Q3 2022 MercadoLibre Inc Earnings Call
But their tier 2022, thank you for joining us I'm, Richard Cathcart Investor Relations Officer for Mercado Libre today, we will share our quarterly highlights on video after which we'll begin a live Q&A session with our Chief financial Officer and Chief.
Executive Officer of Mercado Pago Oswald Jimenez.
Before we go on to discuss our results for the third quarter of 2022, I remind you that management may make forward looking statements relating to such matters as continued growth prospects for the company industry trends and product and technology initiatives.
These statements are based on currently available information and our current assumptions expectations and projections about future events.
While we believe that our assumptions expectations and projections are reasonable in view of the currently available information you are cautioned not to place undue reliance on these forward looking statements.
Actual results may differ materially from those included in this conference call for a variety of reasons, including those described in the forward looking statements and risk factor sections of our Form 10-K for the year ended December 31st 2021, and any of my quarterly bright inks applicable filings with the securities.
Exchange Commission, which are available on our Investor Relations website.
Let's begin with a summary of our results.
Mhm.
Uh huh.
Hello, everyone.
Im pleased to have the opportunity to share some of the achievements and key messages from our third quarter of 2022 results. During Q3, we were able to deliver a strong combination of growth in commerce and Fintech with continued progress towards our annual Todd.
It gets for a profit expansion.
Our operating margin expanded more than 500 basis points to 11% contributing to a quarterly profit of $296 million.
While operating cash generation was solid once again this reflects the strong performance of our business our ability to dilute costs as we scale and our long term commitment to delivering sustainable and profitable growth.
<unk> business continues to show resilience amidst macroeconomic challenges and as physical retail fully reopens with <unk> growing 32% on an FX neutral basis.
Our investments across the businesses over the last few years in technology have enabled us to improve our service levels significantly.
And this is translating into market share gains across geographies, both on a consolidated level and also across multiple product categories logistics investments have been the other major contributor to the improvement in service levels as our managed Medicare a little envious.
<unk> network penetration hit 92% during the third quarter up five percentage points over the last 12 months, we are progressing our strategy to increase monetization with our ads business, reaching one 3% penetration over gross merchandise.
Volume is small, but steady increase on previous quarters.
We delivered a series of improvements in our AD tools.
And we have a roadmap of technology improvements that is accelerating.
Mercado Pago had another exceptional quarter with unique fintech active users, surpassing 40 million Mark for the first time.
Off platform TPB achieved its fourth consecutive quarter of triple digit growth, reaching $23 billion with growth of 122%.
R M. Pos businesses in Mexico, and Chile made a strong contribution to this growth as did QR in Brazil, and our digital banking account solutions in Argentina.
Medicare will get any of those portfolio reached $2 8 billion growing at a slower rate than in past quarters as we slowed originations.
This is a reflection of our prioritization of risk management and margin over growth.
Our credit business delivered a resilient financial performance with annualized email spreads rising quarter on quarter to <unk> 37 per cent.
Our early Npls are stable versus the prior quarter, which is a reflection of the steps, we took to mitigate risk and a weaker lending environment, particularly in Brazil.
With significant gross profit and operating margin expansion, we closed out another quarter of strong financial results that reflect the growth of higher margin businesses. Our disciplined approach to short term growth investments as well as our focus on leveraging our scale to deliver costs.
Dilution on Cogs sales and marketing and G&A expense lines.
This has enabled us to continue to invest in engineering head count, which is reflected in higher product and development expenses as a percentage of sales as we had anticipated.
More detailed review of the third quarter operational and financial results is available in the shareholder letter, which is published on our IR relations website.
And before turning the live Q&A section of today's earnings I'll hand, it back to Richard to get through some of the latest updates to the Mali product and user experience.
<unk>.
And our mission to democratize access to Commerce and financial services, we continue to deliver improvements in the shopping experience of our marketplace.
One example of this is the short videos that can be found on the homepage of our E. Commerce app by consumers can discover products and learn more details and features about the products that are looking to purchase.
This introduces enjoyable content discovery element to the search experience helps promote user engagement and for our sellers as a new channel for marketing and sales.
When shopping for apparel and fashion products offered by thousands of solid Browns and official stores the search experience matters.
We improved the user experience of our fashion segment and you can now browse through different product segments lifestyles on brands. This enhances the discovery experience that is key for this category.
As buyers search for something they need to have better filters to facilitate that search. This is another example of improvements that have been enabled by our continued investment in technology. This year that you can find much more on our app.
And as always we will deliver it quickly to your house. So you can start using their new item as soon as possible.
On the path to improving delivery times are bringing down logistics costs. We have introduced art crowdsourcing solution for the last mile in Brazil, and Mexico, leveraging on our service Center network.
With this innovation all founders will type products destined for high density delivery neighborhoods to a service center that says there's a last mile facility instead of delivering them from door to door from there the drivers from a crowdsourcing platform to make the deliveries to our final customers.
All of this is underpinned by technology developed by the one and a half thousand engineers that are dedicated to logistics.
Developers continue to work on logistics projects like this that will make our network more effective and cost efficient from inbound to delivery and returns.
The many places network has grown to almost 7000 locations with over 99% enabled for pickup and return.
On our path to democratize financial services across the Latam region, we launched many new products over the last 18 months. This includes debit and credit cards savings and investments crypto wallets insurance personal loans and many other products.
We now have a complete offering tailored to the needs of our users, allowing tens of millions of people to manage all of their financial services within our ecosystem, whether they're individuals or small medium and large entrepreneurs.
And this is not just happening in Brazil is the approval of our <unk> license in Mexico allows us to begin to market on Calder Fargo and actively offer it tools to the country's large unbanked and underbanked population.
Makoto Libre will continue to deliver better products and services focusing on the experience of our millions of users with solutions tailored for their needs.
Underlying that commitment we will have higher than an additional 4000 engineers by year end, all of whom will work to develop and extend the competitive drops onto just of our ecosystem.
As always the best is yet to come.
At this time, we will conduct a question and answer session.
To ask a question you will need to press star one on your telephone and wait for your name to be announced please standby, while we compile the Q&A roster.
Our first question comes from Andrew Ruben with Morgan Stanley . Please go ahead.
Hi, Thanks, very much for the question. So some strong results overall, but just to focus on credit and particularly the pass through rate. So when considering the moving pieces you mentioned origination loan performance and a 360 day dynamics, how do you see the evolution.
And of this metric playing out really any color on the drivers. When you think this past cycle could end and what the necessary factors might be anything around that would be highly appreciated. Thank you.
Okay.
Andrew This is eduardo.
So I think we.
What do we see that until we see it.
Finally in line with what we expected when we look at the segments in terms of your day.
We see that.
They are basically performing as we expected them to perform and we did see some.
Hey graduation of metrics, particularly in Brazil, mostly during the second quarter and that was when we started to limit the amount of loans, we offer particularly the personal loans.
He is in the results this quarter have been in line.
What do we expect it going forward you know, we don't provide guidance, but we believe that probably.
Interest rates in Brazil hub are close to a peak already or close to begin and probably next year.
Should start coming down it's still too early to tell.
Selected a new president last week, so it's still very early to tell but with that in mind, we expect that.
Macro conditions will start to improve in Brazil, which was that the country will we were more concerned about digitization of cleared land. So I think that all is working according to what we expected them.
Yeah.
Very helpful. Thanks, a follow up.
Thank you one moment for our next question.
Our next question comes from Irma <unk> with Goldman Sachs. Please go ahead.
Yes, hi, Thank you for taking my question. So with Ed is now reaching one 3% of G. M. B I was hoping you could.
Just had a little bit more light on what drove this quarter over quarter increases.
Correct and as you pointed out it was just a small but steady increase so I was wondering if you already feel that you saw an impact from the launches and you add tools that you've been developing or if this is just much more something for the quarters to come off or even for 2023.
And the second quick question is with encouraging metrics that you've posted once again around user growth and engagement I was wondering if you could perhaps just share your latest thoughts around shifting to to a different perhaps too.
Loyalty program going forward.
Great. Thanks here Matt.
So on advertising.
I think most of the rollout of the new product tools have come towards the end of the quarter.
And the impact of those and this is obviously a constantly evolving and improving product.
Think we should see more in the upcoming quarters than the entire third quarter I think what we see in the third quarter is just the natural evolution of an advertising business.
That there's very strong demand for despite the macro backdrop, given where we play along the conversion funnel and as we continue to invest resources and rule out the tools that came out at towards the end of the quarter, but also new tools that we have we continue to think that there's a lot of upside.
<unk> from our advertising solutions to come in the future.
In terms of loyalty.
We continue to work towards launching our next version of the loyalty program I think we've identified that where most of the value is in our six.
We continue to see a strong evolution of users buying <unk>.
The overwhelming majority of level six users are purchased users and not users who have earn their way towards our six and <unk>.
So we would hope to be launching a new version of the loyalty program in the upcoming quarters that really positions it increasingly better to be a subscription model with more and more benefits that we will continue to build for that highest level, where a majority of users.
We'll probably purchase but we will continue most likely to offer the ability to be earned into that as well.
Thank you one moment for our next question.
Our next question comes from Thiago <unk> from <unk>. Please go ahead.
Hi, guys. Thanks for taking my question well. My first question is regarding Mercado Pago is cost of funding you have been consistently bringing it down but arguably there's still some some way to go to reach levels similar to those of your competition, which alternatives do you feel you have to accelerate this process. It said is it fair to say.
Save that your cost of funding keeps you from maybe entering any lower spread credit products today and my second question is regarding the World Cup and Black Friday very unique combination of the end of this year should we expect you to become maybe a little bit more aggressive when you're <unk> and.
In the upcoming months. Thank you.
Yeah.
So let's see you are correct in saying that there is still room to continue to drive down the cost of funding.
Through renegotiation and <unk> structures more use of <unk>.
For the current segments, where we participate and where we still think most of our focus will be the quality of the underwriting is still by far the most significant driver of the margins in that business and less so incremental basis points or one hundreds of basis points either.
That we can derive from cost of funding.
I think if you take a longer term view than what you bring up is valid and as we look to penetrate higher income segments or pursue lower spread credit products.
Then we will have to continue expanding our cost of funding.
Windows and alternatives to look for increasingly lower cost of funding, but that's not a short term priority right now it's more something that it's been more of a mid term roadmap.
In terms of fourth quarter historically, the fourth quarter, we do lean into it.
More in terms of the <unk> business.
You see that in the results last year, where the profitability in the fourth quarter was significantly lower than prior quarters, but I think we continue to see a combination of a <unk> business that has a better margin structure than it had last year.
And overall business with a better margin structure and so although there will be a ramp up in the pace of investment I don't encourage investors to assume that what happened last year is what we will replicate this year I think the margin in the fourth quarter should be better this year than it was.
Last year, so don't extrapolate from prior year performance.
Okay.
Thank you very much.
Thank you one moment for our next question.
Overall penetration, it's still incipient and any of the geographies that we look at and we expect very solid growth over a multiyear period across all of the Geos.
So that makes sense and then with respect to the contribution margin for Brazil.
How should we be thinking about.
On the advertising no. The total contribution margin it just seemed to dip a little bit. Okay. It was the second question sorry, So Brazil did have compression in contribution margin.
A majority of that.
You can explained really by topline movement, where our <unk> to pass on incremental interest rate cost into the marketplace pricing. Unlike what we did off marketplace generates a certain amount of compression in terms of take.
Hum.
And when you combine that with investments that have continued to grow at a constrained pace, but somewhat faster than what revenue growth is where you see that compression I think the overall idea is if we get a change in interest rate environment and just through natural scale.
Going forward, we don't expect the Brazilian market to necessarily be one that doesn't add incremental margin, but it should also be able to scale going forward.
Oh that makes for me then.
On places and functions.
So it's interesting I think we've always said that places.
Had potentially a very important role in adding nodes to our logistics network, so for pickup delivery and returns.
Returns continue to grow in terms of percentage, but more importantly, the customer satisfaction that drives and ideally also better conversions, but if you look for example at Argentina, We began to see the other piece of the places thesis, which is the creation of <unk>.
Cash in cash out network that has the potential to rival ATM machines. So these small store owners can make incremental revenue and drive incremental foot traffic by serving as cash in and cash out points and we're seeing strong execution on that front in Argentina and.
It's something that we would look to mirror across all of the geographic footprint remember that we have these kangoo points in Brazil in Mexico, and in Chile as well.
And right now you're testing any other functionality around fintech or maybe you know apparel.
If somebody like little wardrobe area, where people would try things on and return right there.
Those types no not yet I think I think we need to be cautious with how much extra operational demands we overlay on these corner shops and small stores. So the focus right now is on the two biggest opportunities we see short term, which are the nodes on the logistics network drop off pick up.
Returns and the ability to move money into and out of your digital wallets.
Through these storefronts.
Understood. Thank you very much.
Thank you one moment for our next question.
Our next question comes from Marcelo Santos with Jpmorgan. Please go ahead.
Good evening, Thanks for taking my question I have two.
The first is regarding fulfillment penetration has been kind of around 40% for a while.
What has been the performance there what are your goals regarding this modality and the second one is regarding logistic monetization I think a couple of quarters ago. You said you would start to experiment in some ways too.
To differentiate the monetization of a few months how has that been going maybe you can give some color geographically were in general. Thank you very much.
Hi, Marcelo Thank you.
So.
We continue to aspire to drive.
Greater adoption of fulfilled by Melly.
In Brazil and across other markets. So we've invested in warehouses and the infrastructure that allows us to scale up and have a higher percentage of <unk>.
Orders in purchases being made on Mercado libre being fulfilled through us.
And if you look at the evolution from Q3 to Q2. It was actually positive we added about three percentage points of adoption of fulfillment in Brazil.
Added three in Chile as well.
So Mexico has always been the highest penetration it's over two thirds of all orders fulfilled from our fulfillment centers.
And the other markets. We believe we will continue to grow and trend towards a higher number we have to see what the end state. There is but we continue to try to improve the experience for sellers in terms of sending inventory to us removing inventory when it's not having the right kind of.
Turn performance and all of these things eventually should help make it easier and more attractive for merchants to continue to send more and more inventory to our fulfillment centers simultaneously and this also explains the double act who are trying to carry out here, we have introduced monetization.
<unk> not only on low turning inventory, but simply on usage of our fulfillment centers that obviously helps our P&L, but in a way it generates a disincentive for merchants to send us inventory until they see that the added cost is more than offset by the improved conversion and lifting.
Sales.
That monetization is still very timid. So were talking you know something that's closer to $10 million a quarter of monetization than what its long term potential could be so it's still fairly slow because we are trying to carry out both the introduction of monetization, but more importantly, continuing.
To grow the adoption of fulfillment.
Perfect. Thank you very much.
Thank you one moment for the next question.
Our next question comes from Stephen Ju from Credit Suisse. Please go ahead.
Thank you so hi Pedro.
Just a follow up question on the advertising business. So.
What are the principal AD units that are driving the growth. There I think you talked about display as what sounds like sponsored search AD units. So but also you know how much more heavy lifting do you think you need to do on behalf of your sellers because you know some of them will be a very sophisticated and well understand how to do.
Run AD campaigns on their own but others may need some help so can you talk about some of the advancements and maybe driving with automation on their behalf.
Great. So so still the vast majority of the monetization.
Is on on product ads. So the insertion of sponsored listings that are interspersed within search results are identified as a sponsored listing but they appear in the middle of a search result.
We have growing capabilities and begin to see improved monetization in terms of display advertising and other more complex ways to work with larger merchants or even brands that want to promote the sales of their products either directly by themselves or from merchants that are already.
Selling on the network, but that's still a smaller part of the revenue base and where a lot of the uptick can come from.
You are correct in saying that many of the merchants, especially the smaller merchants still have a learning curve, we see that very clearly when we look at the dollars invested per listing that we see from cross border merchants many of them coming from China and Asia that are much more sophisticated in terms of the <unk>.
Use of advertising to help conversion rates and so over time, we will have to work with the local Latin American merchant base, which is by far the largest merchant base for them to be able to gain the level of comfort and also ability to use the advertising product as we see in those cross border merchants and that will be a combination of better tools.
And greater automation, which is what we've been working on and also simply education and also patients over time.
In the case of the larger brands and larger merchants. It was more a matter of having improved reporting capabilities and improved ability to segment and generate audiences within mercado Libre and.
And a lot of the more recent rollouts in the back half of this quarter, we're really tailored around that reporting capabilities and the construction of audiences. So hopefully as I answered in an earlier question. We begin to see the results of that over the next few quarters by seeing some of these larger brands and advertisers increasing their average.
Spend on our platform.
Thank you.
Thank you one moment for our next question.
Our next question comes from Marvin Fong with BTG. Please go ahead.
Great. Thank you for taking my questions.
A question on.
Achieving the $40 million and tech users.
Users for the quarter I think I think in terms of percentage growth and as well absolutely.
New users. This is the best quarter in recent memory.
Could you comment on any.
Particular thing, but do things roll.
Higher adoption rates or do you think about that.
General trends towards more <unk>.
And then second question just on Contra.
Contribution margin that I Didnt note the decline in Brazil, but also Argentina.
Increased pretty significantly even in U S dollars.
What drove that improvement or is it because of the mix of Fintech in Argentina is higher and Thats, a higher margin category compared to come. Thank you.
Okay.
Hi, Marvin so with regards to the Fintech users per quarter, I would say that.
This has been a year where we.
Decrease.
The incentives we have been even users who use our products, particularly in the.
The decrease is mostly in the first and second quarter.
In the past, we were offering more incentives and discounts for Google to try a QR codes or utilities.
The other mobile phones, using a well that was pretty.
Pretty much doing all of that.
So I would say that is more organic growth. We are seeing now and the focus has been mostly on increasing engagement increasing principality having.
Got it.
Try different.
Use cases there.
The larger possible amount of boat shows in terms of what are we going to do to continue to do that is mostly we will continue to run out of new products and services and in different countries I would say today that the focus is.
Give a level in Argentina, Brazil, and Mexico, and only now starting to rollout more close to <unk>. So there is room for us to continue with the rollout of some of these growth.
Okay.
Sure in Argentina, what we see is yes, there is an increase in participation from Fintech.
Argentina, the Fintech business in general is also higher margin than in other markets given the scale that we've already reached there I think one interesting data point is the digital account and the wallet in Argentina are already breakeven are actually slightly positive in terms of margin structure.
That's interesting because for us it shows the way that ideally other markets will evolve over time as those businesses grow and gain scale.
And then so.
So on the back of that kind of high level growth some of that spurned by inflation. There is also a greater ability to dilute costs in general so both at the gross profit level and also a direct contribution level. There is a significant amount of cost dilution given me.
Higher rate of growth of local currency revenues then the expenses that are mostly denominated in local currencies as well.
Okay.
That's terrific color. Thanks.
And Pedro.
Yeah.
Thank you one moment for our next question.
Our next question comes from Deepak <unk> with Wolfe Research. Please go ahead.
Great. Thanks for taking the question. So first given the recent subtle changes in the political climate in Brazil.
Do you anticipate any operational or sort of business strategy changes over the next maybe 12 to 24 months.
Any areas that we should be aware of and then maybe second question.
<unk> can you give us some color on the current profitability on the E Commerce segment with advertising scaling and obviously logistics monetization kind of coming through in many markets. How should we think about maybe at a high level of contribution from e-commerce to the total profitability over the next 12 months. Thank you so much.
Great. So the answer to the first question is no no change in strategy derived from any change in political.
Governments I think our business has thrived over the past 20 plus years throughout the entire region.
And has gone through multiple changes in presidents and and ideological lien of of governing parties and that's never changed our strategy I think our users inform our strategy and and the enormous need for digital commerce and digital payments that exists across the region.
I think both on the e-commerce side and on the Fintech side, the story and the way we're trying to manage the P&L continues to be first and foremost for growth and continued market share gains and hold our leadership position, but we.
Believe that given the scale, we have some incremental profit engines that we've found in the different commerce and fintech businesses, whether that be advertising credit. The Pos business, we can combine that growth with consistently delivering incremental.
EBIT.
Over the upcoming periods at least that's the aspiration in terms of the financial model.
Okay.
Thank you one moment our next question.
Our next question comes from Kyle <unk> with UBS. Please go ahead.
Thank you.
Hello, everyone. Good evening, Thanks for asking the question I have two on my side here regarding Ricardo Credit Suisse.
We can see that the overall margins offshore are quite the business actually expanded on a quarter over quarter basis, but if you take a look in our provision coverage you actually reduce it if we look on 30 days or 90 days. So just wondering.
If you could talk a little bit more about your provisioning coverage going forward.
If in the next quarters, we should see.
And increasingly the provisions as a percentage of total portfolio in order to inquiries are the short term coverage ratio again or not.
As a matter of only off lower origination and the second one is around your appetite towards the end of the year and the beginning of next year in terms of origination issue already originating more.
During October .
Not in a lot of the strategy going forward, Brazil. Thank you.
Okay.
Hi, Kyle.
We disclose more information this quarter in the shareholder letter.
Clearly broken down.
Our.
Current one to 90 days plus duo study.
<unk> provisions in our portfolio.
When you look at that and you can see that basically we are provisionally pretty much 93% of all of the of the loans that are over 90 days past due.
Over two thirds.
68% of those that are between $1 90 days past due so I think that we have been very conservative in our provisions will continue to be with <unk>.
And you can do the same way to provision.
We have been very very conservative the increase you see in Npls is related mostly to us slowing down the originations.
Having an average duration of about two months and keeping the bad loans in our books for a full year, but it's mostly related to that with regard to two.
To year end on the mix.
Next year as you know we don't provide guidance.
So far what we have done is reduce the volume of origination and as we see conditions improve we will reverse that but we're not giving guidance on what that should happen.
Okay. Thank you very much.
Thank you one moment for our next question.
Our next question comes from Geoffrey Elliott with Autonomous. Please go ahead.
Hello, Thanks, very much for taking the question.
This topic of credit and when you can ramp up originations again.
You describe trends during the third quarter.
Kind of in line with what you expected it doesn't sound like things fell off a cliff. So what is it now that is stopping you from ramping back up what would you need to see to get more.
Origination is it something in your portfolio is it something on the macro side, what do you need to see that.
Okay.
So what we did during the last the end of the second quarter under the third quarter basically we have.
Score.
In 12 segments.
So those that were lower ranking we will stop offering them, both personal loans and buy now pay later those that were little bit better ranking but not so high up we stop offering them personal loans and we but we continue to offer this buy now pay later.
Good news that we saw is that we believe with hindsight that we took the right decision. It was a wise decision because on the one hand those segments, where we continue.
<unk> loans were profitable and on the other hand, we kept control groups or those groups, where we were not where we stopped offering Lowe's and those who have not been profitable. So I think that we would do there was infusion.
We continue offering loans in terms of control rooms, when we see conditions, improving we will be able to ramp up those time lines again.
And if I can add a 30000 foot if I can.
At a 30000 foot here I think the way we've always constructed Mercado Libre is with a long term view, we're not looking to maximize the size of the credit portfolio over the next two or three quarters, we're looking to build a very healthy and sustainable credit book.
And business over 10 years, and so I think we've said from the beginning that we would slow down when we thought that the quality of the underwriting Meredith that and make sure that we don't put the credit organization under any pressure to accelerate unless they are very comfortable.
But it's the right time to start accelerating originations again so.
We will continue to manage it in that conservative fashion.
Thank you.
One of the <unk> of May to allow it to buy the loans as well of those consumer and merchant loan.
How soon could you.
Doing that.
Originating auto loans and funding them through the <unk> channel.
Not sure I fully understood the question.
So.
A change in the offering memorandum of one of your <unk>.
Okay.
In the last few weeks to allow it holds.
Also loans.
So the question was.
We can the CEO for <unk>.
Holding up so soon how are they going to be originated.
What's behind that.
<unk>.
Okay Auto loans was the question sorry, I apologize we didn't pick up on that so we are going to take.
Our time over the next few quarters to make sure we build out the product we build out the user experience. We test the risk models. So don't expect any rapid ramp up of auto loans. It is a segment that we're interested in it's one that over the long run should be.
One of the multiple credit segments that we move into but we are still in the process of building out the product building the user experience testing product market fit.
And gathering data for the models. So it's not something that will be material in any way over the next few quarters.
Okay. Thanks, very much for both options. Thank you.
Thank you one moment for our next question.
Our next question comes from near Agarawala from HSBC. Please go ahead.
Hi, Thank you for taking my question and congratulations on the results.
On your credit book could you give us some light.
How the underwriting models have performed across the geography of one geography performed better than the other <unk> expectation.
Sure.
Welcome.
Welcome Jim Malone, John does that that mutation called the margins have gone down.
Quarter on quarter is that on purpose.
That decline the Gabon that machine.
Hum.
And the second is.
Thank you Rod lending products are you looking given the current environment.
<unk> cautions on the unsecured.
Thank you Bob.
Thank you our lending products like Aqua.
<unk> go ahead Scott.
Oh.
Looking to grow to compensate.
So it'd be slow growth in the unsecured side. Thank you so much.
Okay.
I would say that let me start with the first part with regard to different geographies and different pros. So I think again we.
Have three main geographies.
Mostly two or three rows.
Much of loans, which are creating online.
In store and consumer loans.
Each of those mines categories were profitable during the quarter I would say that probably we saw more pressure, mostly on Brazilian consumers and that is where we took the BK.
It became the most restrictive.
Loans.
That was compensated with higher profitability and higher margins in Argentina, but.
All in our remodel numbers improved for the quarters and so we are happy with our software.
Okay.
Sorry.
Margins also improved both in Brazil and Mexico.
On on collateralized.
Credit cards or other secured lending let me just separate.
This is not a consequence of slowing down the unsecured lending I think one of the beauties of Mali is we are not solely a financial institution that needs to grow the credit business in order to continue delivering growth and margin expansion credit for US is a business that serves as a draw.
River of more volume and sales and more wallet adoption and usage in our transactional businesses, but we're not under any undue pressure to grow it.
Because it is our core revenue stream and so that allows us to pace ourselves going back to my previous answer. So I don't think we get into the more secured lending product because we're having to slow down unsecured those have always been attractive segments that have been within our view of what the <unk>.
Product roadmap would be collateralized loans credit cards is one alternative we mentioned auto loans, we've talked in the past about payroll loans, but those are all things that are in the future. So right now some of those are being built like the auto loan product others are just ideas eventually we will get there, but not as a <unk>.
Sequence of what's happening in the unsecured lending businesses, which by the way continue to be very profitable and actually expanded margins. Despite the macro headwinds.
If I can just follow up on that have you been losing.
And with that quarter.
Passing on behalf funding costs.
Hi.
Or are you largely done.
Sure let alone.
Okay.
So yes, there has been an increase in apr's as a consequence of an anticipation in certain deterioration of credit performance in the mid risk.
<unk> segment and for the lower risk segments, we actually turn those off in many aspects, but so yes. There has been a price increase in anticipation of weakening performance.
And we should continue to expect that in the fourth quarter.
Do you think you're largely rate should be.
I think let's talk about the fourth quarter, when we report the fourth quarter.
Okay.
Early.
Early in the quarter. Thank you.
Okay.
Thank you one moment for our next question.
Our next question comes from Joe <unk> with Citigroup. Please go ahead.
Thanks, Thanks for taking the question I just.
Two quick ones on my side. The first one you mentioned the profitability of your AD business. Currently at 70 low high <unk> low <unk> EBIT margin can we expect I mean is this business changes it is <unk>.
Margin sustainable how should we see this margin in the medium long run. That's my first question. The second question is a more broader question. When you take into consideration I mean, youre basically stepping back with certain initiatives that have been dragging margins right and you're right now you revised your underwriting.
Great Park business to reduce origination Youre also lowering Alicia as a percentage of net revenue, you're probably going to lower your provision. So it seems to me everything points out to a constructive margin at least in the medium run.
Just wondering how what can you share in terms of messages on all those moving parts are.
How should we see those margins going forward I know you don't provide guidance, but just anything you can share would be very helpful. Thanks.
Okay.
Sure so on advertising.
We've said that we are going to start accelerating the rate of engineers that we allocate to the advertising business is we see very encouraging signs in terms of how big this could be.
We see very strong product market fit and are getting very good feedback from advertisers and so that probably implies that as we try to accelerate the revenue base in the penetration of GMB those investments could compress those margins somewhat I think we give out the high <unk> to low eighty's just to <unk>.
A clear indication that even if you assume a ramp up in investments to accelerate growth. This is still incredibly accretive to overall margins and an incredibly attractive business, but I think it's fair to expect that as we accelerate growth by throwing more resources added in most of that is actually research and develop.
And engineers, you could see some margin compression.
I think Youre right, we don't guide bigger picture, what we've said is that.
We have made sure to be.
Constantly reviewing our portfolio of revenue streams and many of these revenue streams are newer revenue streams with negative EBIT margins, but that we have confidence that over time.
We will grow into profitable businesses and to differentiate between the ones, where we believe we should continue to invest aggressively.
And others, where we are not going to give up there are no changes in strategy or tactics, but we think that we can wait because they are strategically potentially less critical so certain areas like supermarket. For example, there has been a strong effort to improve the margin structures, there and we're seeing good results.
So that we can reaccelerate as quickly as possible that's the largest.
Category in terms of household spend and one that as we improve the margin structure is we can accelerate again.
Others, where potentially we think there is time, we can we can wait.
And not have to carry as steep losses as something that for US is a priority. So I think the takeaway I am trying to transmit here is our strategy hasnt changed over the last few quarters tactically in this market businesses that are very EBIT negative in that we don't see a strategic imperative.
We're comfortable slowing down their growth.
There still are some where we continue to invest and then on the two other fronts, which are engineering head count in product development salaries and wages and also the rollout of our logistics network. We've said that we've continued to invest aggressively there we called out in the video 4000 engineers that will be adding this year.
That's the same number that we had planned towards the end of last year and that remained unchanged for 2023.
So again I think being reiterated we continue to aspire for growth for market share gains and we think we can deliver that while also increasing our EBIT generation on an annual business. That's the financial model that we are striving to deliver.
Very clear thank you.
Thank you one moment for our next question.
Our next question comes from Sean Dunlap with Morningstar. Please go ahead.
Awesome. Thanks for the question.
It sounds like we're fairly constructive on the macro or at least taken against all of those comments about Brazil and it is great to see ongoing market share gains.
I guess I'm just wondering how we can think about buyer held some of the key Geos, Brazil, Argentina, Mexico, any sort of color regarding the cadence of spend during the quarter, we started to drop off towards.
The back half in the last months would be helpful among certain demographics or geographies.
And then to the extent that we did see a downturn would it be appropriate to look towards 2014 to 16 or 2000.
As an analog or there maybe features of the business today that would render it more or less recession resistant.
Period.
Great. So let me take those in reverse order.
Historically, our business has been resilient, we've never said counter cyclical, but we do think that because of the breadth of selection that our marketplace can offer.
In tougher macro conditions consumers have the.
The ability to trade down.
While continuing to shop from us.
Now we have to see what happens I wouldn't try to linearly extrapolate 14 to 16, because when you look at the overall percentage of retail not even online retail just overall retail that mentally represents today versus what it did in 2014 or 16, that's changed significantly and.
And we need to see what happens.
More importantly, the first part of your question and again, it's still early and really the peak period in Q4 is about to come about so we'll have to see what happens, but we don't see any indications of any significant weakening in consumer spend so far.
<unk> again, we will address the full fourth quarter, when we reconvene in February but so.
So far across most of the Geos nothing significant to report Argentina potentially is the country, where we're seeing.
Some level of weakening, but but elsewhere.
Nothing to call out at this point and we will go through the full quarter in February .
Really appreciate it.
Thank you one moment for our next question.
Our next question comes from Jon Cohen, Tony with record Jefferies. Please go ahead.
Hi, This is Chris who check in for John Thanks for taking my question. So your marketplace has been gaining share.
Last year can you just talk about what you think are the most impactful drivers of that outperformance and then again what gives you confidence kind of anybody can capability to continue those share gains going forward. Thank you.
Okay.
We've been investing behind this business for over 20 years I think we have an unparalleled tech team. That's really if you look at the pace of innovation on the user experience over the last two years.
It's dramatically increased in quality and quantity of output.
And I think our users begin to see that in the experience.
We've expanded our selection we've gotten a lot better at category management, and we see that with market share gains in Brazil. If we look at our data not only on a consolidated basis, but also across most categories and thats a reflection of more verticalizing category experiences obviously.
Obviously, the overlay of our logistics network is a critical part to that network that today in Brazil, nearly 90% of all deliveries are done through what we call Meli logistics. So three pls that we control most of the routing and the experience.
Pago is increasingly a differentiator on marketplace.
The availability of credit the ease of payment.
So again I think we are now reaping the benefits of investments that we've been carrying out over the past five six years.
Great. Thanks, so much.
I'm showing no further questions at this time I would now like to turn it back to Pedro Mercado Libre CFO for closing remarks.
Okay.
Thanks, everyone. Thanks for the questions.
We and the whole meli team have a big fourth quarter coming up moving into the peak season, so back to work for us and like we said, we'll be able to go over the fourth quarter. When we speak to you again in February .
We look forward and until then goodbye everyone.
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