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Hi Fellow Fools,

The notes provided below come from numerous sources: MELI’s earnings press release, here:

MELI’s conference call transcript here:

The archived conference call is a must listen for MELI investors and is found here:

And finally, if any of you are more visual (or just want to look), you can see MELI’s investor relations earnings slide show here:

I include metrics from Q3 for comparison. I should mention that I find looking at these comparisons quarter-over-quarter helpful. If they make your eyes glaze over, skip the first one and go right to the second...

For Q3 2017:
- total confirmed registered users increased 21% YOY to 201.2M (first time exceeding 200 million)
- Items sold increased 55.8% to 74.2 million (fastest pace of volume growth in five years)
- Payment transactions grew 69.4% to 62.3 million

- Gross Merchandise Volume was $ 3,075.3 million, 50.7% growth in USD and 93.8 % in local currencies (first time ever exceeding $3 billion)
- Total Payment Volume $ 3,667.1 million, YOY growth of 73.5% in USD and 86% in local currencies
- Net revenues for the quarter were $370.7 million, growth of 60.6% in USD and 79.4% in local currencies (largest ever)
- Gross profit margin was 47.4% (margin compression related primarily to increase in costs of providing free shipping)
- Income from operations was $27.5 million, down 48.7% in USD
- Net income was $27.7 million
- EPS was $0.63
- Declared a quarterly dividend of $0.15 per share payable on January 16, 2018, to shareholders of record as of the close of business on December 31, 2017.

For Q4 2017:
- total confirmed registered users increased 21.7% YOY to 211.9M
- Items sold increased 57.5% to 81.2 million
- Payment transactions grew 72.2% to 73.2 million

- Unique buyers 17.7 million, up 34.5% YOY (new metric)
- Unique sellers 4.6 million, up 16.8% YOY (new metric)
- Gross Merchandise Volume was $ 3.618 billion, 62.8% growth in USD and 132.4 % in local currencies
- Total Payment Volume $ 4.343 billion, YOY growth of 77.5% in USD and 94.5% in local currencies
- Net revenues for the quarter were $437 million, growth of 70.5% in USD and 99.6% in local currencies
- Gross profit margin was 46.5% (margin compression related primarily to increase in costs of providing free shipping)
- Loss from operations was $64.6 million, down 199.9% in USD
- Net income was $27.7 million
- EPS was ($1.53)
- Suspended the dividend effective the first quarter of 2018, as management believes it can achieve a better return by investing in the business.

I have highlighted the first three metrics in each list, as these are the three non-financial metrics that strip out the currency effects and foreign exchange headwinds.

The company announced that it had deconsolidated its Venezuela operations effective December 1, 2017. Here's the statement:

Effective December 1, 2017, the Company determined that it no longer has accounting control of its subsidiaries in Venezuela as a result of the country’s recent selective default determination, restrictive exchange controls and other operating restrictions, all of which have significantly hindered the Company’s ability to make key financial decisions. As a result, the Company has decided to deconsolidate its Venezuelan operations as of December 1, 2017.

The Company will no longer include the results of its Venezuelan subsidiaries in its consolidated financial statements. However, MercadoLibre will remain fully committed to serving its Venezuelan users and will continue to operate in Venezuela after the aforementioned deconsolidation.

Note that the rate of confirmed registered users remained remarkably consistent with prior quarters -- this marks the 25th consecutive quarter of 20% growth or higher. Growth in payment transactions and items sold accelerated both year over year and sequentially, and have done so in each of the last four consecutive quarters. Not only do they continue to add users, but more users choose MELI’s payment option (MercadoPago) and each buyer is spending more. Improvement in these metrics is what we want to see.

Management spent a significant amount of time breaking down some of the key growth metrics in both Brazil and Mexico. It's important to note that these markets were the first to see free shipping and the topline growth that resulted is simply astounding.

The highlights this quarter (which should sound strikingly familiar):

Mexican units sold grew triple digits for the second consecutive quarter to 126% year on year growth up from 46.9% a year ago. In Brazil, units sold also delivered strong results growing year on year to 68.2%. That’s the seventh consecutive quarter of unit volume growth above 50% and also the fastest pace of growth in over five years in Brazil.

GMV has was also very strong during the quarter, and reflect the same trends that we have just outlined in items sold growth. On an FX neutral basis, Brazilian GMV accelerated for the third consecutive quarter to 71.3% YoY. Mexican GMV growth was another high point, not only accelerating for the ninth consecutive quarter on an FX neutral basis to 90.6%, but also delivering the fastest pace of growth in over five years.

These same free shipping and loyalty debuted in Chile and Columbia last June, and in Argentina in mid-January and the company is beginning to see an increase in conversion and buyer metrics.

Management also made a point on the call to discuss its continued moves into financial technology (Fintech) and payments, particularly Mercado Credito, its working capital loans and cash advances.

One of the key things here is that the company has records on these merchants, some going back many years and have keen insight into a merchant's ability to pay back a loan. For these, Mercado Credito offers up a capital advance for up to two months of sales, and collects it back from ongoing business. A specific case that was used was the ability by merchants to borrow cash (that they could get the same day) to stock up for big selling days like Cyber Monday. This enables them to sell more and makes the loans all the more compelling.

From a previous call -- for background:

We believe we are just scratching the surface in filling the void in the traditional retail banking environment throughout Latin America where our merchant base has been underserved for decades. Not only that, but our merchants also greatly appreciate Mercado Crédito, as we are observing that many of those merchants who paid off a loan or advance cash immediately reapply for funding. Additionally, we also observe higher growth rates and better Net Promoter Scores from those merchants who adopted the credit product.

With Mercado Crédito, we are not only addressing two of the main merchant pain points: access to credit and the lengthy application process of traditional lenders, but we are also generating exceptional synergies in terms of accelerating trading on our core marketplace business. We observe that those merchants who adopt our credit solutions experience higher sales and unit volumes, and thus allows us to offer better rates to them. Adding more service layovers is clearly translating in more value to our merchant base, which in turn also results in growing faster our top line, take rate and monetization. We are excited in having the privilege to be able to empower even further our ecosystem of entrepreneurs and look forward to be a trusted partner to them for many years to come.

Latin America has very low penetration in regard to banking services and credit cards, making traditional loan approvals difficult for many small businesses. MELI has metrics on its buyers and sellers, in some cases going back more than a decade and can more adequately determine credit worthiness than local banks -- noting specifically our ability to efficiently score, originate and distribute, credit offerings to merchants selling on MercadoLibre.

MercadoPago accounted for 89% of total gross merchandise volume, meaning the 89% of all those purchases were paid for using the company's payment solution -- taking a cut of each payment transaction. On a constant currency basis, total payment volume increased by 94.5% year over year.

This is significant, because customers that use MercadoPago demonstrate increased monetization rates, have better lifetime value metrics and greater net promoter scores. They specifically called out on previous calls that the customers that use combinations of the platform, shipping, and payment transactions have higher customer satisfaction and those that use them all of them have the highest rate.

The more of MELI's integrated services a customer uses, the happier they become! Interestingly, the more of MELI's services a customer uses, the more money MELI makes. This is truly a win-win!

For off-platform transactions (MercadoPago being adopted across the region by sellers that do not use MELI's platform) payment processing revenue grew 127.9% year over year on a constant currency basis. This marks the third consecutive quarter of triple-digit year over year growth.

Part of this growth can be attributed to the sale of mobile point-of-sale devices (think Square).

When compared to the fourth quarter of 2016 we have multiplied the number of mobile PoS devices sold in Brazil by nearly 13 times, while in Argentina we have grown sales of those devices by a factor of 20.

Let me say that again -- an increase of 13 times in Brazil and 20 times in Argentina!

MercadoEnvios, MELI’s shipping solution also continues to show impressive growth. Items shipped were up 86.9% YOY to 43.8 million units, and free shipping accounted for 70% of GMV. The free shipping that has been rolled out in numerous markets has conditions. In Brazil free shipping is only available on items that cost more than $40, only available to certain sellers. In Columbia and Chile, on all items above $23 and $22 respectively, regardless of the merchant. In Argentina, the threshold is higher, at about $70. In each case, that cost is shared by the merchant.

MELI continues to pursue numerous avenues to enhance the customer experience over the last several years that is referred to Enhanced Marketplace. These include MercadoPago payments, MercadoEnvios shipping, interest-free item listings, an increased diversification of product mix, the Official Stores initiative, and now Mercado Puntos (loyalty program) and Mercado Credito (working capital loans), all resulting in a differentiated customer and seller experience. MELI has shown that reducing the friction points results in increased conversion rates – more customers that make a purchase after browsing. Success with the Enhanced Marketplace in Brazil has led to more of these initiatives being rolled out into other areas.

To this end, the company also talked about the development of warehouse management systems and transportation management systems, which it built in house. They have been executing in cross docking -- a logistics procedure involving products being shipped directly from a supplier/manufacturer, arriving on one inbound truck and being quickly turned around to an outbound truck to the customer(s). In Argentina, this accounts for about 30% of the items shipped. The combination of these strengths/technologies will allow the company to invest in product sorting centers, fulfillment and expand its logistics operation. It has added one product sorting center in Brazil that is now up and running and will look to add more this year. The endgame of course is to differentiate by providing free or low cost shipping.

The whole fulfillment, sorting centers, cross docking, free shipping thing remind you of another company? If you said Amazon, get yourself a cookie. MELI is tearing out whole sections from the Amazon playbook.

As you saw again during the last quarter, this is, and will likely always has been a volatile investment, keep in mind the investing thesis for MELI: Internet penetration is still low in Latin America, internet retail is still in its infancy and mobile retail is just beginning. MELI is the first-mover and trusted brand in the region and standing at the intersection of these trends. It is also engaging it best practices that it is copying from best in class companies that will serve it well into the future. Imagine being able to go back and invest in Amazon in its early days.

One Fool’s opinion, your mileage may vary.

Phoenix 1 Contributor
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