satisfaction as when we measure net promoter scores, we observed a significant gap versus other existing offerings. Additionally, we continue to see both the shift in funding from credit or debit cards to account money as add usage cases and ubiquity of use, as well as growth and invested amounts in our asset management products that already surpassed 50% of total available account money in Argentina. We look forward to launching this full stack of O-to-O solutions in Brazil and Mexico during the second half of the year. Our merchant services business has also delivered encouraging results as this quarter was the second consecutive quarter of acceleration, growing 75% on an FX neutral basis across all sites. We also pleased with the results on the credits front. In Brazil optimizations to collections and credit scoring capabilities have positively impacted merchant default rates and consequently have accelerated the pace of originations in number and nominal amount during the quarter. In line with that, I am also pleased to report that in Mexico, merchant credit are tracking extremely well with positive adoption and the lowest default rates of any of the markets that we offer the product. Finally, we also began offering our credit solution to our POS users in Mexico which we believe should strengthen our value proposition in that country given how underserved this merchant base is when it comes to access to credit. It is also important to highlight that our consumer credit business in Argentina and Brazil continues to fire on all cylinders as originations are up Q-on-Q by a factor of almost 1.2 times. Our vision is that access to innovative technology must be an engine of financial inclusion and opportunity throughout Latin America and we remain deeply committed to advancing on that goal. The region is rapidly accelerating towards digital payments and we know that we have a huge opportunity ahead of us to make a real difference to the constituencies we serve across the region. Let’s move on to some of the highlights in our logistics business, a key enabler of greater transactionality, engagement and conversion on our marketplaces. I'm pleased to report that we continue to improve and have greater control over user experience as we shift more volume to MercadoEnvios. Penetration of our shipping solution on a consolidated basis grew 10 percentage points year-on-year to 81% of all items sold. In line with that, we are also making progress in shifting volume to our managed network. On a consolidated basis cross-docking efforts reach 17 penetration versus 7% last year while drop shipping decreased to 76% and the managed network reached almost one-fourth of all items shipped. During the quarter Argentina was a highlight as MercadoEnvios penetration grew by 19 percentage points year-on-year to 56% of items sold allowing for more widespread adoption of free shipping in that country that is driving strong marketplace growth there. We are also enthused by the results of our Flex solution, but first let remind you what that is. Flex is a MELI proprietary technology that is ideally suited for local or intercity deliveries where our technology overlay enables existing logistic partners that currently work with our merchants to scan upload and deliver packages through our MercadoEnvios network. Through this solution we are able to not only reduce our reliance on traditional carriers but also drive penetration of Envios higher while also taking care of last mile in a much more efficient fashion, which is generally the more complicated part of getting goods from a merchant to a buyer’s doorstep. Since its launch in late 2018 MELI flex shipping solution has already reached 5% of all items shipped representing over 50% of the shipments within the city of [Indiscernible]. The shipments are not only meaningfully cheaper than drop shipping or cross-docking, but they also have better lead times with over 90% of deliveries occurring same day or next day which is resulting in more sales and better conversions for those merchants who adopt the product. We look forward to continuing to deploy flex in several other large cities where we operate throughout the region during the remainder of this year. On the fulfillment by MercadoLibre front penetration continues to scale well in Mexico gaining five percentage points of adoption sequentially and reaching 20% of all items shipped. While in Brazil scaling up has lag somewhat remaining flat quarter-on-quarter as we continue to build out products and processes to scale it. However, in Brazil cross-docking does continue to grow steadily as it reached 15% of items versus only 5% last year. The operational metrics on our managed network are also encouraging. On a consolidated basis average lead times improved by 40% on a year-on-year basis and median lead times improved by almost 25% versus last year. Also shipments arriving in less than two days reached almost half of all MercadoEnvios deliveries on consolidated regional basis. We’ve also made advances in growing the size of our managed network as the build out of fulfillment capacity continues in full swing. During the quarter, we opened one fulfillment center in Sao Paulo with 200,000 units storage capacity, a second fulfillment center in Sao Paulo with 350,000 units storage capacity and a cross-docking center also in the city of Sao Paulo with the processing capacity of 60,000 orders per day. Now, let's move to some of the highlights in the marketplace business. Despite increasingly tougher comps and continued optimizations in our shipping subsidies, the marketplace business continues to show great resiliency. Gross merchandise volume reached $3.1 billion on an FX neutral basis, consolidated GMV reaccelerated to 27% year-on-year growth driven by solid execution in Argentina and steady performance in Mexico. Argentine GMV on an FX neutral basis accelerated to 70% year-on-year and Mexico maintain momentum at 48% year-on-year growth despite the toughest comp of the year where it grew 70% in Q1 of 2018. The solid performances in Argentina and Mexico were partially offset on a GMV basis by Brazil which grew 18% on an FX neutral basis. However average two-year local currency growth for the first quarter in Brazil remained at around 44% indicating that part of the slowdown should be attributed to the very tough comps from the prior year. Additionally, the deceleration in Brazil is also explained by the implementation of free listing caps resulting in a reduction of free GMV from 11% during the first quarter of 2018 to only 5% of GMV this quarter. It is also important to note in Brazil that we exited the quarter at a higher growth rate than we entered in. We continue to focus on category expansion as a catalyst for growth of our marketplace businesses. During the quarter we have expanded and improved our supermarket experience in Mexico with already more than 18,500 [ph] consumer packaged good SKUs available on our site. Although still at an early stage we observed that basket size is also approximately 20% higher on orders that have supermarket items in Mexico, a clear indicator that the key vertical to increase purchase frequency on the site is trending in the right direction. In line with that we’ve also improve the user experience in our apparel vertical by enhancing discovery engines further facilitating returns and strengthening our intellectual property program which has been instrumental in incorporating established brands that improve assortment and bring brand equity to our marketplaces. As a consequence of apparel is the fastest growing category growing at 79% year-on-year on an FX neutral basis consolidated. Not only do we continue to expand categories but we also deepening product selection and assortment. Listings available on the platform a measure of depth of inventory surpassed the 200 million mark for the first time. This quarter also marks the ninth consecutive quarter of growth in this important KPI at a rate higher than 50% over the prior year. We also continue to make strides on our shift towards a mobile first platform. During the first quarter of the year mobile app, GMV represented almost 50% of gross merchandise volume, a 10 percentage point improvement versus a year ago while 81% of all new registered users were also coming from mobile devices. If we consider wet mobile into this mix, GMV coming from mobile experiences is 63% of total gross merchandise volume. Finally, we made meaningful progress in offering more robust search and discovery experiences to our buyers through our catalog initiative. During the quarter catalog gross merchandise volume reached 29%, 38%, 25% of GMV in Brazil and Argentina and Mexico respectively presenting an improvement in the mid to low teens year-on-year for these markets. This is an important initiative since cataloging allows us to understand better the inventory we carry enables us to better understand what products to show our buyers and consequently allows us to highlight the second to none price and selection we offered to our users in the region. As we grow the percentage of gross merchandise volume that is catalog, our buyers will be able to find the products they are looking for more quickly and this should result in higher conversion rates. Before I move on to financials, let me give you an update on the recent secondary offering we perform during the first quarter 2019 where we finalize a successful raise of $2 billion from both financial investors as well as a strategic investor PayPal. This capital rate gives us greater balance sheet flexibility over the long run and we expect to use the capital primarily to fund the growth of our payment initiatives build out our logistics capacity and drive the adoption of the services as well as for general corporate purposes. As we move forward in the year we will outline in greater detail how our pace of investment will pick with specific callouts of areas where we are increasing spending levels. We maintain long-term opportunities such as payments and logistics as priorities with potential for margin contraction in the short term depending on the return windows of the investments that we carry out. It's also important to highlight that we are very pleased that PayPal was a strategic investor in the transaction. The latter, we believe not only validates the joint vision we share in terms of business and purpose to digitalize the economy and leverage technology to generate financial inclusion, but also to offer compelling financial solutions to those who are unserved or underserved by traditional financial institutions. The trust that has been built over the years with PayPal in the history we have been formally interacting gives us confidence that we will be able to find areas that will generate synergies with each other as we move forward into the future. In this regard, our teams are working on determining commercial agreements that can be put in place that complements PayPal’s global merchant based data, products and technology with a little know-how and distribution capabilities. Let me now move on to financials. During the quarter we continue taking the necessary steps to recalibrate our P&L and rebalance our financial model to deliver sustainable growth. From a topline perspective gross billings ascended to $549 million, the 20th consecutive quarter of gross billings growth about 60% on an FX neutral basis driven by improved monetization on our marketplaces and continued successful execution on our payments business particularly on our financing business and off-platform revenue streams through merchant services and POS. On an FX neutral basis our main countries also delivered solid performance from a gross billings perspective on an FX neutral basis. Mexico maintained momentum growing a 113.5%, Argentine accelerated to a 108.2%, and Brazil sustained solid percentage growth of 50% reaching 50.9 year-on-year. Consolidated net revenue came in strong as well, reaching $473.8 million and accelerating to 93% year-on-year in FX neutral basis as we optimize shipping and loyalty program subsidies. Gross profit ascended to $237 million during the quarter representing 50% of net revenues versus 50.7% last year. Shipping carrier and operating cost explain most part of the gross margin compression over the prior year. We've included a detailed breakdown of these and also other OpEx margin evolution in the cover slide that accompany this presentation, as reported operating expenses grew to $226.9 million or 47.9% of revenues versus 59.9% during the first quarter 2018. Main drivers of OpEx leverage this quarter were attributed to scaling, marketing given increasing in efficiencies on buyer protection payouts lower loan loss provisions from our client portfolio, as well as leverage in salaries and wages. As a result operating profit for the first quarter of 2019 ascended to $10.1 million, an increase of $11 million versus last quarter. The low operating income we saw $15.6 million in financial expenses attributed for the most part to financial interest related to the convertible notes due in 2028. Interest income increased by 166% year-on-year to $24.4 million mainly attributable to a higher flow in Argentina and Brazil, as well as the proceeds from the convertible note issued in August of last year. Our ForEx line was negative $3.7 million mainly do to the U.S. dollar revaluation over Argentine peso net position in Argentina. As a result of all this, net income ascended to $11.9 million, an increase of $14.2 million versus last quarter resulting in basic net income per share of $0.13. That wraps up our strategic report. We started the first quarter of 2019 on firm footing and although we are very encouraged by the performance of our business and the opportunities that lie ahead of us, we still have plenty of work to do in order to deliver on our product roadmap and consolidate our leadership position. We have accelerated our revenue growth and earnings growth with positive cash flow while we continue building superior experiences for our users. The sustain momentum we see in the business gives us confidence to continue investing behind high potential areas such as Fintech and Logistics. We are very pleased with our progress and look forward to keeping you updated next quarter as we continue to democratize commerce and money throughout America. With that let me turn it back to the operator for your questions. Thank you very much.

[Operator Instructions] Our first question comes from the line of Deepak Mathivanan from Barclays

Hi. Congrats on the great quarter. This is Mario Lu on for Deepak. from the queue simply press the pound key again if you have a question or comment at this time please press star then one or your telephone keypad. Our first question or comment comes from the line of Deepak methadone from Barclays. Your line is open. Congrats on a great quarter. This is Mario is on for Deepak. So we noticed that you currently started charging low value items shipping surcharges in Argentina similar to the program you have in Brazil. So should we expect to see meaningful revenue benefits from this? Are lower ASP items, our large portion of free shipping in Argentina? Thanks.

Hi. The mix of low ASP and high ASP is fairly consistent. What you need to bear in mind is that the actual amount we are charging on low ASP items in Argentina is materially lower than Brazil. So from the point of view of how many items this will impact and therefore both the revenue increase, but the slowdown in units we expect it to be less impactful than Brazil was.

Got it. It’s Helpful. Thank you.

Thank you. Our next question comes from the line of Robert Ford from Bank of America. Your line is open.

Hey. Thank you and good evening everybody and congrats on the quarter as well. I was very impressed with the increase in the contribution margin in Brazil, why is it more than doubled? And then I was wondering if you could maybe break it down in terms of the contributors there, please?

Okay. So just to make sure we're looking at the same thing. The improved contribution margin in Brazil is the question, right?

Yes, Pedro. It’s close to 26% and about 11% last year. Sorry. I'm not looking at Brazil, I’m looking at it at the wrong line. But there's -- nevertheless there's a big improvement. Now I was just wondering what the factors were behind that?

So we just want to make sure because some of us here thought it was a decrease, so if you would add to that. So, definitely there are optimizations in shipping costs both at the contra rev level, but also at the actual cost level. There are slightly about 400 basis points of improvement sequentially and about a 1000 year-on-year in more efficient marketing spending. Those are really the two biggest drivers.

Now there's a big numbers. And then Pedro, could you touch a little bit on maybe some of the wallet functionality across your major markets. You've mentioned that you will launch a full stack of O-to-O solutions in the second half. But I was wondering if you could tell us a little bit of what you have now in the major economies and how you see that which you need I guess in terms of central bank approvals and functionality to go life?

Yes. Great question. Thanks. So I would say that Argentina is really the country where the O-to-O efforts have been rolled out in a set of both actual life product functionalities, but equally important enough business development and onboarding of the merchant side of the network whether that be what we call single player cases, so utility payments, transportation agreements. So large agreements with anchor use cases and also a multiplicity of smaller merchants that start accepting the QR code, so Argentina that's a fairly robust although still early stage ecosystem and hence we're seeing the results we're seeing in Argentina. Brazil although most of the functionalities are like product wise, there are still improvements to be made in terms of the ability to fund wallets and more importantly we are not as far along in the business development and rollout of the merchant side of that network Yes. So we're going to begin to aggressively start pursuing the commercial efforts in Brazil during the ongoing quarter, in terms of building the merchant side of the network. And Mexico I would say is the third phase where there are still features to be rolled out and we're not yet -- have not yet begun to aggressively roll out merchant adoption and that also starts to pick up during this quarter.

That's very helpful. Thank you and again congratulations.

Thank you. Our next question or comment comes from the line of Ravi Jain from HSBC. Your line is open.

I have a couple of quick questions. So, first on the Brazil GMV, are you happy with the 18% growth in this quarter. Of course we understand that the comp was tough, but on the quarter over quarter it has slowed down. And we also see the shipping subsidy has come down. So is there space to increase the shipping subsidy and reactivate that business in Brazil. What are your thoughts on the Brazil GMV? And the second question is on the payments business. We of course have seen a lot of aggressive most by competitors in the MPOS business. If the prepayment revenues come down materially over time how does that change your investment plan. I mean do you start using more cash on the balance sheet instead to invest in the payments business? Thanks.

Great. So, I think the prepared remarks tried to convey clearly that we think that the headline Brazilian GMV growth number was probably the low point of the quarter, certainly not something that we are content with. As you mentioned, part of that is a consequence of the optimization around shipping. Bear in mind also that January and February of last year were the two highest growth months in a multi-year cycle. So there still is an element of very very tough comps. And then as March rolled around and especially the back end of March the comps get easier. And so we already exited the quarter at a better growth rate than that. As we've revamped our shipping capabilities, I think there is now the intelligence in place to invest equal amounts in shipping but in a more efficient manner. And so that hopefully will be an incremental way to try to reignite growth in Brazil. And then obviously the flip side of the slowdown in the business was the positive contribution in Brazil. We just walked through Bob's question on marketing spend. So I think a combination of simply more efficient investing. Additionally, easier comps and potentially more investments on an absolute basis are the three levers with which we will try to reignite growth in Brazil. Marcos Galperín: Regarding the Payments question, I’d say that we continue to have an aggressive growth plan for Brazil and middle markets going forward. I would say that over the last few weeks some of our competitors have started to win specific actions that even though have been more aggressive. When we look into the situation we don't feel that the segment of Michael merchant where we mostly operate. We don’t just see just a – we don’t anticipate a significant impact there and therefore we did not modify our prices. Bear in mind that we settle our taxes in most cases in three plus zero. So if you [Indiscernible] merchants already very, very good and so far we haven’t notice the reduction in volume. Having said that, we will continue to monitor what our players do and we’ll look on pricing in order to remain competitive, if necessary.

Thank you. That’s helpful.

Thank you. Our next question or comment comes from the line of Marcelo Santos from JPMorgan. Your line is open.

Hello. Thanks for taking the question. I wonder if you could discuss a little bit more on the opportunities on MercadoCredito, so that you start reaccelerating, already appeared in the balance sheet. So what are the main changes made and potential you see for the coming quarters, for the coming year in the various markets that you’re in? Marcos Galperín: Okay, Marcelo. So, I think that in the last few quarters we have seen two changes. On the one hand we have the introduced consumer credit in Brazil which was before only available in Argentina and it has been growing very very nicely. And second on the merchant grade from what happened last year was that we had a peak in the first quarter and that was due to above rollout out in the first quarter and last year were the first time we offered a holder of the loan to get a second loan. And therefore we had a huge increase or a large increase in the number of credit. As most credit are for 12 month, we have a second peak now in this first quarter and that is related to those first -- second loans expiring and being renewed. I think those are the two main drivers behind in Greek volumes in terms of credit.

Great. Thank you.

Thank you. Our next question or comment comes from the line of James Friedman from Susquehanna. Your line is open.

Hi. Thank you. It's Jamie it's as we had. Congratulations on the great numbers guys. Can you hear me okay? Marcos Galperín: We can hear you.

Yes. So I just want to ask a couple of things mostly on the payment side. So Pedro in terms of going at or approaching or above now in Argentina and across the company, the 50% threshold payments coming off platform, is that more of like mythical level or is there something really strategic about that that we should contemplate? That's sort of the first question. I'll discuss the second one. With regard to PayPal have you used the same language that they use which is commercialization. I was wondering is it too early to ask for some use cases of how you guys might work together or if that's too specific like is it is it fair to assume that it's going to be more on the merchant as opposed to the consumer side that you described in your need to commercialize the merchant side of Brazil with internalization or with QR codes? Anyway a couple of used cases on the PayPal side would be helpful?

So the first one, there is no scientific relevance to the 50% threshold. I think it's just a notion that the off-platform business which is by far the largest Tam continues to grow faster than on Marketplace. But that's all there is to it. Marcos Galperín: The only thing I would add on Pedro's comment is that, is more on more we are targeting off-line transactions. And since e-commerce it's only 5% return in Latin America the total addressable market for the offline is really very large significantly larger than online, but we expect them to continue.

And then in terms of PayPal I think we need to continue to hold off until the actual agreements are hammered out. They do not imply a focus on merchants versus consumers. I think we're looking at areas where we can be synergistic to each other and drive win-win business combinations and those could be either on the consumer side or the merchant side. But I think we'll be able to address those in detail once we actually get them signed.

Okay. If I could just sneak in one more, I won't probably on the early settlement or the prepayment. Maybe this one, so you were calling out some differences between Argentina and Brazil market on the payment side. If MercadoPago could like invent the payments world, the future payments world of Latam, would you prefer to be carded or not carded? And how does that play to your strategic strengths?

Look, so let me answer that with two slightly different takes. First of all is we need to be where the consumer is and where the merchant is. So if merchants want credit cards we offer [technical difficulty]. So we were saying Merchant and consumer choice is important to us. Now having said that, we believe that non-carded, so the QR network we’re trying to build through IT technology, internet protocols and mobile devices can offer much greater disruption to final services in terms of lower cost more efficient distribution and more massive distribution than proprietary networks that are owned by Visa or MasterCard. So we will follow where consumer and merchant choice is, but if we have our say, we believe you can deliver a better experience and a more cost efficient experience in a non-carded world and that’s what we’re trying to construct.

Got it. Thank you.

Thank you. Our next question or comment comes from the line Stephen Ju from Credit Suisse. Your line is open.

Okay. Thank you. Pedro or Marcos if you want way in here also from a strategic perspective and particularly for Brazil you are walking away from dealing with what looks like economically a rational transactions. So if they’re rational for you than chances are there probably a rational for your competitors as well. So do you e-commerce growth in the country has entered a period of structurally slower growth? Or are you seeing some of your competitors willing to underwrite the volume that from a economic perspective maybe a rational. And I think – also in your prepared remarks you call that consumer credit origination in Brazil and Argentina are up by a factor of 1.2. So that’s speak where I’m guessing of where your rapid pace off-platform versus on-platform loan. So what are some of the friction headwinds you guys saw for recently that is driving this? Thanks.

Sorry, apologizes. We have a line in a backup line in for whatever reason they don’t all that different moment, so apologizes for that. I don’t know if we still folks on the line. I’ll answer Stephen question and we’ll see the other questions we have. So I would say that if you look at the evolution of the free shipping program in Brazil we were probably the company that was most aggressive last year and was most willing to subsidize unit economic in the short term, didn’t make sense and an attempt to generate volume on certain routes or by investing longer life time values. With the cost changes last year even those longer life time value stop making sense for us. But I don’t think that our rationalization of our program to a more intelligent and more rational player necessarily implies changes from other players. So, I think you just need to look at the way we’re trying to invest less in shipping for same amounts on percentage wise but in a more intelligent way, and I don’t think there’s a read through to what other players are doing.

Okay. Thank you. Our next question or comment comes from the line of Edward Yruma from KeyBanc Capital. Your line is open.

Hi. Thanks for taking questions. This Matt on for Ed. So you’ve done a good job improving search and discovery. Wondering if you could elaborate a bit about your catalog initiate, how exactly is the data being cataloged and I assume its been carry out by your seller and how do you incent them to do this? And finally, how does improving search and discovery flow through to conversion rate? Thanks.

Yes. Great question on catalog, high-level answer. Yes, sellers have to share information with us. We have try to build the data architecture in a way that we can with the least amount of data requested try to fill in gaps, but it does require some work from seller. The efforts have been a combination of gammafication, so if you look at our seller central it very explicit and the improvements that you can get from complete datasets that allow us to place your product on the catalog efficiently and then also improvements in conversion either through better search and sort algorithm and eventually hopefully sometime this year actually view item pages that concentrate much more volume on catalog items.

Thank you.

Thank you. Our next question or comment comes from the line of Marvin Fong from BTIG. Your line is open. Mr. Fong you may need to unmute your phone.

Hi. Sorry about that. I was on mute. Just two questions if I could. First one on Envios Flex. If you could just give us an idea about just the cost advantage of Flex versus some of the other last mile solutions that you guys currently use. It would be very interesting and then also in terms of the other cities, major cities you’re thinking about entering, give us a sense of how much those areas represent in terms of GMV? And then secondly on merchant services, the reacceleration in growth, if you could just add some color on what exactly is driving that, is it just general improvement in online activity by the sites or is there something you guys specific going to improve the PTV growth in that channel? Thank you.

Okay. So first all, the current version of Flex is not a significant driver of improved cost. It is a significant driver of improved delivery time. Flex is what enables same day delivery for example, and so that’s really focus – and its also in many market specially for large concentrated urban areas are very quick way to onboard merchants because they continually use their same delivery infrastructure but now powered by our technology and our capacity to delivery. In terms of what we’re trying to accomplished with coverage of Flex we’re going to start rolling it out in the large urban areas in different countries. I don’t think we have the data right here what percentage of our sales, Sao Paulo, Rio Minas will represent in Brazil. But remember that that doesn't mean that you get 100% of the volume in those countries. So I think if we look at Buenos Aires [ph] that is probably at high single digits, mid single digits of total GMV and one large city. I think you can assume that even as we roll out other large areas the initial phases are single digits of our GMV if that and then over time we hope to be able to increase that adoption. Flex is one part of a multiple series of services. Fulfillment is another one cross-docking, is another one, and I think all of those combined is really what we're trying to grow in detriment of the drop ship model which is the one where we have the lowest service levels and the least control over quality. Marcos Galperín: And going onto the merchant services question I would say that that's key. But just in terms we look at guarantee and we have 108% year-on-year and we show acceleration in all of three markets; Argentina, Brazil and Mexico, so I think we have been really [Indiscernible] what generated most of the growth is one extra factor and year ago Brazil, we had lost significant merchant and that lower growth [Indiscernible] So if you look at Brazil we have had four quarters in accelerating growth. Q3 will grew more than Q4 – sorry, Q3 will grew more than Q2, Q4 more than Q3 and now significantly more than Q4.

Okay. Thank you, guys.

Thank you. Our next question or comment comes from the line of Irma Sgarz from Goldman Sachs. Your line is open.

Yes. Thank you for taking my questions. Congrats on the quarter. Regarding the marketing spend where you drove quite a lot of leverage this quarter specifically in Brazil. When we sort of think about that line going forward from here, how do you think about sort of the cadence for this going forward not just for the rest of this year but also for subsequent years. I would imagine that the building I'll see to why it cited payment system and the building of the Pago brand, specifically in Brazil will require a little bit of marketing spend. Is that something that you'd expect to show up in that line or not really, and the same also for the deployment of the complete to suit of the Fintech solutions should that be something that impact your R&D line or your development line or again nothing too relevant to expect in terms of cadence of investments here in this line?

Okay. So as you know Irma, we try to not get into too much forward looking guidance but I think they're both great questions so I'll comment high level on both. I’ll start with the R&D one. I think we continue to be very aggressive in trying to grow out the engineering pool and the number of engineers we hire. But I think even if we accomplish our hiring targets there's a natural scale to the business and so I don't think you should seek too much margin compression from R&D spend. This is more about just focusing on reallocating engineers more and more to the new Fintech initiatives and of the incremental engineers more and more will get assigned to Fintech initiatives. The marketing question is a great question. I think probably the best way to answer is your assumptions are correct. I think as we move into the remainder of the year and we begin to -- as I outlined begin to launch our commercial efforts in Brazil and Mexico to build out the two sided network that will mean incremental marketing spend. I think we're willing to acquire consumers for the wallet looking at longer term return profiles. So that could also generate greater marketing as a percentage of revenue investments. And then in general the first quarter is one where we had very very limited investments in brand advertising. If you continue to take a long term view which we do I think brand advertising is an important complement to performance marketing and programmatic marketing. And we also have a second brand that we want to start building now which is the payment brand. So that also means incremental investments. So I would assume that probably marketing is at a fairly high point in terms of efficiency and that there should be increased investment moving forward.

That's great. Thanks.

Thank you. Our next question or comment comes from the line of Tom Champion from Cowen. Your line is open.

Hi. Good afternoon. I'm curious if you could talk about the revenue profile of off platform PTV relative to on platform. That's the first question. Also it seemed like shipping time improved a lot again. Could you just talk about the key drivers there? Sounds like Flex was a contributor, but anything else that might have contributed there would be would be great to hear. Thank you.

Sorry. As we try to gather some data points for the first question can you walk us through the second one again please.

Sure. If I have it correct shipping times improved quite a bit relative to that to the fourth quarter and it sounds like from your comments that Flex might have had something to do with that. I'm just curious if there were any other drivers there?

Sure. So Flex is still fairly small. Flex Like I said in mid single digits of the Argentine GMV. So that's not really what's driving most of the improvements in time. I think most of the improvements in time are actually driven by improvements in the network both our managed network as we have better more percentage going through fulfillment, better delivery times in our cross-docking network, but also and this is important our transportation partners on the dropship network have also improved significantly their delivery times. So sequentially Q1 was the best quarter in terms of consolidated delivery times in the last five quarters, but it was fairly slightly better than Q3 and somewhat better than Q4. The dramatic improvement was over a year ago where Q1 of last year delivery times have really improved very much over the last four quarters as we built out the manage network.

Okay. Marcos Galperín: Yes. Going to the first question regarding Sao Paulo’s off-platform that is off-platform, you mentioned [Indiscernible] pretty similar. There’s on versus off-platform. In terms of revenue it's tricky because on-platform we don't charge [Indiscernible]. Accordingly one difference there is that we usually see no useful plan and more product and revenues. The on platform and in MPOS unless so the online merchant, so there is one difference there. Another difference is that we look at frequency of use at wallet is a one where we see the case where consumers are and [Indiscernible] lot of volume specifically we try in those resource [ph] versus vertical.

Got it. Thank you.

Thank you. Our next question or comment comes from the line of Kunal Madhukar from Deutsche Bank. Your line is open.

Hi. Thanks for taking the question. Couple if I would. With regard to the payment launch on the more complete build out of the payments off in Brazil and in Mexico.

Sorry, can you speak up a little bit louder, we’re having trouble hearing you.

Okay. Sorry. Thanks for taking the questions. Actually couple if I could. With regard to the new offerings that you’re planning to launch within payment and logistics and in Brazil and Mexico, how does the comparative landscape kind of look in those countries for those services?

Okay. So let me start out with logistics very quickly. I think Mexico is a very competitive market in terms of the quality of the networks of some of the larger online retailers. Fortunately it's also by far our most efficient logistics network and so that allows us to be very competitive. But it is the market with the highest I think consumer expectation given what ourselves and other competitors are delivering. I think Brazil, both because of geographical complexity and distribution, but also the quality of existing networks, consumer expectations are probably a step behind as is the quality of service of our competitors still. And so, maybe one way to characterize it is if we continue to deliver on our roadmap in Brazil, we think it puts us in a very competitive position as a leader in terms of quality of network in Mexico. I think we need to deliver on our roadmap to continue to be among the companies with the best time, but it is a competitive scenario.

Thanks. And on the payment side? Marcos Galperín: The payment side I’d say, we are still in general is the most competitive markets in Latin America. So I said so, I think is the one that [Indiscernible] we have grown with the most that usually an MPOS also is where we are growing out full bundle of flows [ph] to rolling out payments. We launch already those consumer merchant pays in last quarters and launched a functionality into asset management when we pay consumer the balance we had. But I think we’ll have a great complete offering. We are competing there with many players, but most of them are more of a niche approach where you get more focused on either acquiring or on the wallet side we believe that we have a more comprehensive approach. But Mexico I would say is less competitive than Brazil, but we also at an earlier stage and we're only now starting to invest more. We had growth on MPOS and we have rollout. And we have not yet rolled out the asset management solution which we will rollout in a coming quarters.

Thanks. And one other question if I could. You've done a great job kind of getting most of the different countries back into profitability. What's happening with Mexico? Why do we have lingering losses, of contribution losses from Mexico?

Two reasons. One of them I think you alluded to in your initial question. It's a more competitive market, where other competitors are also losing significant amounts of money. It's also a smaller market so it doesn't have all the scale advantages Brazil or Argentina for example. And so we've been fairly committed to continue to invest in that market because the size of the opportunity is very large it's the second largest economy in the region. And additionally, we're fairly confident that at larger scale that business can have a healthy P&L as we see in other markets. And so it's a matter of continue to invest behind it, to make sure that we reach that scale as quickly as possible and hopefully faster and at more scale than competitors.

Thank you so much.

Thank you. Our next question or comment comes from the line of Pedro [indiscernible] Bradesco BBI. Your line is open.

Take comfort in knowing that its Latin American general that has communication problems not just start.

Mr. [indiscernible] please go ahead with your question.

Hello, can you guys hear me?

Yes we can hear you now.

Okay, just wanted to come back to the comment you made on fulfilment in Brazil having lagged in the quarter. Just hoping you could maybe elaborate a little bit as to why that was. I mean are you seeing any kind of resistance from sellers? Is there any kind of friction or maybe specific capability you guys are still building out at this point? And second question on the Brazil GMV. You guys mentioned apparel. Is there any specific focus from you guys at this point regarding specific categories to the extent you try to tap into these the second wave of growth for e-commerce. Thank you. Marcos Galperín: Yes. So I think that let's dig into numbers a little bit. Our fulfilment efforts in Brazil in terms of penetration and adoption by sellers were flat sequentially. That's not good. It's not that it's down. And I think information yes, there still are friction points that we need to continue to solve for our merchants. In terms of onboarding inventory with us and that's what we're working on. And additionally, we also did pull back on the subsidies we were offering to fulfil through us. And that also had some impact on flat. When we looked at the cross stocking network to packages that still work on our own network, but that are initially at the merchant location and we do both first mile and then cross dock and long haul and last mile that continues to trend positively and gained a few percentage points in terms of adoption last quarter. So I think to unlock once again the growth of fulfilment. It's a combination first and foremost the technology solutions to unlock the friction, and we could analyse and will be probably investing again in some incentives to get sellers to trial the fulfilment solution. In terms of categories, I think we called out a few of the categories that we are focusing on building out, compelling user experiences to try to capture. Apparel was one of these and we called out is one of the fastest growing categories and I think we're performing very well there. But there's still room for more growth. It's a very large category, and we continue to work on consumer packaged goods, which is a very large category and a very high frequency category. We're still in much earlier stages there, but it's probably the next big one that we're focused on. Good stride there in Mexico in terms of selection, Brazil is the next market we begin to focus on.

Great. Thank you very much.

Thank you. I'm showing no additional questions in the queue at this time. I'd like to turn the conference back over to management for any closing remarks.

Great. We apologize for the mess up on the communication and we look forward to next quarter when we continue to give you updates on how the business is going. Thanks everyone and hope to talk soon.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect everyone have a wonderful day.