Q3 2019 Earnings Call
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I would now like to hand, the coffins do your speaker today Federico Sandler. Please go ahead Sir.
Hello.
We want and welcome to them and I wouldn't even <unk> earnings conference call for the quarter ended September Thirtyth 2019, I infer that equals <unk> Investor Relations officer for my telling anybody or senior manager presenting today, It's Pedro Arnt, Chief Financial Officer. Additionally, we'll spend a few minutes CEO .
We'll be available during todays <unk> session.
This conference call. It's also being broadcasted over the Internet and is available to 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 parents and technology initiatives. These statements are based on green.
All information and then are current assumptions expectations and projections about future event.
Well, we believe that are 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 this cost in this call for a variety of reasons, including those described in the forward looking statement and risk factor section overtime.
Okay, and other filings with Securities and Exchange Commission, which are available on our Investor Relations website.
Finally, I would like didn't remind you that during the quarter. So this conference call you may discuss some non-GAAP measures I reconciliation of those measures to the news comparable GAAP measures can be found in our third quarter 2019 earnings press release available in our Investor Relations website.
Now, let me turn the call over to better.
Thank you for that equal hi, everyone.
And thanks for joining our third quarter 2019 earnings call.
I want to kick off by saying that we've delivered another quarter of robust results.
We've made significant progress in executing against our strategic roadmap to not only deliver innovative technology solutions to our customers.
But also to continue democratizing ecommerce and digital financial services.
With that said.
Let me start with our Fintech progress reports.
During the quarter, we reached an important historical milestone as for the first time ever total payment volume away from medical leave it is marketplaces surpass TPV on marketplaces during a full quarter.
And did so not only on a consolidated basis, but also in our largest market Brazil.
As of this third quarter two of our main countries are processing more payment volume away from our ecommerce platforms than on them as Argentina, and Brazil, TPV off marketplaces reached 63% and 52% of total TPV respectively.
Consequently, and driven by the successful execution of all our off platform initiative.
TPV off platform U.S. dollar growth accelerated to 140% year on year for the quarter.
On the service by service level, starting with our merchant services business.
The business continues to maintain momentum.
During the quarter merchant services once again surpassed $1 billion of TPV on a consolidated basis.
Argentina, and Brazil, where highlights during the quarter as our gateway solutions scales.
As well as we execute on market fit solutions for both larger merchants and long tail merchant.
Moving onto our Npos service the largest of our payments businesses off platform in terms of TBV. We're pleased to report that it continues to grow strongly with quarterly active merchants already surpassing the 2 million Mark on a consolidated basis.
Additionally transactions per unique active device continue to increase as usage grows in both Brazil, Argentina as well as in Mexico.
In Brazil for Npls is we also launched our point pro device during the quarter, which has been gaining traction driven by our recent branding campaigns as we begin to observe meaningful improvements in top of mind and spontaneous awareness in surveys. We have recently performed post campaign.
Our point pro device will enable us to pursue slightly larger merchants while in parallel we have also launched a third device the point, many which will allow us to better serve the needs of our micro merchant segment of users.
In Mexico, our Mpls business is also gaining traction as we scale out branding and communication campaigns.
Devices sold in Mexico grew by 58.5% versus last quarter, and almost 200% versus last year well active collectors during the quarter continue to grow north of 300% year on year.
Moving onto our wallet services I am pleased to report that we have also reached an important milestone during the quarter.
For the first time since launch wallet TPV almost reached $1 billion on a consolidated basis.
On an FX neutral basis TPV grew by a factor of over four X versus last year.
Additionally, consolidated quarterly active payers on the wallet grew a robust 35% versus last quarter, reaching 6.1 million active payers.
Argentina was a highlight during the quarter for our wallet business as we see positive results across most T.K.P. eyes.
One of these is frequency of payment per unique pair.
This metric reached almost 11 payments per unique payer during the quarter driven by successful execution in the rollout of our in store Q Our network.
A testament to this is that in spite of the FX headwinds there occurred during the quarter in the country spend per unique payers per quarter continues to rise in us dollars, even reaching $200 per quarter.
A significant part of this wallet success is driven as I just mentioned by in store QR payments during the quarter, we doubled the amount of QR payers and QR collectors versus the prior quarter, reaching 2 million and almost 1 million respectively.
Additionally, in store QR payments in Argentina already represent over 50% of total wallet TPV for the quarter.
As we advance with our payment strategy, we aspire to replicate the success, we are seeing in Argentina across other markets in the region that have launched at a later date.
Still on Fintech I want to take a moment to update you on our credit business Mercado Credito overall, the merchant credit business continues to grow at a healthy clip in terms of originations and is contributing to diversifying our revenue streams, while generating more value added.
Services to our merchant base.
We continue making inroads in growing our merchant credit business in Brazil and in Mexico.
During the quarter as originations grew 118% year on year, and 216% year on year, respectively.
Additionally, in Mexico, as we strengthened our scoring algorithms and have more data on her merchants, we have increased loan terms, while still maintaining very low levels of and collectability.
In Argentina, and as a consequence of our strong FX headwinds and increasing local benchmark interest rates that followed during the quarter.
Our overall merchant loan portfolio is down on a sequential basis when measured both in us dollars.
As well as in terms of credit originations.
On the consumer credit side on platform consumer credits in Argentina continue to show resilience, giving us confidence that our scoring models continue to strengthen as we did not observe increases in nonperforming loans, despite the deteriorating macro conditions and how your benchmark rates.
In Brazil, However, we are still absorbing higher levels of bad debt as models continue to improve and older vintages start to seek repeat loans.
Additionally, I am pleased to report that during the quarter, we launched our consumer credit business in Mexico, which should help us to further improve our value proposition to buyers in that country.
We've also hit stride in funding sources for Mercado credit, though as we continue advancing in lowering funding costs and driving scale.
Argentina, we issued a public market securitization under the semi figure, which has allowed us to lower funding costs, while in Brazil, We launched our first consumer credit Trust also generating savings in funding that we will be able to pass through our buyers and sellers in the form of lower interest rates.
Before we delve into the rest of the prepared remarks I'd like to first make a few comments in regards to the increase in bad debt stemming from our credit business during the quarter bad debt increased by $13.3 million, an increase of 86% versus last quarter.
This increase is explained for the most part by two of our more recently launched products in Brazil.
Consumer credits and Npos merchant credits.
Given that we are such an early stage in both of these products.
Higher level of loan losses are within our expectations.
It's important to highlight that both in consumer credit and Npos credits in Brazil, we are taking the appropriate measures to improve these loan losses going forward.
We have adjusted pricing taken advantage of incremental information, we collect on nonperforming payers to strengthen our churn and behavioral credit scoring algorithms and have refocused on performing payers.
That wraps up the Fintech progress report.
We still have much to execute in the back half of the year and beyond.
It is imperative that we continually innovate and deepening customer engagement in order to maintain and try to further widening the distance between our value proposition and that of our competitors.
And in keeping with that focus the third quarter saw significant progress in consumer in merchant engagement on the Mercadopago platform.
Let's now move on.
To some of the high points from our marketplace business.
Consolidated GMB accelerated for the third consecutive quarter to 37% year on year on an FX neutral basis, driven by solid execution in Argentina, Mexico, Colombia and Chile.
Despite macro headwinds Argentina delivered the best quarters. Since Q2, 15 on an FX neutral basis and continues to grow meaningfully above inflation.
During the quarter, Argentina accelerated GMB on an FX neutral basis to 80.2% year on year.
Moving on to Mexico. It continues to be one of our fastest growing markets accelerating GMB growth on an FX neutral basis to 47% year on year, continuing to gain market share and growing well above market growth rates. Additionally, we continue to see higher net promoter scores as.
We improve our user experience and bring down delivery times and costs year over year as our managed logistics network expands.
Columbia FX neutral GMB grew at the fastest pace over the last 28 quarters accelerating to 50% well, Chile also accelerated to deliver the best quarter since the beginning of 2018, delivering FX neutral GMB growth of 32% year on year.
Incremental marketing investments greater traffic and improving conversion rates explain the results delivered in the latter countries.
Lastly, a recap of Brazil during the quarter where results were uneven.
Fixed neutral GMB growth came in at 24% year on year.
The deceleration was driven in part due to a cohesive strike, which created approximately 200 basis points of quarterly headwind during the month of September .
Additionally initiatives to cap free GMB.
To 2% of GMP versus 5% last year also had a negative impact on gross.
Despite the deceleration incremental GMB added during Q3 19, when compared to GMB of the prior year. During the same quarter was still a robust $378.6 million among the highest in recent quarters.
In line with that we're also encouraged to see unique buyers accelerating for the second consecutive quarter in Brazil to 25% growth year on year, while new buyers delivered the fastest pace of growth in over a year.
Additionally, in Brazil selection continues to deepen as we reached 120.4 million listings during the quarter. Another indicator that we continue to execute well on key capabilities.
Demand metrics for other countries continue to trend well as unique buyers reached 26% year on year growth on a consolidated basis.
Argentina, Mexico, Chile, and Colombia, all accelerated sequentially year on year to 22%, 50%, 38% and 53% growth respectively. Also new buyers are accelerating in all geographies as we begin to invest more aggressively in March.
Getting.
On a consolidated basis, new buyers, who are robust 10 percentage points versus last quarter.
On the supply side. We also continue to focus on deepening selection available to our buyers through our cross border initiatives.
As cross border trade seller base and pipeline continues to grow and we integrate our international sellers into our logistics platforms.
Fulfillment by Meli for cross border is operational in Mexico, and we continue to strengthen partnerships with international carriers.
Additionally, we are starting to deploy our international sellers supply into Brazil with early positive results.
Moving onto another key strategic priority for us and enabler of our enhanced marketplace vision logistics.
Our own logistics network continue to grow during the quarter on a consolidated basis, reaching one third of all laden shipped and gaining almost 20 percentage points of adoption versus last year and seven percentage points versus last quarter.
In Brazil reliance on drop shipping network continues to come down, reaching 71% of items shipped versus 90% last year.
CLIA reflection that our own network continues to grow and gain share of items shipped.
As of Q3, 19, Mismanaged network reached almost 30% of items shipped well fulfillment penetration grew to 7%.
Last quarter.
In Mexico fulfillment penetration continues to move along full steam.
During the quarter reached 35% of items shipped growing penetration six percentage points versus the prior quarter and almost 30 percentage points versus Q3 18.
The successful execution is also allowing increase by two percentage points the amount of shipments in two days or less in Mexico versus last year.
Argentina is making progress as well on the logistics front mercadoenvios penetration reached almost 70% of items shipped well fulfillment reached 5% of items within a quarter of launching the service.
Another positive data point from Argentina is that our flex logistics platform continues to fire on all cylinders and reached 10% of items shipped during the quarter meaningfully contributing to increased by 23 percentage points the amount of shipments in two days or less in the country versus last year.
Now that I've covered the main highlights and business KP ice for the quarter, let's move on to financials, where we have continued accelerating the pace of investment in our growth initiatives, mainly in marketing as we move into the second half of 2019.
During the third quarter gross billings continued to maintain strong momentum growing on an FX neutral basis above 60% for the third consecutive quarter, while also accelerating in us dollars to 45.4% year on year. Despite FX headwinds in some of our main countries.
On a by country basis gross billings delivered excellent performance as well on an FX neutral basis.
Brazil growing at 43.5% year on year, Argentina at 118.1, and Mexico at 104.4% year on year.
Consolidated net revenues grew faster than gross billings, both on an FX neutral basis, and U.S. dollar basis growing to 91% year on year, and 70%, respectively, and reaching $603 million as we continue investing behind free shipping loyalty and optimize.
Hi, subsidies, which have minimize contra revenues.
Argentina was a highlight as net revenues accelerated sequentially over 20 percentage points in dollars to 38.8% year on year during the quarter. Despite a devaluation of 13% the Argentine peso versus the prior quarter.
On an FX neutral basis revenue accelerated again, 218.9% year on year, demonstrating the resiliency of our business in that country.
Net revenues in Brazil, and Mexico also continue to grow at a very good clip both in us dollars and on an FX neutral basis.
Revenues in Brazil accelerated to 76.6% in dollars.
While on an FX neutral basis it grew 77.3%.
Mexican net revenues grew triple digits in us dollars for the fourth consecutive quarter to 146.4% year on year, an equally impressive 152.5% on an FX neutral basis.
Gross profit was $284.3 million, representing 47.2% of revenues during the quarter and relatively flat versus 47.8% a year ago.
The 62 basis point margin compression was driven for the most part by shipping subsidies and warehousing costs of our managed network, which was partially offset by collection fees sales taxes and hosting fees.
On a sequential basis gross profit was $284.3 million, representing 47.2 of revenues during the quarter versus 50% during Q2 of 29 team.
This 281 basis point margin compression is explained for the most part by incremental inventory costs from the robust sales of mpls devices during the quarter and increased shipping subsidies to promote adoption of our logistics network.
We've included a detailed breakdown as we do every quarter of these and also the Opex margin evolution I am about to cover in the slides that accompany this presentation.
As reported operating expenses ascended to $366.3 million or 60.7% of revenues versus 50.9% during the third quarter of 2018.
On a sequential basis operating expenses increased 81.4 million.
Which resulted in sequential margin compression of 848 basis points, mostly attributed to incremental marketing expenses and bad debt as I previously discussed.
From these 848 basis points of sequential margin compression in Opex 689 basis points are explained by the incremental marketing expense, while 194 basis points are explained by growth mainly in bad debt from our credit business in Brazil.
Both of these partially offset by 101 basis points of scale in salaries and wages gionee given that a significant portion of our Gionee head count is in Argentina.
The step up in marketing is explained almost entirely 90% of it to the launch of our branding campaigns and our main countries as we continue to strengthen our ecommerce brand, but perhaps more importantly, as we begin to build the mercadopago brand and begin to communicate the benefits of our payments ecosystem.
Adam to our users through more traditional marketing channels.
It's important to highlight that although the volume and revenue returns on these branding initiatives will play out more in the mid turn we've already began to see increases in unaided brand awareness of meli in the most recent brand tracking surveys that we've conducted.
If we break down that $51.3 million of incremental marketing spend Q on Q. During this quarter. The vast majority 46.2 million were deployed to branding initiatives, 60% of those for the marketplace and 40% of those for payments.
As a result of these incremental investments I've walked you through operating losses ascended to $81.9 billion.
The 848 basis point contraction that I, just explained plus the 281 basis point gross margin contraction covered earlier in Cogs explain the sequential decline and also the difference between positive EBIT and negative EBIT.
Moving down the piano, we saw $14.5 million and financial expenses attributed for the most part to interest accrual on her convertible note due 2028.
And financial guarantees in Argentina.
Interest income increased by 229.5 million year on year to $28.5 million, mainly attributable to the proceeds from the convertible note issued in August 2018 on our follow on offering earlier this year.
Which both generated more invested volume in interest gain and also due to higher float in Brazil, and Argentina from our payments business.
Forex gain was $987000, primarily as a result of strengthening the U.S. dollar over our Argentinean peso net liability position in Argentina.
We recognized a valuation allowance on deferred tax assets in Mexico, and Colombia, which accounted for $91.5 million and $7.2 million respectively.
We still anticipate the possibility of eventually being able to use these tax credits in the future.
Should we be able to use the valuation allowances they will be recorded SP et al gains in future periods.
As a consequence of all this net loss for the quarter ascended to $146.1 million explained for the most part by the incremental investments in marketing and the aforementioned tax valuation allowances.
On a per share basis. All this resulted in a basic net loss per share of $2.96.
Free cash flow defined as cash from operating activities less payment for the acquisition of property equipment and intangible assets net of cash acquired was $124.1 million versus 74.4 million in the same period last year cash short term investments.
Long term investments totaled $3.1 billion.
Reflecting on the first three quarters of 2019, we remain very encouraged by the performance of our business overall and remain excited about the opportunities that lay ahead of US. We believe we are building superior experience is in products for our consumers and merchants and the sustained momentum we see in the bid.
And this gives us confidence to continue investing.
We look forward to keeping you updated on our progress next quarter and for now we can take your questions. Thanks.
Thank you as a reminder to ask a question you want to press Star one.
On.
So what are your question pest the pankey, please standby Bobby compared to Q1 day roster.
Our first question comes from Stephen Ju with Credit Suisse. Your line is helping.
Okay. Thanks, So Pedro theirs.
Talk to focus on given you guys are marching in multiple different directions I'll just pick one.
So the pro mobile point of sale with device.
You guys just introduced.
Can you talk about whether the merchants that you're targeting there are existing Mcconnell library merchants or argues a completely different set of new merchants wondering what the acquisition cost would these merchants might be.
And on a go forward basis, and when you release I guess the mini version also I guess this is probably the version that is more appropriate for the merchants that would otherwise be on the marketplace.
Thank you.
Hi.
Oh I see when there is lot though.
Thanks for the question.
With regards to point for all.
Addressing these really small businesses in the past we are many device we were target the mostly long end of a long period, which were mostly indeed laws our reach into slightly larger.
Businesses.
Here, we are even though we are promote the needs in our platform I'd say most of the new push because again you source Mrs audio radio and the more Colibri platform. So where are you seeing a sole source on we're reaching outgrew through marketing through these specific markets. We are have not done we're not disclosing Doug distant goes.
We are very comfortable.
The yes.
It is very appropriate.
Field is it reasonable.
We also introduced.
Point, many cheap which is a device that is targeted on on the smaller merchants, but other already has its telephone people need so that it does not need to be bird with the telephone and and we also do is not doing doing last quarter and these are addressed in different segments of the market. So I will say before.
The smaller individuals and then slightly larger merchants.
Thank you next question comes from Deepak Mathivanan with Barclays. Your line is helping.
Great.
Thanks for taking the questions.
Can you talk about some of the initiatives that's driving use case in frequency got on the wallet, perhaps dumps are the merchandise on the in store site and without going into specifics how are you planning to attack this aggressively.
2020, and beyond and end up in store QR wallet damages growing really fast, particularly in Argentina, how do you think about the monetization plan for this long term.
Our.
Primary merchants that seeing the usage right now thank you.
And.
Hi, This is always while though let me take the first part of the question.
With regards to use cases on an increasing in frequency of users.
I think.
Lumen drivers have been when they want.
I didn't use cases in each of the countries, where we operate and the other one piece I think popularity for <expletive> drug called networks also have been growing in all of Argentina, Brazil, Mexico.
So the things we've tried to do is important juices too.
The word on success, but also to use more than one different flow if I'm not retention rates are higher when users engage more than one of the use cases.
Towards the later part of the question and.
You ask about Monetisation plans, we have already made public though users in Argentina, Oh, we'll start charging 0.6% for start buttons on sections. Unfortunately card transactions.
Starting during Q3.
When spokesperson.
I can just follow up on that what is the site.
Roughly.
And can you provide on kind of growth characteristics up but thank you.
Yes.
Great. So I think what we disclosed in the script was that that business was approaching a billion dollars during the quarter.
It's growing at a very robust rate so it's growing over fourx.
Okay. Thanks.
Thank you.
Our next question comes from Robert Ford with Bank of America. Your line is open.
Hey, good evening and thanks for taking my question Oh, sorry.
Can you talk a little bit about how rapidly your lending algorithms are evolving for for consumers and mpls clients in Brazil, and how you think about the growth of the credit book in Brazil as a whole.
Great.
So you have the disclosures around originations in the number in a second let me just address the evolution of the of the algorithms. So whenever we launch something new obviously, there's a little time that it takes through the algorithms to improve we began to see strong improve.
Since in the third quarter, hopefully, we see them reflected as we move forward in the year. So we are seeing and we're comfortable with how the algorithms are performing in terms of originations when we look at Brazil.
Originations have been fairly stable.
Overall originations Q on Q slightly down and the same applies for the consumer book So in terms of.
Incremental originations, it's been similar size Q2, Q3 in the range of incremental $30 million Brazil.
And Peter you did you dictate that right. This is not a demand issue your determining how quickly you grow those originations correct.
We do and if you look at our history, we've been very disciplined so either if macro conditions change or if we think the algorithms still need to get more robust weaken slowed down origination rhythms and we have done that in different quarters. This last quarter for example in Argentina, you'll see a strong.
Long slow down for obvious reasons. So we continue to take a long term view on this we continue to be very I.
I think cautious and making sure we're being efficient and we entirely determine how much we opened the spigot or close the spigot in terms of the origination volume.
Understood and then I think which is one of the fastest growing sites in Brazil. How are you thinking about the cross border business, there and how are you balancing user experience with assortment growth GMP crop.
Yes, so I think on CBG really what we've been more focused on recently is how do we offer a seabeach deep PBT offering that's differentiated from some of the other global players in a lot is that is focused on the user experience both for sellers and buyers. So.
We're working on how do we really streamline the whole process in terms of shipping customs trying to figure out if there are ways to get inventory into country faster and therefore into your doorsteps faster once you've ordered I think that's been one of the reasons why growth there hasn't been explosive.
Because we've really tried to focus on building out the right user experience.
And we've made consistent and solid strides on that.
I think hopefully when we look back in a few years that we'll have become a sizable business with a user experience and net promoter scores that clearly differentiated from some of them.
Faster growing wishes, our or or other players that focus more just on getting demand from China to Brazil, and not so much on the user experience on the way.
Very helpful. Thank you.
Thank you.
Next question comes from Mike Olson with Piper Jaffray. Your line is open.
Hey, good afternoon, I know you don't provide specific go forward guidance, but Q3 was a fairly dramatic change an operating loss. So just wondering how do you think about kind of the near to medium term operating loss should the quarterly loss run rate it couldn't be more like QQ or more like Q3 or somewhere in between and would you say the companies.
So focused on profitable growth as you've described before and if so what kind of timeline could take it back towards that.
So what we need to make sure that we balance is this sustainable business.
With.
Making sure that were also capturing opportunities that exist in front of us and that were aware of what the competitive dynamics are I think if you look at the quarterly disclosures, you'll see that we've tried to given a lot of indication on Q3 on where the incremental margin compression comes from you'll see a lot is that is either increased.
The investment in customer acquisition marketing for the entire wall and payments strategy across multiple geos, which is something that we do want to invest in because we see an enormous tam and a very very large opportunity.
In some cases with longer payback times on merchants, we acquire or in the case of Raleigh, an enormous opportunity with a very good proof of concept in Argentina, but still in a market launch monetization model and then on the marketplace I think we've identified.
An opportunity to incremental our brand awareness and our brand equity so you'll see in the disclosures that there has been almost the entirety of the incremental spend sequentially is on marketing.
Marketing is something that's very easy for us to control and that we also think scales well going forward. If we sustain these levels of revenue growth.
While still being a material marketing budget to continue to consolidate our leadership.
Thank you.
Thank you.
Next question comes from my fellow Santos with JP Morgan Your line is open.
Hi, good evening, Thanks for taking my question.
The first question I'd like to make is.
Please.
Corruption off the.
More or less ballpark number.
Levels for the different businesses you have like.
General terms I think it this is in the past him just wanted an update now and the second question is regarding and Pos.
Do you plan or do you offer already some sort of softer together weve payments is this something that's on the pipeline to help to merchants together, we have to payments. These are the two questions.
So so very quickly.
Relative profitability by the different businesses, we don't disclose I think at times, we've given overall indication, but given how competitive the situation is getting I think you had very good disclosures are segment not by business line.
And obviously these businesses are in very different.
Pace of growth and development. So I would argue that the steady state current sorry, the current PNM was and what they look like is by no means an indication of what those businesses could deliver in terms of margins in DNL at scale again, just to reiterate right. If you look at many of the Fintech initiatives right now.
Now it's more about.
Grossing TPV and customer acquisition, and making sure that the customer engagement and consumer user metrics are going in the right direction and then when we hit a certain level.
Scale, we start introducing monetization model and if you look at Argentina is involved there just mentioned we're going to be doing that this corner I think that reiterates our commitment to monetizing a wallet in the fintech initiatives when the time is right.
Right time could be.
In the relatively short term as what we're doing in Argentina.
Thank you.
Thank you next question comes from Ravi Jain with HSBC. Your line is now open.
Hi, a couple of quick question. So the first one on Brazil.
The GMB growth do you think that is.
It.
If there is room to kind of accelerate that and 2020 in terms of especially given the competitive landscape is getting even intend for local appeals are raising money in international players are trying to also expand that offering.
How do you see melees positioning and your strategy do you think you want to accelerate your logistics build out do you think that's going to beat the keeping or do you want to just continue investing in branding and that's how you plan to attack the competition and the second question is do you see some synergies or the potential for free.
During the two businesses together are the users of the wallet, becoming more and more violence on your ecommerce platform. All should we think that the ecommerce vials. All your first start up those of the wallet how do you think about.
Cross selling between the two business. Thank you.
Okay, sorry, just one thing I got cut off before finishing the answer to the previous ones. So very quickly in terms of software for the M. Pos is when you look at the M. Pos devices that we distribute and the merchant base and the multiplicity of services and products that were pursuing currently we don't have.
But as a high priority software or ERP like solutions, we're much more focused on.
The multiple other financial services that were offering and not the ERP business. We do look to integrate with existing ERP is like the links partnership we announced last corner, but in general it's not a focus of us to build our own core ERP.
Brazil, I don't think it's an either or question, we're very focused on the rollout of our logistics platform, where actually extremely pleased with the results were seeing there in terms of migrating more and more volume onto our own network and also the sophistication and the results were seeing that network.
So that will be a core component of our differentiation in our value prop in Brazil.
And that drives a lot of opex through the piano I think because we're seeing incremental improvements in net promoter scores and engagement metrics that also gives us greater encouragement to also invest more in marketing to communicate some of those new services and new brand attributes.
But just in general to attract more visitors and buyers to the category. So I think we're being more aggressive on the marketing front incrementally and sequentially.
And it's not in detriment of investments that we're making in user experience or technology or fulfillment and again, we don't give forward guidance on growth rates, but I do think that we hope that all these investments could lead to better user experience and hopefully that need.
Two more incremental gross.
In terms of ecosystem and platform now obviously, we believe that that's one of the if not the biggest differentiator that we haven't we need to focus on I think when we look at it today, there's probably more that we and leverage the existing user base of E Commerce to drive wallet in.
Fintech usage. However, I think it's roughly split 50 50, 50% of monthly active payers have some sort of activity on the marketplace and 50 are just net new.
Fintech users and hopefully overtime, we are able to bring on to the marketplace as we launch our revamped medical the loyalty program over the next few quarters that should be instrumental in driving more and more cross usage and cross selling of our entire ecosystem.
Thank you that's helpful.
Thank you.
Next question comes from Gustavo Oliveira.
Your line is open.
Thank you for taking my question.
I wanted to understand it's still the Brazil, GMB growth you've been reducing your.
Shipping substitute says you grew more comfortable with your algorithm.
He is.
We have any finishing increasing again subsidies are getting curie.
Following the optimal level that you wonder.
Workweek going for.
And whether you prefer to.
More of that Resourcing inc. to bring investments.
Yes.
So look.
Obviously, we are always innovating and always thinking of ways to drive better user experience more volume. So I think meli is always about potentially changing things right. Now I think we have reduced versus prior years the level of subsidies.
As a percentage of revenue, but we also feel that the subsidies. We offer now are a lot more intelligent and a lot more targeted if you look at it sequentially. There was actually a slight increase in subsidies not so much on transportation, but subsidies aimed at getting merchants to send more inventory to our fulfillment centers.
And that's had very positive results in terms of growth as the managed network and fulfillment in Brazil has began to grow again as you saw in the numbers.
Again, I want to stress I don't think this is a trade off between marketing for shipping I think a lot of the marketing spend has been incremental and that's what's driven the change.
In the DNL profile and we're confident that that's the right thing to do for this phase of the business, where we need to invest in growth of Fintech and user acquisition, and where we see an improving user experience on the marketplace and we want to invest behind that.
Yes.
That's I think the way we're looking at the incremental marketing investment that was in the DNL in Q3.
Going forward at least for this phase.
Thank you.
Thank you.
Our next question comes from my Scars with Goldman Sachs. Your line is open.
Yes, hi, Thanks for taking my question so.
Regarding managed network, where you made a lot of progress on a quarter over quarter basis. As you look out further into the future and you continue to sort of keeping your footprint.
Two questions here Firstly, what do you think in terms of like what do you need in terms of.
Entered the footprint does it more question of like of getting additional.
Fusion center space, or maybe increasing more hubs and an increase in potentially even the level of automation in your.
And your network and then.
Secondly.
As you think again further out and look through your merchant base.
Do you have any plans for also offering additional services, where you help your your merchant.
Derek you target the local.
Local tie in through through sort of click and collect initiatives within their stores, where you could just off of the.
So to the interface on the on the marketplace and connect to the connects buyers and sellers and.
And then also solution on the.
On the logistics, but where it doesn't really go through your fulfillment or your cross docking.
But but office basically local transportation solution.
Thank you.
Okay. So.
I think most of the elements you included in your question at the beginning in terms of what other.
Issuance to the managed network. We believe we will continue to see in terms of incremental warehouses incremental service centers and hubs.
And the increased automation I think the answer is yes, remember that in our motto warehouses and.
Incremental service centers, those our opex, they're not capex incremental automation, depending on what it is capex, that's very manageable number.
And so all of those are part of our network plans for all the countries, where we're building out the managed network.
In terms of click and collect their most of the functionality does exist. So we can work with select retailers on click and collect having said that however, I think our focus not being a bricks and mortar retailer who has some cost into buildings is much more on building out the fastest than most.
Sufficient.
Network to get packages to your doorstep with potentially the overlay and we began to do some addition, Brazil of drop off point and eventually pickup points, but not so much store fronts of our merchants, but rather nodes within our network, where drop off and pick up tenant.
Her so our focus I think is more of the Youre Native E Commerce player for now and isn't trying to leverage existing physical stores and more on building out the efficiency in the speed of our own network. We can work with select retailers, who want to on offering click and collect on what they sell on the platform.
And that hasn't been a focus.
Great. Thank you.
Thank you.
Next question comes from my one follow.
Your line is now open.
Hi, Thank you for taking my question. My first question is just on the marketing spend I'm looking at the flight in your presentation, which is very helpful. Just breaking it down.
Between branding performance and promotion.
And I was little surprised perhaps but how much is about 60% it looks like is on branding.
Yeah.
Majority about on the marketplace given your such a well known brand already just talk about the decision.
Fine your marketing allocation and do you find that like in terms of trying to drive first time users on.
But digital wallet that.
No promotion thing and performance marketing aren't aren't good ways to do that thanks.
Yes, so couple of things first of all.
These include both commerce and Fintech branding investments bear in mind that when you you should look at the branding investment probably on an annualized basis.
To have a better sense of overall percentage of revenues, we've concentrated a lot of the investments in Q3, and a little that in Q4 that doesn't necessarily signal and that is an ongoing quarterly amount. Although we have a very strong brand as e-commerce becomes more and more.
Our main stream, we still see opportunities to drive more user and more top of mind.
Behind the Mercadolibre brand and like I said earlier part of what we're communicating there are also some of the newer attributes we have so the speed of our delivery network the prevalence of free shipping.
And other newer benefit of the marketplace as its really improved service and then on the Fintech piece. If you were to look we do have to build out the Mercadopago brand. If you look at some of these markets Mercardolibre is incredibly well known mercadopago as a brand was historically on marketplace.
And so there is room to start building standalone knowledge behind but I would say the first time, we've ever done any brand building for Mercadopago.
It's always been known in use primarily on the marketplace. We do agree with you that.
For a customer engagement customer acquisition promotional and targeted discounts are very effective and that's really where most of the promotional.
Budget comes in is for the Fintech piece, but because we've never generated any awareness around the brand and there are other competitors that have invested.
Brand marketing behind their brands I think there is room to do that as well and works. We're pleased with both the quality of the campaign and some of the initial results were seeing in terms of incremental brand awareness and top of mind.
Great and as a follow up my follow up question just on the.
But the vision to start charging transaction fee on the digital wallet.
In Argentina, I believe you could do.
Help us put that thought process like why why do it now when you're still at early stage of you know adoption do you feel like you can start charging the transaction fee and it won't flow growth or is the more that you've decided to sort of increase or sort of drive more profitability.
Slow down growth a little if you could comment on that that'd be great. Thank you.
Yes.
Moving to move all though so I think it's two things when they want.
We believe we were pretty an unbelievable good multiple decision. We continue to believe that after the this price increase is will be a hell of a good wonderful decision. We continued to be the two biggest electronic payment method in the markets, we will touch points. So your 0.6% for both store banner.
David cards, and this is cheaper it on the going rate everybody pays for debit cards, you not to do not what does your 0.9%. So we'll see we'll lose a huge multipurpose vision, but we also think that it was worth doing it as a proof of concept and to the as the market and see how they start.
Okay. We are starting to based on central fees for these four juggle payments and just complementing that they think this is important is.
We're committed to investing behind a business. If we know that there's actually an attractive business behind that and so we felt that in Argentina, we had enough traction with the free product. It was time just start monetizing and also to make sure that we start building out business that's sustainable in profit over the long term.
And I think that's a reflection of how we've always approached our businesses and that hasn't changed which changed I think is just our desire to use the scale, we have and the capital we have to invest aggressively to really gain users and then too as rapidly as we can without hurting that long term.
Growth beginning to monetize and actually Buildout is sustainable business. So that's what we do in credits. So what we're beginning to doing that you are it's what we do and mpls. So what we've always done in merchant services.
Great. Thank you guys.
Thank you Sir our next question comes from Tom Champion with Cowen. Your line is now open.
Hi, Good afternoon, guys. Thanks, Thanks for taking my question.
Just just asked can you comment on any marketplace buyer.
Changes in Brazil since the launch of Prime in mid September and also what what's the status of.
Strike is that has that been resolved or does it remain ongoing or do it did it flow into to for Q.
And then on the payment side.
Q our network appears to be a really important frequency lover with a wallet in Argentina and just curious if it's available at this point in Brazil. Thank you.
Look I think we haven't seen any changes in our business attributable anything that happened on the prime front.
It's very very early stage I would say we compete with them.
Aggressively in head on in Mexico.
I think we like what we're seeing from how our business continues to perform their.
Brazil, I would say, there's a very very big difference between the business we have in the business there are running.
And so I don't think we attribute anything to do whatever was launched by a competitor during the quarter.
So strike is over.
Obviously, it had an impact on our business I think we said in the ballpark of 2% of GMB growth in the quarter. It was only a few days. So obviously the impact in the month of September was larger than that I think the silver lining to this is unlike the last time Cornelius had a strike our managed network we were able to move.
Volume away from Korea was towards the managed network. That's one of the reasons why we saw the strong improvement in managed network adoption in Brazil during the quarter and increasingly going forward. Every time. This happens again, I think we will be better and better prepared to simply move volume away from whoever as an operator.
Final complication to other carriers, we can already do that in Argentina, and Mexico quite well in Brazil, there's still significant rely in suncor aaos, that's waning at a very consistent.
Month on month.
With regards to York build network as you mentioned thumb.
Definitely has been a frequency lever in Argentina have seemed odd girls the Merkel Oh ecosystem that those users who use goes no more transactions every month in Brasil. What has happened. So far is remember were relaunch, we actually launched during the second quarter during the third quarter, they're very excited with yes celebration of fund section.
And some of monthly active there's a monthly active sellers. We we have seen so we're very excited but acceleration.
But most of the acceleration has been driven by new uses new sellers joining the network.
And increasing frequency is if it involves us it didn't Argentina for things that need to happen is fully populated to increase for there to be more payment options available and then we should see an increasing frequency.
Got it thank you guys.
Thank you. Our next question comes from John Coffee with Susquehanna. Your line is now open.
Hi, Thank you for giving me and.
As I remember from previous calls, maybe maybe I'm forgetting something that your cross border transactions were fairly minimal I thought a recall there were some may transactions between countries like Brazil, and maybe China I know you called it out a little bit more in this call is way can you just walk me through a few basic use cases of each some cross border transactions you would have.
Today or are planning in the near future in the last question just also pretty short one.
One of your marketing spend in Q3 should we think of this is a little bit more bursty or could this be a new trajectory that we might see going ahead of the next few quarters. Thanks.
So just one clarification when we refer to cross border here. The focus is really on cross border E. Commerce. So it's more on our retail business. What we're trying to do there has to offer a cross border solution that unlike the more prevalent.
Winds really focus on companies that have global merchant bases, and then pushed product globally in how we can leverage our existing marketplace and the benefits of that marketplace locally.
To bring in inventory not so much intra Latin America, but primarily from Asian merchants, and North American merchants, but deeply integrated into some of the assets that we built on the marketplace. So when I mentioned earlier I think Bob's question around tying cross border trade to the user experience.
It's how can we leverage the assets, we build in logistics to get those cross border items to your doorstep a lot faster than we would if you were buying on some of the other global platforms. How can we use local teams we have to really facilitate an expedite.
Harris and customs processes. So it's less of a hassle free people purchasing on the platform and the idea then is to get global inventory to the doorsteps of Latin American consumers, it's not so much focused on payments.
Look marketing again, we don't guide I think we've given you guys a thought process on why we think the timing is right just pick up the pace of marketing investments a very obvious on the fin Tech space, we're attacking many different French simultaneously you our network Npos car.
Merchant services.
We see tremendous opportunity here and we want to make sure that we invest behind it and we need to build out the brand and then on the marketplace because of all the improvements. We've made we think it makes sense to strengthen some of the brand attributes communicate some of the new brand attributes going forward I think a lot will depend on the performance and.
What we see in the data around these investments brand investments are not performance like that you can see immediate impact we will be tracking he key numerical KP eyes do surveys through direct to site organic traffic and other ways, but we knew need to give it a little bit more time.
To see what the residual impact of those brand investments are and I think based on that we'll have a clear sense of how we continue to invest going forward. So I think spectrum.
Three corner on what we did during the quarter rather than than forward looking.
Yes.
Thank you. Our next question comes from Richard Cathcart with Bradesco. Your line is open.
Hi, guys. Good evening I wanted to ask about the money network in Brazil.
Specifically kind of what behavior, you're seeing from consumers that all receiving their products by the managed network.
I think that they're getting a better service.
The buyer core hail from so I think what I'm trying to get out if you're seeing any kind of improvement in frequency.
All conversion.
I'm confused increasingly refi products from the managed network bank.
Yes, so look we're beginning to see some of the numerical flow through of the benefits of the managed network in Brazil. So lead times are becoming cheaper than the sorry faster than the rest of the other alternatives transportation costs.
Our coming down so, it's becoming cheaper to deliver packages across the network, although it's still far from at full capacity and perhaps most importantly to your question net promoter scores are now higher on the managed network than away from it at this point roughly six point tire and.
Tracking.
Two widening that spread conversions are a little bit more difficult to measure because there's a lot of other stuff that impacts conversion. So the tests haven't been asked conclusive there, but again I think we're increasingly convinced on both the immediate and also long term benefits of the managed network versus the old drop ship network.
Yeah.
Thanks, very much and if I may just a quick follow up for for a volatile I think.
I wanted to ask you about the promotion the discount for you've been offering to confuse moves to use the mercadopago want it can you just give it a little bit of color.
About you know kind of what you're learning from them.
Those discounts and promotions and kind of how that's impacting you favor. Thank you.
Sure John .
Let me tell you about our experience in Argentina, which probably is what we're seeing us debate for what we're doing now in Brazil, and Mexico, and we started a dinner we started with always on promotions. So every time you went against or you get a promotion then we switch off to every time given this promote the these stores or teams work, which would go light houses.
We started a larger merchants we were when.
We were giving you a discount the first time you you paid in each of those unreal stage now in Brazil, and eventually not to you know, we weren't able to who diminishes the amount of promotion we bid. The first one we did this is.
Stopped doing promotions, there was little bit of a slowdown but a month after that we will go into the same rate as we were before where that Britain similar right. So we are following that playbook in Brazil.
Film, we just want to add as many sellers and as many buyers as possible payers as possible and eventually we will focus on improving and make you more efficient does this comes.
Okay. Thanks very much.
Thank you I final question comes from Rodrigo Nustar, It's how your line is open.
Hi, Thank you for taking my question.
Regarding the machines.
Beginning Brasil.
More color on on the steps you're taking thing.
Penetration, which are the main.
Thank you.
Okay, great. So I think like we said.
Level of fulfillment penetration really began to pick up again from a low base, but nearly doubled sequentially. This quarter I think it's been a combination of solving some of the friction around sending inventory to us building better tools for sellers building more efficient.
Pickup routes more frequent pickup routes and then combined with economic incentives that we did offer.
So I think we were kind of stuck for two corners, there without too many improvements in adoption, we begin to see that pick up again, and I think our level of confidence right now that we will continue to scale out our fulfillment network.
Also our cross docking network is pretty good.
Thank you.
Thank you.
This concludes today's question and answer session, ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.