Q3 2023 Earnings Summary
- MercadoLibre continues to demonstrate strong growth and profitability, achieving an 18% EBITDA margin in Q3 2023, up from 16% in the previous quarter, with significant contributions from the 3P marketplace, credit business, and advertising business.
- The company is expanding and strengthening its ecosystem by adding new features and products such as advertising, which grew above 70% in revenue for the sixth consecutive quarter, credit cards, insurance, and content partnerships like Meli Mas, creating a unique and compelling offering that drives user engagement and market share gains.
- MercadoLibre is leveraging artificial intelligence to enhance user experience, launch innovative ideas, and gain operational efficiencies in areas like customer service, fraud prevention, and development processes, positioning the company for future growth opportunities.
- MercadoLibre is increasing exposure to credit risk by expanding lending into mid-risk segments and increasing originations in Brazil and Mexico. This has led to higher non-performing loans (NPLs) in the consumer segment, particularly in Mexico where consumer NPLs have increased due to deliberate expansion into riskier segments to grow faster.
- The company's first-party (1P) business remains unprofitable, with management admitting "We are yet not there" regarding profitability. Despite 1P sales growing 58% year-over-year and efforts to improve profitability through better inventory management and pricing, the 1P business continues to be a drag on margins.
- Competitive pressures are limiting the positive impact of lower interest rates in Brazil on MercadoLibre's fintech business. As interest rates decline, the savings are often passed on to merchants due to competition, making the net benefit to the company's profitability closer to neutral.
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Profitability and Margins
Q: Margins improved despite plans to reinvest—what happened?
A: EBITDA margin reached 18%, up from 16% last quarter. Strong performance across businesses, especially the 3P marketplace, drove margin improvements. Brazil improved margins by 12 percentage points year-on-year, and Mexico by 6 percentage points. While investing in logistics, brand promotion, and a team of 15,000 developers, they've gained scale and managed costs with discipline. -
Credit Business Expansion
Q: Are you shifting credit strategy in Brazil?
A: With increased spreads in Brazil, they're confident to increase origination in consumer credit. They've accelerated lending in longer-duration products and increased credit card issuance, seeing positive results so far. -
1P Business Growth
Q: How is the 1P business progressing?
A: The 1P business grew 58% year-over-year. In Brazil, 1P penetration is around 3-4% of GMV and increasing. They see 1P as strategic for market share gains, especially in categories like consumer electronics, and have improved profitability through better supplier negotiations and inventory management. -
Credit Quality in Mexico
Q: What's causing uptick in early delinquencies?
A: On the consumer side in Mexico, NPLs have slightly increased by design as they chose to expand into mid-risk segments to boost origination. Spreads remain healthy, and the increased risk is priced into the rates. -
Competition and Cross-Border Trade
Q: How does Temu's entry into Mexico affect you?
A: MercadoLibre continues to perform well, with 38% growth in items sold. They see overlap between Temu and other cross-border platforms but maintain competitive advantages through logistics enabling fast shipping and payments offering attractive financing. They're strengthening cross-border capabilities, including in Brazil. -
Advertising Business Growth
Q: How is the advertising business trending?
A: Advertising revenue grew over 70% for the sixth consecutive quarter. Product ads, particularly among self-service sellers, are the main driver. Ads penetration reached 1.7% of GMV overall and is close to 2% excluding Argentina. -
Impact of Lower Interest Rates
Q: How do falling interest rates in Brazil affect you?
A: Lower rates tend to be positive, leading to more transactions and lower financing costs, which improve profitability. On the fintech side, competitive pressures may lead them to pass savings to merchants, making the impact closer to neutral. -
Logistics Efficiency
Q: Are delivery initiatives improving costs?
A: They're seeing efficiencies from initiatives like Meli Delivery Day, but it's too early to quantify. They've kept total net shipping costs over GMV broadly stable in 2023, offsetting headwinds. -
Use of AI for Efficiency
Q: How are you leveraging AI?
A: AI enhances user experience and operational efficiencies in customer service, fraud prevention, and development. They've used AI in fraud prevention and credit scoring for years and are expanding into search, recommendations, and developer tools. -
POS Business Strategy
Q: How does the POS business fit long-term?
A: The POS business is a significant part of their fintech offering, providing solutions to merchants and cross-selling banking products like credit and investments. They've adjusted pricing strategies for larger merchants, improving activation rates and TPV per device without reducing margins. -
Meli Mas Subscription Program
Q: Any updates on Meli Mas subscriptions?
A: It's too early to share numbers, but they're seeing good engagement and increased frequency and spend among subscribers. The program is expected to enhance customer loyalty over time.
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