Martin de los Santos - Vice President-Finance Pedro Arnt - Chief Financial Officer & Executive Vice President.

Mark R. Miller - William Blair & Co. LLC Eugene Charles Munster - Piper Jaffray & Co (Broker) Ross Sandler - Deutsche Bank Securities, Inc. Marcelo Santos - JPMorgan CCVM SA Stephen Ju - Credit Suisse Securities (USA) LLC (Broker) Michel Morin - Morgan Stanley & Co. LLC.

Good day, ladies and gentlemen, and welcome to MercadoLibre First Quarter 2015 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. As a reminder, this conference is being recorded.

I would now like to hand the conference over to Martin de los Santos, Vice President of Finance and Head of Investor Relations. Sir, please go ahead..

Hello, everyone, and welcome to the MercadoLibre earnings conference call for the quarter ended March 31, 2015. I am Martin de los Santos, Vice President of Finance and Head of Investor Relations for MercadoLibre. Our senior manager presenting today is Pedro Arnt, Chief Financial Officer.

Additionally, Osvaldo Gimenez, 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 under 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 might discuss some non-GAAP measures. A reconciliation of these measures to the nearest comparable GAAP measures can be found in our first quarter 2015 earnings press release available on our Investor Relations website. Now let me turn the call over to Pedro..

58% for Brazil, 94% for Argentina, 32% for Mexico and 284% for Venezuela. Moving down our P&L, gross profit grew 23% in the first quarter to $103.4 million. Gross profit margin was 69.8% of revenues versus 72.7% in the first quarter of 2014 and 70.5% in the fourth quarter of 2014.

This represents a loss of 285 basis points of margin, primarily from 237 basis points of higher processing fees resulting from the growth of MercadoPago, a business unit with lower margins than those of our marketplace, and 104 basis points of incremental sales taxes generated by our shipping and financing initiatives which were partially offset by 35 basis points of scale and customer support as we continue to streamline those operations.

Operating expenses for the period totaled $77.8 million. Excluding the one-time impairment charge related to our Venezuelan fixed assets, operating expenses totaled $61.6 million, a 24% growth versus last year's first quarter.

As a percentage of revenues, operating expenses were 52.5% in the first quarter versus 43.2% in the same quarter last year and 42.4% in the fourth quarter of 2014. Excluding the one-off operating expenses were 41.6% of revenues during the first quarter, 162 basis points of margin improvement versus last year.

Let me break the remaining OpEx down for you line item by line item. Sales and marketing, the largest operating expense line, grew 17% year-over-year to $26.2 million or 17.7% of revenues, versus 19.4% for the same period last year.

Year-over-year scale was mainly driven by successful collection efforts leading to improvements of 242 basis points in bad debt and 70 basis points in chargeback improvements from our MercadoPago operation.

These were partially offset by 132 basis points of margin contraction due to higher investments in our buyer protection program as we expand the guarantees in coverage we offer our buyers to entice greater engagement.

Product development expenses grew 41% to $17.2 million, representing 11.6 percentage points of revenues in the first quarter versus 10.6% in the same period last year.

This contraction in margin is due primarily to 131 basis points of salaries and wages increments, 29 basis points of those coming from the long-term retention plan as we added north of 200 engineers to our talent pool versus last year.

Finally, G&A increased 19% to $18.1 million during the first quarter or 12.2 percentage points of revenues versus 13.2% a year ago if we exclude the impact of the Venezuelan devaluation.

This scale in G&A is largely driven by an easy comp, as last year's Q1 had roughly 200 basis points from a write-off of certain tax credit related to the expiration of the prior software development law in Argentina.

This quarter we also saw 83 basis points of efficiencies in outside services due to savings in legal fees, all this offset by a contraction of 116 basis points in salaries, 102 of those coming from the long-term retention plan and 30 basis points from depreciations and amortizations due to the acquisition of Portalinmobiliario in the second quarter of 2014 and our new offices in Argentina, which we started amortizing in January of 2015 once we had moved into them.

As we highlight each start of the year, our annual merit compensation and inflation adjustments account for a significant part of the increase in our salaries and wages line items in the first quarter and the resulting margin compression.

Total salary and wage expenses, a component of our COGS as well as our OpEx lines, grew 7% on a Q-on-Q basis and 41% on a year-on-year basis. Additionally, head count grew 22% versus last year as we added almost 500 employees over the last 12 months.

Furthermore, long-term retention plan accruals were higher by 142 basis points, as I've broken out in some of the line items previously noted, due to a higher stock price also negatively impacting the scalability of the business.

Finally, also included in OpEx was the aforementioned charge of $16.2 million for impairment on our Venezuelan long-lived fixed asset remeasured at the Simadi exchange rate. As a result, operating income for the quarter was $25.6 million or 17.3 percentage points of revenues.

However, excluding the one-time impairment charge, operating income would have been $41.8 million or 28.2 percentage points of revenues versus 29.5% in the first quarter of 2014 and 28% last quarter.

Below operating income, we benefited from $4.3 million of interest income, up 42% year-on-year thanks to higher interest rates on larger amounts invested. We also saw a $5 million loss in financial expenses, the majority of these corresponding to interest accrual on our convertible bond.

In our ForEx line, we saw an $8.6 million loss versus the $3.1 million gain in the first quarter last year. The adoption of Simadi in Venezuela generated foreign exchange losses of $20.4 million, which were partially offset by $10.1 million of net increase in the value of our foreign exchange holdings in Brazil.

These effects all led to net income before taxes of $16.4 million, which would have been $53 million were we to exclude Venezuela's impairment charges and ForEx losses. That is 36% above last year's first quarter numbers. Income tax expense was $14.7 million for the quarter. As happened with the switch to SICAD 2 in the second quarter of 2014, U.S.

dollar liabilities on Venezuela's balance sheet further appreciated, resulting in losses recognized under Venezuelan GAAP for a one-off tax benefit of $3.8 million. As reported, U.S. GAAP blended tax rate was 89%, driven by the one-time charges in Venezuela that I previously mentioned which are non-deductible under U.S. GAAP.

Excluding impacts of this devaluation on G&A, ForEx and taxes, the blended tax rate for the first quarter would have been 34.8%, up from 22.4% in the same quarter 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.

As we noted last quarter, if we are eventually granted access to the new tax holiday the government has launched, we currently understand we will be able to recognize certain tax gains in future quarters.

Net income came in at $1.7 million or 1.2 percentage points of revenues during the first quarter, resulting in a basic net income per common share of $0.04.

Had there been no impairment to foreign exchange and income tax effects resulting from Venezuela's devaluation, net income would have been $34.6 million, a margin of 23.3% and an EPS of $0.78 versus 26.3% and $0.69 a year ago, respectively. Purchases of property, equipment and intangible assets during the quarter totaled $8.3 million.

For the period ended March 2015, free cash flow defined as cash from operating activities less payment for the acquisition of property, equipment, intangible assets and acquired businesses net of cash acquired was $29.9 million versus $20.5 million last year.

Cash, short-term investments and long-term investments at the end of the quarter totaled $558 million. Wrapping up, we declared our quarterly dividend of $4.5 million or $0.103 cents per share, payable on July 15, 2015 to shareholders of record as of the close of business on June 30, 2015.

That wraps up my review of financial and operational metrics for the quarter. In summary, our businesses continue to perform well, with good traction along most of our strategic initiatives and very positive customer feedback, primarily in Brazil, where the rollout of our latest services is further along.

We will spend the remainder of the year very focused on rolling these services out to more markets and are confident the results should also be positive there once we do so. We look forward to sharing the advances on these fronts with you in the upcoming quarters. We can now take any questions you might have..

Thank you. Our first question comes from the line of Mark Miller from William Blair..

Hi. Good afternoon, everyone. Pedro, we covered a lot of ground in your remarks. I guess my first question would be on the acceleration in the new confirmed users on the site, up 33%. That's the fastest in three years.

Could you expand on what you think is driving that? How much of that is coming from marketing? And then on the marketing spend, my understanding is the way you're shifting that increasingly to mobile, there can be a longer payback but ultimately a higher lifetime value.

So can you just tell us where we are also in that inflection point?.

Sure. So, I think as we noted in the prepared remarks, what we've seen in the quarter are improvements in our marketing execution. No radical departures in how we're investing the money. There is an increment in terms of amount spent, but by and large it's been more solid execution. Mobile is being accretive in that sense.

We've I think gotten better at SEO and also in converting registered users. So the short answer, Mark, I think is we were simply more efficient with our marketing spend. We did spend more during the Q, but not a dramatic departure.

If you look at online customer acquisition investments as a percentage of revenue, there isn't any significant change there, about 10 basis points incremental versus last year. So really it's been primarily better execution. And then in terms of cohort analysis or lifetime values, we really haven't been disclosing much.

We have said, as you mentioned, that it's what's been behind the incremental spend and our greater confidence in acquiring users, but we haven't gotten into any incremental detail..

Great. That's helpful.

And then just to I guess think about the deployment of the enhanced marketplace, all the features to other markets, what are the biggest constraints to you there? Is it that they have to move in concert with each other, the Envios together with financing or is it people? I guess how should we think about the rate of uptake across other markets to replicate Brazil? Thanks..

Sure. So there's probably two different drivers behind uptake. The first part of your question was more of an execution issue and how we determine the road map for rollout. If you think of these incremental services, primarily payments but also Envios, they do require technology integrations with third parties.

And so part of our road map in terms of determining how quickly we can deploy to other countries is driven by the different partners, whether they be financial institutions or logistics and shipping companies, and how quickly we can build technology overlays that interact with theirs. So there is a both internal manpower issue, but also our partners.

The other I would say element in understanding pick up is just what the inherent demand for these different services could be in these new markets. And I think we've alluded to it the past, for example how Brazilian consumers that are the ones that are the most accustomed and most versed to buying on credit.

And so that explains the very strong adoption we've seen of the credit piece in Brazil. When you think of the Envios platform, geographic distribution will be a relevant factor. Argentina, our transactions are more concentrated within the metropolitan area of Buenos Aires, so that might lead to less rapid adoption than what we saw in Brazil.

And there are some other external factors. So I think all-in what we said is Mexico and Argentina were already working, both on the credit piece and the Envios piece we're seeing some good traction, that is noted in the prepared remarks. The cadence of growth has been very strong, yet less marked than Brazil.

And then the subsequent markets that we're looking at for the rollouts of free credit and Envios eventually are probably some of the Andean markets, Chile and Colombia, and we haven't given specific dates there..

That's helpful, Pedro. Great results. Keep up the good work..

Thank you. And our next question comes from the line of Gene Munster from Piper Jaffray..

I'll add my congratulations on the results. And, Pedro, if you could just walk through – I know you had a lot of numbers there and I might have missed some of them, but what you see are the key metrics in Brazil. And then separately, this has been a lot of different pieces that have been coming together that are adding up to these results.

I guess can you talk a little bit about the sustainability of this? In other words, is there anything changing the competitive dynamic that could make you feel that we should anticipate these results continuing? And then my last question is, with the eBay spinout, does that have any impact on MercadoLibre?.

Great. So the Brazilian market obviously continues to perform very well, driven in large part by the enhanced marketplace. A couple of numbers there. Let me just start with revenues. Slight deceleration, but still very strong revenue growth in local currencies of 58%. If you take into account the ForEx headwinds, that's still 31% in U.S. dollars.

When we look at total payment volume in Brazil, in local currencies it's growing at nearly 80%, 79%. That shows the strength of the payments business.

We said that 60%-ish of all Brazilian GMV is already being done on credit, so that's phenomenal penetration of the credit offerings and that's been one of the key drivers behind the growth in total payment volume. The Merchant Service business in Brazil is also performing well and that also explains the growth in Pago.

And then shipping in Brazil, we're rapidly approaching half of all units being shipped through Envios. So those are probably the key metrics to show the traction we're seeing behind the enhanced marketplace..

Sorry to interrupt you there, Pedro.

How about successful items sold?.

Sure. Units sold for Brazil was 26%. The other number we called out is, if you just look at the units through the enhanced marketplace, 38%, so very strong growth when we look at overall solid 26%. When we looked at the units sold that are using one of our credit shipping or payment solutions, that's growing even faster than the overall number.

You had asked about sustainability. Like we've always said, we're focused on replicating this to the other markets. We also think there still is room for increased adoption in Brazil. Shipping is not yet at 50%, so that should also allow for some incremental growth.

Having said that, obviously the comps begin to get tougher as we move into the second half of the year, not so much Q2, given that that's really where the ramp up of the enhanced marketplace in Brazil began.

So we'll be able to comment more on that when we get there, but just in terms of comping, the comping really begins to get tough Q3 and Q4 for Brazil..

And then eBay's impact?.

Sorry, could you repeat the question on eBay and the impact?.

Yeah, the impact of eBay spinning out or becoming – the marketplace becoming a separate business, how does that impact their relationship with you? Could there be some shares that could be coming afloat because of it? Any potential other impacts that may, whether it's M&A related or any other broader thoughts about what that spinout means in terms of MercadoLibre?.

Yeah, in terms of their shareholding, that really is a question for them. Nothing we can comment. And in terms of impact on our business or things we're focusing on, like we've always said, we focus on what we can control and our users.

So I don't really anticipate that that's something that should have any relevant impact to what we're trying to build out here. And what they will do with the shares is a question for them..

Okay. Great. Thank you..

Thank you. And our next question comes from the line of Ross Sandler from Deutsche Bank..

Thanks. Pedro, I just wanted to follow up on the Brazil unit growth. I think last quarter was 33% and I think you had a 3 point easier comp, if my notes are correct from a year ago.

So if it was 26% this quarter, can you just talk about the macroenvironment that you're seeing in Brazil? And then of all the things you're doing with the enhanced marketplace strategy, how much of a driver is the free installment program that's happening in Brazil? I think you said it was 48% of transactions right now.

Is that a meaningful driver of some of the acceleration you've seen in the last couple of quarters or at least last quarter? And then as you comp through that what do you think the growth rate might look like in Brazil? And then the last question – sorry, I know this is a lot.

But I think you said the GMV growth excluding Venezuela for overall MercadoLibre was 22% in local currency in the prepared remarks. Is that correct? Just want to make sure. Thanks..

Sure. So first of all, units sold did decelerate in Brazil from 33% to 26% when you look at it consolidated. We've always shied away from macro explanations when the business is accelerating. And so I think that also applies to when there's some deceleration.

The deceleration is probably driven primarily by the fact that although a lot of the growth is being driven by the move to the enhanced transactions, those transactions that have a credit overlay, a payments overlay, shipping overlay and all three of those continue to grow very nicely.

The growth rates once these services get more and more penetrated are less steep, so that's probably the biggest drive behind.

With Pago at over 90% adoption in terms of GMV already in Brazil, that means that you're beginning to max out the percentage of transactions on marketplace that didn't have Pago and now can access Pago and through Pago shipping and credit.

And so I wouldn't explain the deceleration from macro factors necessarily, but I think it has more to do with just normal oscillations in growth rate that the business has in this part, somewhat driven by already being more penetrated in many of these enhanced marketplace metrics.

And, again, we still think that the 26% in units growth is very solid growth for that market. In terms of how relevant has the free installment been for credit and, more importantly, for overall growth, we think very relevant.

When we look at the takeoff I was mentioning earlier in the back half of last year of the enhanced marketplace where it really began to accelerate, that coincides with when we launched free installments and that's not a coincidence.

The more buyer-friendly credit terms, namely free installments, have been a very strong driver of adoption of MercadoPago and of purchases on MELI overall. It hasn't been the only driver. I think the other factors have also been important, shipping being a very relevant one, better selection, better brand selling on the platform.

But definitely credit has been very important. The number we gave out this time is that nearly two-thirds of all GMV in Brazil is being done through credit, so there's still some penetration that we can add, but it's grown very quickly to be a majority of all Brazilian GMV. And what was the third part of the question? Sorry..

Just what was the overall growth rate for GMV excluding Venezuela in local currency? I thought you had said 22%, but you were going through a lot of numbers so I may have written that down wrong..

Just one second. You're correct. So excluding Venezuela, gross merchandise excluding ForEx grew at 22%. If you take into account currency headwinds and the dollar has strengthened versus all of our currencies, as we mentioned, then GMV growth excluding Venezuela was 5%. So 22% ex-FX, 5% in dollar terms, as reported..

Great. Thanks, guys. And nice quarter. Thanks..

Thank you. And our next question comes from the line of Marcelo Santos from JPMorgan..

Hi. Good afternoon. Thanks for taking the question. I actually have two questions. First, on the large retailers, the official stores, I just wanted to understand a little bit better the dynamics of competition in there. You say you're trying to attract more volume to be sold through your platform.

When you do that, do you think you are taking share from the other e-commerce players or are you really convincing those players to sell more in the marketplace? That is the first question, if you could throw some light there. And the second is on the Classified business. So you said you made a revamp in the real estate offer.

Do you feel that your Classified property, the portfolio is complete? Or do you still see space and need for more M&A in there? There are the two questions..

Sure. So in terms of the competitive pressure of the official stores, I mean, the way we've always seen it is purchases that occur online are still very small compared to offline throughout the region. It's still sub 5% even for Brazil.

And so when we onboard branded merchants, branded retailers that start offering their products online, many times what you generate is a transaction that perhaps would have occurred offline and you get it to occur online. Yes, if it's occurring on MELI by definition it's not occurring on one of the other online players.

So in that sense, there's a market share gain. But like we've always said, what's more relevant are the share gains that are occurring from offline commerce.

So hard to do the counterfactual, to say if the purchase is occurring on MELI by definition it would have occurred otherwise on one of the online competitors, because it could have been a purchase that would have occurred offline. And we've always been of the thought that that's a majority of where we're gaining share from.

So as we onboard these brands, hopefully what we're doing is moving customers away from buying something offline and buying it online that's more efficient and a better experience. What's also true is that many of these brands, they are multi-channel.

So they don't choose only one marketplace to sell through, but in many instances they offer their inventory on their own websites and on MercadoLibre. And then that depends on where the demand is.

So if we continue to focus on our buyers and driving demand, we should be able to move more and more purchases through our marketplace that complements whatever volume they're selling direct through their own websites, those that have their websites.

In terms of real estate, I think we've always said that marketplace companies that operate in specific verticals that are interesting to us, those verticals certainly include real estate as well as motors and other verticals that exist, are always interesting M&A opportunities for us. And so I wouldn't say we feel our portfolio is complete.

I say we continue to look for interesting companies that could be very easily tucked into what we're doing and brands that operate in vertical spaces that we've identified as strategic for us. So if you look at the case of Mexico, we had already bought one real estate company last year and now we've bought another one.

So we're comfortable adding to our portfolio, even within the same vertical if we think there are synergies and it makes sense..

Okay. Thank you very much..

Thank you. And our next question comes from the line of Stephen Ju from Credit Suisse..

Yeah, thanks. So, Pedro, I just wanted to understand this correctly. So you mentioned two-thirds of GMV in Brazil is done on credit and this includes interest-free and legacy financing. And also presumably the other markets are lagging this level of adoption.

So as you look over the next few years, especially given the context of interest-free financing, do you think this level becomes the new norm for the other regions as well? Also you touched on advertising in your prepared remarks.

How have the conversations on how adoption among your sellers has been? Do you think it'll be an uphill battle to convince them to use this product or is the 400% in profit dollar trade-off already well apparent to them? Thanks..

Sure. So of the two-thirds that are done on credit, the way that breaks out is the new (56:05) the installment free really has become the lion's share of that. So slightly less than 50%, 48% is what we mentioned in the prepared remarks of GMV is free installment for buyers. So the remaining 16% to 18% is what comes from the legacy credit.

Whether that's the new norm for the other countries, two years, three years, four years down the line, difficult to tell. Credit is a very relevant component to retail in the region. And so structurally I don't think there are any reasons why that couldn't become the case, but we need to continue executing and see where we get.

The initial results we're seeing are quite positive although earlier stage than in Brazil and, like we said, with an adoption curve that's somewhat less aggressive than in Brazil as was expected. So I think we will get to very high levels of adoption of free installment. It might take a few years rather than a few quarters.

Switching over to the advertising business. The initial uptake of sellers using the product ads to redirect back into our marketplace has been very strong. We're seeing very solid growth in the advertising business in terms of revenue. And that revenue is primarily being driven by this new product advertising format.

It's still a small business, so it's not even 5% of revenues. So let's continue to monitor it. If it sustains these levels of growth, it could grow into a very nice revenue stream for us and current indications are quite positive. It's a business that's growing well north of 50% in terms of revenues.

Let's see if we can sustain that going forward for a few more quarters, but all points seem positive right now..

And are there are any more incremental territories that can be rolled out interest-free financing? And where are the product ads live right now in terms of regions?.

So products ads, because that's internal, it's our own platform, our own technology. It doesn't require integrations with third parties, like we had mentioned before. It's easier for us to roll out pan-geographically so it's present in most of the relevant countries and almost all of the sizable markets.

And the existing sales force, all they have to do is sell a new format. And a lot of this is also self-served because it's more of a seller-driven incremental merchandising to their items, so product ads is rolled out everywhere. On the free installments, the focus so far has been Brazil, Mexico and Argentina.

We will be rolling out additional geographies over the next few quarters. I had mentioned earlier that Colombia and Chile in terms of size are the next markets that make sense. We haven't given out specific dates..

Thank you..

Thank you. And our next question comes from the line of Michel Morin from Morgan Stanley..

Yes, thank you. Two questions, Pedro. The first I just wanted to clarify, you mentioned growth in the financing piece in the quarter. I'm not sure I got the number, 60%-something. I wasn't sure if that was company-wide or Brazil only..

Great. So in constant currencies or in local currencies, the growth of financing revenues was actually 100%..

Okay.

And in dollars? And that includes Venezuela?.

Well, Venezuela doesn't have a financing product. So in this case, it's not relevant. So excluding Venezuela is also 100%. So Venezuela has no impact on that..

So, Pedro, given the kind of growth that you're seeing here, and I know historically you haven't given us a quantification of how relevant this is.

Is there anything you can share with us that can better frame how relevant this has become, especially in Brazil?.

Sir, does that conclude your question?.

No, no just one second. We want to give some thought on that. I think it's a relevant question. So in terms of obviously this has been growing very strongly. So when we look at the component of revenue that's coming from financing on a consolidated basis, it's in the teens of overall revenue.

Brazil obviously is somewhat stronger than that, so a little bit above that, it's been growing nicely and is roughly 20% of revenues..

Okay. That's very helpful. Thank you.

And if I may, just on the adjustments to net income, just to be clear, to get to your $0.78, you're adding back the FX loss in Venezuela but you're not deducting the FX gains elsewhere, like in Brazil?.

That's correct, yes. So all we do there is assume that the devaluation in Venezuela would not have occurred. That's the only thing that we....

Okay. That's clear. Thank you..

Thank you..

Thank you. And that concludes our question-and-answer session for today. I would like turn the conference back to management for any closing comments..

Great. So thank you, everyone, for your interest. Business continues to perform well and we look forward to speaking to you again in a quarter with updates on how things have evolved during the second quarter of this year. Thank you and goodbye..

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone, have a good day..