Feb 24, 2009
Executives
Pedro Arnt – VP of Planning, Treasury & IR Marcos Galperin – President and CEO Nicolas Szekasy – EVP and CFO Hernan Kazah – EVP and COO
Analysts
Imran Khan – JP Morgan Steve Weinstein – Pacific Crest Robert Ford – Banc of America Stephen Ju – RBC Capital Markets Scott Devitt – Stifel Nicolaus Gustavo Oliveira – Citigroup Mark Argento – Craig-Hallum Capital Tony Tang – LUSIGHT Research Tim Hayes – Fidelity Investments Aquico Wen – Legg Mason
Operator
Good day, everyone, and welcome to the Mercadolibre's Fourth Quarter 2008 Earnings Results Conference Call. Today's conference is being recorded.
At this time, I would like to turn the conference over Mr. Pedro Arnt.
Please go ahead, sir.
Pedro Arnt
Welcome, everyone, to Mercadolibre's earning release conference call for the quarter and year ended on December 31, 2008. Company management presenting today are Marcos Galperin, Chief Executive Officer; Nicolas Szekasy, Chief Financial Officer; and Hernan Kazah, Chief Operating Officer.
This conference call is also being broadcast over the Internet and is available through the Investor Relations section of our website. Before handing the conference over to Marcos and Nicolas and Hernan, I remind you that during the course of this conference call, we will discuss some non-GAAP measures.
A reconciliation of those measures to the nearest comparable GAAP measures can be found in our fourth quarter and year end 2008 earnings press release available on our Investor Relations website. In addition, management may make forward-looking statements relating to such matters as continued growth prospects for the company, industry trends and products 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.
Our actual results may differ materially from those discussed in this call for a variety of reasons, including those described in the forward-looking statements and risk factor sections of our 10Q, 10K and other filings with the Securities and Exchange Commission which are available on our Investor Relations website. With that disclaimer, let me hand the microphone over to Marcos.
Marcos?
Marcos Galperin
Good afternoon and thank you to all who have joined us today for this call. I will begin the call by providing some qualitative comments about our outlook and discussing some of the highlights from the fourth quarter and full year 2008.
I will then turn the call over to Nicolas who will speak in greater detail about our financial performance. Hernan Kazah will also say a few words today since as many of you are aware from our release, he will soon be stepping into the role of CFO.
After our prepared remarks, we will be available for your questions. All in all, fiscal year 2008 was a very good year for us.
We grew our business on a number of fronts and despite the global economic turmoil in the latter months of the year, still produced a very solid fourth-quarter and only moderately felt the impact of the macro economy on our business. While we continue to carefully monitor the impact of the tougher environment and our very focused on running our business in the most cost-efficient manner possible, we also continued to believe that industry and regional factors largely dampened the impact of the global economic slowdown on our business.
These favorable factors include the continued adoption of the Internet across Latin America and the growth rate of broadband and PC penetration in the region as well as a the less severe economic slowdown forecast for Latin America when compared to other parts of the world. In addition to these larger trends, we were encouraged by the growth in number of holiday shoppers that visited our site this year.
We believe that this trend was due in part to our improved selection of available goods, but also due to consumers’ increased propensity to bargain hunt in 2008. This increased holiday shopping activity has driven a monthly sequential improvement in sales throughout the quarter.
Therefore sales results when measured in successful items year over year growth was stronger for the fourth quarter than any other quarter of the year, indicating in part that we are able to push through recessionary conditions and post improving results. I would now like to quickly highlight our financial results for the fourth quarter and full year and then move to the progress that we have made on our ongoing business strategy.
For the fourth quarter, we continued our solid momentum and experienced high growth rates. We saw rapid growth in the number of live listings, unique sellers and buyers and gross merchandise volume.
Specifically for the fourth quarter, successful items grew 22% and gross merchandise volume grew 14%. And on a foreign exchange neutral basis, gross merchandise volume grew 32% as local currency average selling price continued to increase.
Total net revenue was up 24% to 33.4 million over the fourth quarter of last year. And on a local currency basis, total net revenue grew 45% year on year.
Income from operations grew 48% to 11.2 million with an operating income margin of 33.4%. Net income was 7.9 million, a 49% increase over last year and earnings per share was $0.18, a 38% increase over last year.
Specifically, for the full year, successful items grew 21% and gross merchandise volume grew 38% year on year. Total net revenue was 137 million, up 61% over the previous year.
Income from operations grew 73% to 37.5 million with an operating income margin of 27%. Net income was 18.8 million, a 94% increase over last year, and earnings per share was $0.43, a 95% increase over last year.
In general, we are very pleased with the growth and progress that we have experienced in all of our businesses during the fourth quarter and throughout the past year. I would now like to move to a discussion of the progress that we have made on a number of important fronts throughout the past 12 months.
We believe we have made important advances during 2008 our stated goal of offering our buyers an ever-improving online shopping experience. Among many upgrades carried out during 2008, I would like to draw particular attention to three things.
First, we recently upgraded our product and listing pages. These upgrades have made it much easier for buyers to shop for their desired products.
The new and improved view item and listing results pages encourage increased usage, allow for decreased download times, generally lead to more efficient product browsing, and ultimately generate more transactions. These streamlined user experience is particularly important to inexperienced users who are in the early stages of exploring our offerings and will represent an important growth segment for MercadoLibre.
Second we continue to improve our search technology. We place great importance on constantly upgrading the capability of our search to accurately match what buyers are looking for with the existing supply of products on our site.
I believe that we have made important advances in this area during 2008. Finally, I would like to highlight our new real estate platform, which among other features allows a user to have customized functionality for the real estate searches.
In the real estate segment, we aspire to achieve over the long run the same kind of traction and success that we are having in motors classifieds. Going forward, we will continue to invest in ways to improve our offerings so that we can simplify the buying and selling processes and bolster the usability of our site.
We recognize the importance of a superior technical offering in contributing to our leadership position of the online marketplace space in Latin America. And we are committed to continuously strengthening our website offerings and adding to the expertise of technical team.
As such, we are very excited to have launched our beta version of Mercado Clicks, our advertising sales platform. Through Mercado Clicks, advertisers are able to attract traffic to their sites by purchasing text displays that appear on the primary MercadoLibre site.
The development of our Mercado Clicks offering is an important milestone in our goal of becoming a comprehensive e-commerce service provider. We believe that as Mercado Clicks expands, it will become a key driver of our advertising business and will help us gain share of wallet from larger online retailers who are interested in buying traffic from us.
Over the long run, we view Clicks as driving advertising revenue streams as we add to the number of advertisers that we offer our services to and increase the visibility of us on our site as MercadoLibre becomes even more popular. Additionally we believe Mercado Clicks adds to the user experience as it allows buyers to browse products from both our marketplace sellers as well as branded retailers all in one single destination.
Although Mercado Clicks is still very much in beta stage, we are already generating an additional albeit immaterial revenue stream from the offerings. It is currently available on Brazil, Argentina, Mexico, Venezuela, Chile and Uruguay sites.
It is a great example of how we are constantly aiming to diversify our total offerings and capture the alternative revenue streams that are available to us as leaders in our market. I would now like to take up a moment to address MercadoPago’s progress over the year and the quarter.
We continue to see an immense business opportunity in online payments throughout the region. As the Internet develops in Latin America, and a greater number of large and small-scale retailers open online sales channels, we expect that the demand for a safe, efficient and cost-effective payment platform will increase.
Our objective is to offer such a solution and strengthen our leadership position in that segment, leveraging the user base and know-how we have acquired through the use of MercadoPago on our marketplace. However, despite the fact that the fundamental business pieces behind MercadoPago remains intact, it is only fair to acknowledge a few headwinds we have faced.
Most importantly, the timing of the MercadoPago 3.0 rollout has been slower than originally anticipated. We continue to work very carefully and consciously to produce a technically superior, scalable and user friendly version of MercadoPago, dubbed MercadoPago 3.0, that can be rolled out with confidence across the rest of our geographic markets.
We place the highest priority on those factors rather than timing or rush to market. We continue to be fully committed to our goal of having the new MercadoPago3.0 platform available in all major markets.
In the meantime, we are pleased that earlier versions of the product are working well in Brazil, Mexico and Venezuela. Additionally, rising interest rates on consumer credit as a consequence of the global credit crisis have also generated a slowdown in the rate of growth and adoption of MercadoPago during the fourth quarter.
We believe however that at some point interest rates should decrease allowing us to transfer those lower financing costs on to our consumers, thus re-igniting growth in MercadoPago. We actually started to see some evidence of declining interest rates in Brazil during the latter part of Q4 and early Q1.
Finally, when addressing fourth quarter MercadoPago results, it is important to take into account the four days during which the payment platform was unavailable due to site instability. I remind you that as we have mentioned on our last quarterly call, we have taken the necessary steps to ensure that these problems do not occur again.
On another note, we are very pleased to have ranked during Q4 as the number one car site in terms of traffic in Argentina, and the second largest car site in Brazil and Mexico as measured by unique visitors. 2008 was the first year that we have achieved such high rankings in comScore Media Metrix ratings and it is largely a result of the launch of our new motor site and overall efforts we have been doing to improve the buying and selling experience of our motors users.
All these initiatives, as well as others and our overall success to date are indicative of the progress that we are making on our ultimate goal of providing our buyers and sellers with the access to the best possible online marketplace. As we enter our new fiscal year, we remain optimistic about our prospects and strongly believe that we remain well positioned to leverage the positive growth trends influencing Internet, broadband and PC penetration rates in Latin America.
These trends will allow us to capture additional revenue and grow our total presence as our users and content evolve and improve over time.
Nicolas Szekasy
Thanks, Marcos. I would like to use the rest of this call before taking questions to go into more detail on our Q4 and full year 2008 financial performance.
All growth rates mentioned in my remarks represent year over year comparisons. Overall, Q4 was a good quarter in which we generated revenue growth and continue to deliver year over year economies of scale in our operating expenses.
These resulted in healthy margins, solid bottom-line growth and excellent cash flows, in spite of the tough economic environment. Specifically for the fourth quarter, net revenues grew 24% to 33.4 million, gross profit margin was healthy 81%; income from operations was 11.2 million, operating income margin 33%, and net income was 7.9 million.
The key factors driving revenue growth in the quarter were the addition of 1.7 million new confirmed registered users, bringing the total to 33.7 million users of MercadoLibre, and the acceleration in the growth rate of successful items to 22%. Also continued growth of ASPs in local currencies driving strong year over year growth of GMV and TPV in local currencies ahead of unit volume growth, solid performance in our classifieds and advertising businesses, and higher interest rates charged to MercadoPago users that are buyer financing options.
These positive trends were partially offset by a negative foreign exchange effect in the q quarter as the US dollar strengthened in relation to local currencies. If you excluded the impact of currency rate changes and calculated Q4 2008 top line using Q4 2007 exchange rates, the year over growth would have been 45%.
Foreign exchange accounted for $5.6 million less revenue than in Q4 of 2007. Specifically, our marketplace gross merchandize volume grew 14% to $523.7 million while its ForEx neutral growth was 32%.
Our total payment volume decreased 3% to 55.3 million while its ForEx neutral growth was 20%. Additionally, there are some one-time site related factors in Q4 that had a negative impact on our GMV and particularly on our TPV as Marcos described.
Also, during November we decided to suspend buyer financing for one week until we re-analyzed our options in the new economic environment, and this step obviously had an impact on TPV. We then re-introduced financing with pricing approximately 80% higher than before to match the increases in financing costs we're having.
By doing so, we increased MercadoPago take rate and sustained margins but clearly the volume for MercadoPago was affected. Towards the end of the quarter, we began to see some loosening of interest rates in the market and we gradually began to reduce our pricing.
Our take great on a consolidated basis increased to 6.4% from 5.8% in Q4 of 2007 due to growth in both marketplace and payments take rates. As always we remind you that take rate is a measure of net revenues as a percentage of GMV.
Seen independently, marketplace segmented rate rose to 5% from 4.6% in Q4 of last year and payments segmented rates rose to 31.4% from 10.2% a year ago. The marketplace take rate growth versus last year was driven by solid growth in classifieds and advertising.
The payment take rate was driven by our financing revenues, which for the first time were higher than our processing revenues. Taking a look at revenues broken down by segment, marketplace revenues grew 24% to 26 million and payment revenues increased 28% to 7.4 million.
The marketplace represented 78% of revenues and payments the remaining 22%, the same breakdown as Q4 of last year. Gross profit grew 29% to 27 million, representing 80.7% of revenues v versus 78% for the same period one year earlier.
Operating expenses for the period totaled 15.8 million an 18% increase year over year, reflecting continued leverage of our infrastructure combined with a sustained disciplined approach towards spending and investing across the organization. This focus on costs has been a part of a culture since we started up but we have re-emphasized the need to be extremely conscious with discretionary expresses to ensure we have resources to invest in the business drivers by continuing to deliver a solid bottom-line.
We should review some specific drivers for the expense line. Product and technology development remains a strategic area of focus for us.
Expenses in this area grew 72% versus the same quarter last year reflecting mainly the expansion of our team. Sales and marketing grew 14% for the quarter, continued to be our largest expense item and represented 27% of sales versus 30% of sales in the prior year quarter.
We achieved economies mostly via improved ROI in online marketing and lower bad debt. G&A expenses grow only 10% year over year.
As a result of the factors just discussed, income from operations was 11.2 million representing a strong 33.4% operating income margin. Below the income operating income line, there were two significant results this quarter that we should explain.
First, we recorded 5 million of interest expense and other financial charges, which were mainly due to the cost of discounting MercadoPago credit card coupons in Brazil. This included approximately a 3 million one-time impact in October when we discounted 100% of the receivables outstanding at that time.
As part of our decision, we continued discounting all of the MercadoPago receivables during November and December as they were generated, and this impact was compounded with the market increases in interest rates we mentioned before. For reference, the average monthly interest expense related to MercadoPago more than doubled in November, December versus the average for January to September.
Second, we recorded a 4.2 million accounting gain on our foreign currency line of which 3.1 million were generated in Venezuela and 1.1 million in all of the other countries combined. In prior quarters in Q4, we incurred some ForEx losses in Venezuela during the process of transferring funds out of the country.
However, this quarter we also recorded some gains in Venezuela that more than offset these losses. The gain in Venezuela was the consequence of some local changes in accounting standards that resulted in positive 2008 year end retained earnings locally.
This positive net income gave us the right to initiate during 2009 a request for US dollars at the lower official exchange rate to distribute dividends. As a reminder, Venezuela has a dual exchange-rate system that comprises an official exchange rate, which was 2.15 bolivars per US dollar, and a parallel exchange rate that was 5.4 bolivars per dollar at December 31, 2008.
So based on paragraph 27 of FAS 52 that refers to foreign currency translations, the Venezuelan subsidiaries have re-measured the assets and liabilities in US dollars outstanding at December 31, 2008 at the parallel exchange rate and translated them at the official exchange rate. Specifically, this re-measurement of our year end assets and liabilities position contributed a positive 5 million foreign currency gain in our P&L in the fourth quarter of 2008 and an after-tax impact on a net income of 3.3 million.
The re-measurement related to the assets was included as non-current other assets for 7.8 million in the consolidated balance sheet. Important to say, the accounting treatment for assets and liabilities in US dollars is based on the current accounting rules and exchange rate situation in Venezuela, all of which could be very different in the future, and we will be describing this ForEx affect in more detail in our 10-K.
Pre-tax net income in Q4 2008 was 10.8 million, 82% higher than last year and tax expense was 2.9 million, which represented a blended tax rate of 27%. Net income for the three months ended December 31, 2008, was 7.9 million reflecting an increase of 49% and resulting in a basic net income per common share of $0.18.
Non GAAP net income excluding the effects of the Venezuelan re-measurement explained a few minutes ago and of the long-term retention plan was 4.8 million or $0.11 per share. Now moving on to 2008 full-year results, looking at 2008 in perspective, it was a very positive years despite the challenges of a complicated macroeconomic and financial context.
The year had two very distinct periods. During the first nine months, we had strong local currencies versus 2007 and in the last three, the wind changed and we had strongly devalued local exchange rate.
Specifically during 2008, we added 8.8 million new confirmed registered users, marketplace gross merchandise volume grew 38% to 2.1 billion and the total payment volume grew 62% to 266 million over the same period last year. Our business generated net revenues of 137 million growing 61% year over year.
Revenue growth for the year was driven primarily by the combined growth in key volume metrics and take rate, which went from 5.6% to 6.6%. Our marketplace revenue grew 58% to 109.6 million and payment revenue increased 76% to 27.4 million.
If you excluded the effect of currencies rate changes and calculated 2008 top line, using 2007 exchange rates, the year over year growth rate would have been 56%. TuCarro and to a much lesser DeRemate also had a positive contribution to year on year growth rates.
Total operating expenses for the period was 72 million, a 59% increase. These expenses represented a 52.5% of revenues versus 53.1% in 2007.
As a result of the items described, income from operations grew 73% year-on-year to 37.5 million, representing a 27.4% operating income margin versus 25.4% for last year. Non GAAP income from operations margin was 29.1% after excluding the effects of the long-term retention plan and the compensation costs related to the acquisition of CMG.
Other expenses were 1.5 million of foreign currency losses and 8.4 million of interest expense and other financial charges. In terms of taxes, we accounted 10.6 million in 2008, which represented a full-year blended tax rate of 36%.
The effective tax rate was 28%. Net income for 2008 was 18.8 million compared with 9.7 million during 2007, a 94% year over year growth and resulting in a basic net income per common share of $0.43, 95% above 2007.
Non-GAAP net income was 18.7 million after the effects of excluding the long-term retention plan and the compensation costs related to the acquisition of CMG were offset by the effect of excluding the Venezuelan foreign currency re-measurement. Non-GAAP Basic EPS was $0.42 for the year.
Now, let us take a look at our segment results. In Q4 and for the full year, we have begun to disclose Venezuela’s m marketplace results in the marketplace segment.
Overall, the marketplace represented 80% of revenues for the full year and payments 20% versus an 82-18 percent breakdown last year. We delivered margin gains in both segments.
In terms of cash, net cash provided by operating activities for the 12 month period ended December 2008 was 54.5 million versus 6.8 million for the same period of 2007. As described before, a significant portion of this flow was generated in Q4 when we converted into cash all of our funds receivables from consumers in our payments segment by discounting credit card receivables.
The balance outstanding in this line in our balance sheet was 29.2 million at the beginning of the year had grown to 34.9 million in September 2008 and was only 2.3 million at the end of Q4. In addition, we continued to generate strong operating cash flows in our marketplace segment.
Net cash used in investing activities was 37.6 million in 2008. The key components were 39 million for the acquisition of TuCarro and DeRemate.
CapEx was 4.9 million representing slightly less than 4% of revenues. Net cash used in financing activities in 2008 was 11.6 million driven by reductions in short-term debt in prior quarters.
In Q4, we launched a stock repurchase program of approximately $20 million. In Q4 2000 we began to execute on the program.
We repurchased in the open market 229,700 shares for a total amount of $2.6 million. The repurchased shares were accounted for as a reduction of common stock.
Additionally, in Q4 2008 we sold put options for 185,000 of our own shares. Put options can be exercised by the counterparties up to March 31 2009 at a strike price of $10.
We have collected a premium of $336,000 net of commissions and had recognized a gain of $157,000 in Q4. Wrapping up, 2008 was a very good year and the results were excellent in relation to the tough global environment.
We closed the year with strong growth in the volume of all our businesses, expansion and operating margins, a healthy allocation of resources towards our strategic areas and initiatives, excellent cash flows, and a solid cash position of 58.3 million, which includes short-term and long-term investments. Finally as you know, we are in the process of undergoing a management transition in which my colleague Hernan Kazah, our current COO will take over the role of CFO, which I will vacate on April 1.
I am pleased to be handing over the CFO’s responsibilities to such a capable individual and will stay on till the end of the year to assist Hernan and the rest of the team with the transition. Relating to this, Stelleo Tolda, our current Brazil country manager will assume the role of COO while retaining his existing responsibilities.
Hernan has joined us to say a few words today and after Hernan’s remarks we will be back to take your questions.
Hernan Kazah
Thank you and good afternoon. I wanted to take this opportunity to introduce myself to those of you who might have not interacted directly with me yet and to let everyone know that I'm very pleased to take on this new role with MercadoLibre.
As those of you who might have met over the past 10 years know, I have been with the company since the very beginning when it was not more than a business plan on Marcus’s notebook in mid-1999. I consider it an honor and a pleasure to be part of such a terrific story.
I look forward to my new responsibilities with the same energy and commitment as I did back then when we are forming the company and going through the initial round of financing. With the help of Nicolas, who is staying on with us during the transitional period, as well as with the assistance of the rest of our highly competent team, we expect that the transition in the role of CFO will be seamless.
In a similar fashion (inaudible) new role, I will be assisting Stelleo Tolda as he takes on the role of the COO. All of us are very solidly committed to working very closely together as we have to ensure that we continue to manage the company in the best possible manner to make the most of the significant opportunities before us and drive long term sustainable growth.
I look forward to speaking with many of you personally in the future. I reiterate my enthusiasm and commitment to my new role.
And now we would be pleased to answer your questions. Operator?
Operator
(Operator instructions) We will take the first question from Imran Khan with JP Morgan.
Imran Khan – JP Morgan
Yes, hi. Thank you for taking my questions.
And Nicolas, good luck with your new adventure. Two questions, first question about Brazil, and I'm not sure if you talked about it during the call.
It seems like Brazil gross merchandize volume was down on an year-on-year basis, and I was trying to better understand even if we adjust for FX Brazil came in slightly below, trying to understand why, what happened there? And secondly, take rate defined as auction revenue divided by the gross merchandize volume seems like declined sequentially, could you please help us to understand that?
Thank you.
Nicolas Szekasy
Imran, this is Nicolas. Brazil GMV in US dollars fell, but…
Imran Khan – JP Morgan
The revenue, sorry, the revenue. Auction revenue was 10 million compared to 11 million a year ago?
Nicolas Szekasy
Yes. We saw growth in Brazil in successful items and we saw growth in Brazil in GMV in local currency but when we converted to dollars the year over year result was a decline.
So you are right with that. It is mostly a matter of ForEx, when we measure Q4 of 2008 versus Q4 of 2007.
And the second part of the question, which is, take rate, yes, the take rate for the marketplace grew year over year. Your question was sequentially versus Q3, right?
Imran Khan – JP Morgan
Yes.
Nicolas Szekasy
It declined gradually overall. I would say one of the factors that we had as far as the site downtime was that we gave some credit back to his our users during Q4 and that was a one-time impact.
That is what probably makes the difference versus Q3. Overall we believe that the take rate is at a healthy level and probably in this type of environment, we won't be doing much pricing, but we don't expect the take rate to change downwards also.
So I hope that’s basically the answer.
Imran Khan – JP Morgan
A follow-up question quickly, what is the local currency revenue for Brazil in the fourth quarter on a year-on-year basis and what was that in Q3 of 2008 on a year-on-year basis, so that we just have a comparison about what the trend is?
Nicolas Szekasy
What was the Q4 – can you say that again?
Imran Khan – JP Morgan
Q4 local currency revenue growth for Brazil compared to Q3 2008?
Nicolas Szekasy
I don't have it here in front of me but you can do the math. Brazil has been growing GMV on successful items below the average for the full company.
So that is what we can tell you now.
Imran Khan – JP Morgan
But it seems like the Brazil growth rate decelerated even in local currency pretty sharply. I am just trying to understand that because if I look at the members, right, on a reported basis Brazil’s revenue was closer to 50% in Q3 and fourth quarter was negative 10% so, yes, the assets were negative, but I'm trying to understand how much is like…
Nicolas Szekasy
The exchange rate in 2007, don't have the exact numbers but in Q3 and Q4 were very similar. They were in order of 1.5, 1.6 reals per dollar.
And in Q3 it was pretty much at that level, the same level as in the prior year, and all of the devaluation happened as of October and it was a very steep devaluation of close to 50%. Exchange rate went from 1.5, 1.6 to 2.3, 2.4.
So I would say that all of the ForEx effects happened in Q4 and we didn't see almost any ForEx effect in Q3.
Marcos Galperin
Operationally—Imran, this is Marcos, we have got very healthy growth in terms of successful items and local currency GMV in Brazil when we exclude the site outrage in October and November.
Imran Khan – JP Morgan
Okay, thank you.
Marcos Galperin
Thank you.
Operator
And next we have Steve Weinstein with Pacific Crest.
Steve Weinstein – Pacific Crest
Great. Thank you.
I wondered if you could just talk a little bit more about what is happening in Venezuela from revenue standpoint. It looks as though it is a major contributor to growth in the quarter and certainly has a great trajectory.
Did you make changes in there, is the market just – I do know if the inflection point is there or something or currency or something going on so we can help understand the trend there and maybe do a better job of forecasting for 2009?
Nicolas Szekasy
Yes. I would say there are three distinct factors.
The first one, along the lines of what you are asking is that Venezuela is a very vibrant marketplace, our growth in metrics there is very strong, has been very strong in 2008, and has been very strong in prior years. So we are extremely satisfied with the evolution of the business there.
The second one is that we acquired TuCarro in January and that was a significant business relative to the size of our operation in Venezuela. So for most of this year, in the year over year comparison, that was favorable, and as of Q1 of 2009, we will be comparing apples to apples there.
And the third has to do with currency. The reporting in Venezuela, the local currency, financials are converted at the official exchange rate of 2.15 bolivars per dollar and that has not changed throughout 2008, and obviously as we have been discussing the exchange rates in all of the other countries in the region have devalued quite significantly.
So in several ways, the revenues of Venezuela in dollar terms look higher relative to the revenues in dollar terms of Brazil, Argentina, Mexico and the other countries.
Steve Weinstein – Pacific Crest
How should we think about the organic growth in that business going forward?
Nicolas Szekasy
I would say so far Venezuela in terms of matrix successful items is the one that we looked at the most has been growing faster than the average for the company. But going forward it is hard to say exactly what is going to happen in each specific market.
But it has been a very robust trend and I would say not only 2008 but in the prior years as well.
Steve Weinstein – Pacific Crest
Okay, great. Thank you.
Opera Operator
.
Robert Ford – Banc of America
Hi, good afternoon everybody. I had quick questions, just trying to understand the foreign exchange items, because when I look at the 4.2 million that you entered in the income statement net, and then the loss that you report on the cash flow statement of (inaudible), how much did you actually incur in the quarter that’s actual cash, it is not just a change in the accounting practice?
And then I wasn't sure Nicolas of your comments as to whether or not you were able to repatriate any of the profitability from Venezuela at the controlled FX rate of 2.15, whether you were able to do that are not?
Nicolas Szekasy
I will start with the second part. The answer is no.
We had cumulative positive retained earnings in Venezuela for the first time this year, so we will initiate that process to access dollars at the official exchange rate soon. That is a process that might be lengthy and complex.
So in theory we have the right to access those dollars at that rate, but still to be seen how successful we are with that. So that is there.
And then I would say most of the line that we described during the first part of that call, most of it is accounting. There are some expenses that were associated with taking funds out of Venezuela, those are cash, those are netted from the gains that we recorded, but again are mostly accounting driven.
Robert Ford – Banc of America
And then there was a sharp increase in your funding costs? I think it was Marcos who had mentioned that you had an 80% increase year on year in terms of your funding costs for Pago, but those declined over the course of the fourth quarter.
Can you comment a little bit as to how much of the funding costs are for Pago year-on-year going into 2009 and what you are likely to do with your payment terms online?
Nicolas Szekasy
Yes. The cost of financing increased to approximately on an average 80% during the beginning of Q4 mostly around October and the first half of November.
Towards the end of the quarter, they started to go down a little bit and that continued to be the case during January as well. We had increased our pricing for financing to match the increases in costs during Q4, and then as the costs have been coming down, we have been also adjusting downwards our pricing to match that.
Robert Ford – Banc of America
And just Nicolas, year-on-year right now how much is the price of financing up in Brazil, is it up 80% like it was or is it…
Nicolas Szekasy
Now it is approximately 50%, 60% above what it was last year in September. So it came down but still substantially higher than what it was.
Robert Ford – Banc of America
If you look at alternative online retailers or brick and mortar offerings because I would have suspected affordability is what folks are looking for net-net, how do you think your offers are comparing to those alternatives?
Marcos Galperin
Bob, this is Marcos. Were you referring to specifically to the financing or are you referring to the offerings in terms of value?
Robert Ford – Banc of America
No, value, I have no doubt were the value leadership is, I'm specifically referring to the financing.
Marcos Galperin
Well, as we’ve discussed in the past, some of the offline retailers, the brick and mortar, the brick and click, have more aggressive financing than what we do. That is why we have process for sometime now, talking with banks to try and offer more aggressive financing.
Having said that, in this environment, we believe that that shortcoming that we used to have is a significantly smaller concern to us than what it was in the past.
Robert Ford – Banc of America
Great. So are you seeing other channels rollback with some of the zero interest financing and that sort of thing, is that the case?
Marcos Galperin
Well obviously in this environment, I think it is going to be very hard for retailers to – zero financing is never really zero finance. So it is going to be hard for anyone to offer very aggressive financing terms to consumers.
Robert Ford – Banc of America
Fair enough. Thank you very much.
Marcos Galperin
Thank you.
Operator
And we will move to Stephen Ju with RBC Capital Markets.
Stephen Ju – RBC Capital Markets
Good afternoon guys. The buyer market, it seems like the bigger territories are either flat or increase in a ASPs in the fourth quarter on a FX neutral basis, which in this current environment seems to be counterintuitive, can you give some color as to why you think this is happening?
Marcos Galperin
Yes. I think we always expected that ASPs would be increasing in local currencies.
We had talked in the past about our partial hedge process. Whenever there are devaluations, some of our products increase in prices in local currency following the devaluation.
A typical example would be an (inaudible) for $100 in Brazil that was selling 150 reals before the devaluation and now is selling at 230, 240 reals, that is part of our mix and this hedge is only partial but definitely is in place and is driving local currency sales piece upwards.
Stephen Ju – RBC Capital Markets
Okay. Thank you.
Operator
And moving on to Scott Devitt with Stifel Nicolaus.
Scott Devitt – Stifel Nicolaus
Hi thanks. Two questions please.
The first one related to the direct contribution margin in Venezuela, last year our fourth quarter was 64%, this year was 48%, I'm wondering what the underlying driver of that is, is it TuCarro or something else? And then I had a follow-up, thanks.
Nicolas Szekasy
Yes, I would say two things. TuCarro clearly has to do with this and they are saying is that probably the starting point was too high and not sustainable.
When you look at the marketplace margin on average, it is slightly above 40%. So the 64 probably required that we added some personnel there in the operation or that we incurred some additional expenses versus what we're spending last year.
So we're very, very happy with 48% and we don't think that we could keep on at the prior levels.
Scott Devitt – Stifel Nicolaus
And 48 is a sustainable margin in Venezuela?
Nicolas Szekasy
It is hard to tell. It's a very efficient operation.
Probably over time, when I see less differences amongst the countries, but I think that we would be happy with our margin that can be lower than what it is today and it would still be still a very healthy margin.
Scott Devitt – Stifel Nicolaus
Okay, thanks. And I think you mentioned 45% constant currency growth and correct me if I'm wrong but if that’s the constant currency number, could you then give the constant currency revenue growth rate excluding acquisitions in 4Q08 and then get back the same figure for 3Q08?
Nicolas Szekasy
Yes. We do not break out TuCarro or DeRemate.
Just to give you a sense, we believe that what DeRemate added in Q4 is pretty much comparable to what we lost because of the site outrage in terms of the days that we lost and the credits that we had to give out. So probably that did contribute very much.
And TuCarro in 2007 for the full-year revenues were approximately $6 million last year, so that gives you a sense of how much it could have been.
Scott Devitt – Stifel Nicolaus
Okay, thank you. And just finally could you update us on the tax rate, are we still looking at – is it – I mean we went to a very high rate earlier in 2008 to a much lower rate, are we still targeting 35% as the long term number?
Nicolas Szekasy
I think that’s a fair assumption. In the first half of 2008, we had a few one time items that drove that rate upwards, and we always believe that we should be below 40% in the medium term.
Most of the countries in which we operate are at 35. We have some tax benefits in Argentina that makes the average rate there lower.
So if we are capable of doing efficient tax saving, we should be around 35%, that is a fair projection.
Scott Devitt – Stifel Nicolaus
Thanks.
Operator
And we have Gustavo Oliveira with Citigroup.
Gustavo Oliveira – Citigroup
Hello, everyone. My question is again on the take rate on the marketplace, you mentioned that you gave or your are giving some credits back to consumers, is this something that you believe it is going to be temporary just because of the recessionary environment that we are living on or it is something more structural that you are changing your price structures therefore the take rate could be delivered for a much longer time?
Marcos Galperin
Hello, Gustavo. This is Marcos.
These credits were one-time that we gave for Q4. Because of the site outrage, many of our power sellers and a lot of our sellers could not access their My MercadoLibre part of the site for four days.
So obviously that had an impact in their ability to follow up on transactions they had received and therefore that impacted our take rate for the quarter. In addition to that, they having issues in their ability to follow up and closing up transactions, we issued credit for the insertion fees and their feature fees that they had paid and we have extended also the duration of their listings; in a way that also implies a credit.
But that was something that we did just because of the incident that occurred during Q4, and we have taken the measures, the necessary measures to avoid having a repeat incident like the one we have.
Gustavo Oliveira – Citigroup
Okay. That is pretty clear.
Thank you.
Marcos Galperin
You are welcome.
Operator
And we will take Mark Argento with Craig-Hallum Capital.
Mark Argento – Craig-Hallum Capital
Hi, Marcos. Could you talk a little bit more about your ad sales efforts, have you built out the sales force or what is your go to market strategy there?
Marcos Galperin
We have a very small sales force that display ads, but we have launched is more of an automated take out mechanism, which we believe is more scalable and is significantly more strategic for us than our display ad strategy. We believe that this is a very important feature for long-term, but it is still on a better format.
The revenues it is contributing are largely immaterial. But basically it enables us to capture share of wallet from large retailers, or even up our power sellers as they open their own sites and will nonetheless like to buy traffic from us given that we are the ecommerce destination in the region.
Mark Argento – Craig-Hallum Capital
Okay, that is helpful. And then switching over, in terms of power sellers, vendors selling products on the site, you guys don’t release a metric around number of new sellers, I don't believe on the site, could you talk a little about the trend there, and also any change in terms of the mix of products that’s being sold on the site?
You’ve seen a trade down phenomena, people buying and selling different types of products given the economic environment.
Marcos Galperin
We see very healthy growth in our operational metrics. We were very satisfied to see successful items accelerating in Q4 to 22% year-on-year growth despite the site outrage.
And typically that metric grows in par with sellers and buyers. They go hand in hand.
In terms of category mix, we haven't seen much changes so far.
Mark Argento – Craig-Hallum Capital
Thank you.
Marcos Galperin
Thank you.
Operator
We will take Tony Tang with the LUSIGHT Research.
Tony Tang – LUSIGHT Research
Hi. Thanks for taking my question.
First one is regarding your interest expense, so you mentioned in the fourth-quarter actually well you mention a little bit there is a $5 million charge, could you elaborate more in detail how did that rise here, and how should we look at this number in the future?
Nicolas Szekasy
Yes. We spent $5 million; approximately $3 million out of the five were a one time event at we discounted our stock of receivables that went down from 30 million plus to 2 million.
So 2 million were more operational or run rate interest expenses, so that gives you a sense of where we are at excluding the one-time event.
Tony Tang – LUSIGHT Research
So which meets this quarter, the first quarter of 2009, so we should see that number coming down around 2 million, is that right?
Nicolas Szekasy
We don't discuss projections for Q1.
Tony Tang – LUSIGHT Research
Okay. Another question for the Pago, the payment volume, if you take FX effect outright, so pretty much the volume is flat quarter over quarter basis, could you characterize it more like how the Pago system will be adapted by users?
And then it seems like it is kind of low pace out here, what is the general reaction from the 2009 users, and I know that the tax rate is going up?
Marcos Galperin
So Pago has several issues affecting its performance in Q4 as we mentioned, it is four days of complete site outrage. We took away financing for a week in Brazil where financing is very popular.
Then we reintroduced financing at rates that were 80% higher. So obviously the combination of all those issues had a negative impact in the growth rate of Pago during the quarter.
Many – all of those issues have been solved and the rate has started to trend downwards, and we expect Pago to continue growing with the business as we move forward. As you know we also have launched an open version of Pago that is available in Argentina, Chile and Colombia, which is still largely a beta version of the product, and we are working to make this version scalable, and once we are satisfied with the quality of the product that we have, we will continue with the roll-out.
In the meantime it is growing together with the business.
Tony Tang – LUSIGHT Research
When do you see the revenue contribution from outside Brazil in terms of Pago will pick up, do you see that in two, three quarters time or…?
Marcos Galperin
Sorry, Tony, but I did not understand your question?
Tony Tang – LUSIGHT Research
In other words how much of these payment revenue is coming from inside Brazil?
Marcos Galperin
We have a significant portion of our Pago business coming from Brazil. The penetration is higher of our overall revenues for Pago, Brazil represents a higher percentage of our total revenues for Pago than for our marketplace business.
Operator
And next we have Tim Hayes with Fidelity Investments.
Tim Hayes – Fidelity Investments
Thanks. Hi, guys.
Two questions if I could, the first one is, I know you don't like to say much specific, but just from a qualitative perspective, anything you can say about the outlook or how you are thinking about 2009?
Marcos Galperin
So the question is the outlook for 2009?
Tim Hayes – Fidelity Investments
Any qualitative comments or thoughts about the year ahead?
Marcos Galperin
Yes. I would say overall what we're seeing for the region in general is looking better than what we see or hear about expectations mostly around the northern hemisphere in the US or Western Europe.
The economies in the region have slowed down quite significantly but still there are some expectations of growth. And on top of that, we believe that our growth has substantially much more to do with secular growth in broadband, internet users and things like that.
We believe that it is not going to change very significantly this year. So overall we believe that our business should be evolving and I think there is not much more than we want to say at this point, but overall we finished the year with a strong Q4 and we are working hard to have a good 2009 as well.
Tim Hayes – Fidelity Investments
Okay. And then in terms of your – the second question is, if the environment proves to be more difficult from a macro perspective than what you are currently expecting, can you talk a bit about the levers that you might use, in other words, from a cost cutting or marketing or advertising spending perspective, what are you likely to cut first if necessary?
How would you sort of prioritize things strategically?
Marcos Galperin
We like very much the way in which we finished the year in Q4 with G&A growing 10% year over year, sales and marketing growing more than that, and product development growing substantially more than that. We think that if we continue allocating resources to products that is when we get the best return.
And so for that is not a very significant portion of our P&L, so even if we invest there ahead of the growth of revenue, we think that the ROIs is very strong. And then the other levers is continue to invest in marketing, and we think we have opportunities to continue leveraging our discretionary spending, continue leveraging our G&A, infrastructure and sustain high margins even if the economy or the growth is not what we expect.
Tim Hayes – Fidelity Investments
Okay. Thank you.
Marcos Galperin
You are welcome.
Operator
And we will take our final question from Aquico Wen with Legg Mason.
Aquico Wen – Legg Mason
Yes, hi. Thank you.
Just a quick question, you had mentioned that the 3 million out of the 5 million interest expense was a one off related to the discounting of receivables, but to the extent that financing (inaudible) particularly Brazil, I would have expected that you would discontinue receivables and therefore should we not expect this kind of charge to be recurring going forward and it will extend the trend financially for the business through this kind of receivables I would expect that to be recurring, right?
Marcos Galperin
Yes, it is definitely a recurring. So…
Aquico Wen – Legg Mason
So, it is not a one-off expense, is it?
Marcos Galperin
No, the one-off is 3 million out of the five, so we still have a…
Aquico Wen – Legg Mason
The 3 million you mentioned is related to the discounting of receivables, right?
Marcos Galperin
Yes, I think this is a good question to clarify the issue. We had a very – we had built throughout the years a very large receivables position which we sold in Q4 and brought it down from roughly 30 million to 3 million, so that was the – that produced a very large interest expense, and that’s the 3 million that is a one-time, so the 3 million that we current have in account receivables is what we will be discounting on a weekly basis and will produce an interest expense that will vary with according to interest rates in Brazil, but we had a very large receivable asset that we discounted in Q4 and produced 3 million interest expense that’s a one-time.
Nicolas Szekasy
Before that the first nine months of the year we were spending approximately $300,000 per month on interest for discounting and in November, December, we were spending approximately twice that much for the discounting that we're doing.
Aquico Wen – Legg Mason
Okay, all right. Thanks very much.
Thanks for clarifying that.
Marcos Galperin
Thank you, and thank you all for taking the time to attend our call and ask the questions. Thank you very much.
Bye, bye.
Operator
That does conclude today's conference call. Thank you everyone for your participation.