Nov 3, 2010
Executives
Diego Escobar – IR Marcos Galperín – President and CEO Hernán Kazah – EVP and CFO
Analysts
Imran Khan – JPMorgan Gene Munster – Piper Jaffray Robert Ford – Bank of America Stephen Ju – RBC Capital Markets Jordan Rohan – Stifel Nicolaus Steve Weinstein – Pacific Crest Aaron Kessler – Bank Equity
Operator
Good day, ladies and gentlemen, and welcome to your MercadoLibre Q3 earnings conference call. (Operator instructions).
And as a reminder, this is being recorded. I would now like to introduce Mr.
Diego Escobar. Please begin.
Diego Escobar
Welcome, everyone, to MercadoLibre’s earnings conference call for the quarter ended September 30, 2010. The company management presenting today are Marco Galperin, Chief Executive Officer, and Hernán Kazah, Chief Financial Officer.
Additionally (inaudible) Hemenes, Senior Vice President of MercadoPago, will be present during today’s Q&A session. This conference call is also being broadcast over the internet and is available through the investor relations section of our website.
I remind you that 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 Q3 2010 earnings press release available on our investor relations website.
In addition management may make forward-looking statements related 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 trajections are reasonable in view of 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 the call for a variety of reasons including those described in the forward-looking statements and risk factors sections of our 10Q, 10K, and other filings with the Securities and Exchange Commission, which are available on our investor relations website.
Now let me hand the floor over to Marcos.
Marcos Galperin
Thank you, and welcome everyone to today’s conference call. Let me begin by summing up Q3 as a good quarter for us with sustained trading momentum on our platform even as we continue to dedicate resources to longer-term initiatives that have limited immediate impact.
Throughout Q3 we continued to observe the positive dynamics which I have described over the last few quarters characterized by increasing levels of engagement by our users with our different service offerings. This increased complementary usage of marketplaces – classifieds, payment, and other (inaudible) – guarantee both improving user appearance for our customers as well as (inaudible) financial models for our company as we move forward.
In the meantime secular trends in technology remain steady and under line of strong future (inaudible) commerce in the region where we operate as growth in internet and broadband penetration continues to be fortified by improving infrastructure, access to computers, and quality of connection available. New consumers are spilling onto the web at a rapid pace, and in Q3 alone we added 2.8 million new users to our community of buyers and sellers, surpassing the milestone of 50 million users and ending the quarter with 50.2 million total confirmed registered users.
This figure represents a 25% increase over last year. The convergence of these internal and external factors allowed for a record gross merchandise volume of $888.1 million in the quarter, a 12% increase year over year and 26% higher than last year when measured in local currencies.
Items sold, possibly a better reflection of the stable rate of growth for our business as it eliminates distortions brought about by currency fluctuations, grew even more robustly at 30% versus 2009.
I would like to pause for a moment here and clarify that revenues for the quarter were negatively impacted by a change in MercadoPago financing operations as revenues generated from installment-related financing charges are now reported net of the cost of discounting credit card receivables. Had financing receivables also been presold in Q3 2009, the effective year on year growth in net revenues would have been 19.9% in US dollars and 33.6% in local currencies.
This has no impact whatsoever on net income. On the other hand, net income was positively impacted by a lower tax rate as we had some onetime tax benefits.
Manuel will explain these issues in detail in just a minute. We believe our quarterly financial performance is further proof of MercadoLibre’s consistent execution while capturing the opportunity of this rapidly growing ecommerce region.
I firmly believe that our focus on technology and innovation is what allows us to capture this growing potential quarter after quarter. Let me now turn to some of the operational highlights of the quarter.
During the quarter our efforts on the IT front continued to center on the new software platform we are developing for our core applications. The project is an entire rewrite of most of our code, focused on making it more robust, scalable, and principally more open.
The key deliverables that we hope to share with you over the next few quarters will be the incremental fabrication of the MercadoLibre API. The API will initially cover the core functions of our trading platform and eventually cover most of the functionality available on MercadoLibre, MercadoPago, MercadoClicks, and MercadoShops.
In addition to this major milestone we are also confident that the new platform will allow us to significantly shorten our own internal product development cycle, meaning that as we advance we will be able to roll out more new functionalities and services for our users than ever before. Importantly, this initiative implies an important dedication of our IT resources towards a project that strengthens our future ability and capacity for innovation, while forgoing product launches and short-term innovations that might have contributed to our growth in the immediate quarter.
We are eager to see the effects of this project in what is now our closer future, enabling us to tackle a list of innovations including an unlimited queue, deploying our services for mobile devices as they increasingly become tools for ecommerce, becoming compatible with a wider range of third parties interested in using our marketplace as a business platform, for developing tools and applications (inaudible), and, as mentioned previously, increasing the speed of execution of our product enhancements. Now, for a closer look at the operational highlights from our business units.
Our classifieds business is showing renewed strength after we tweaked our business model by introducing free listing options. Quarter classifieds grew faster than the marketplace, as its revenues were up 61% when measured in constant dollars.
Notable in this deep acceleration is the fact that an increasing number of the many new cars listed under the free option are upgrading to paid listing alternatives. This validates our strategy of offering a free classified alternative as a key customer acquisition tool, to then be monitored for (inaudible) and cross sale offerings.
This achievement is notorious in Brazil, where unique new sellers have grown 89% year over year. Also key to the improvement in results is the fact that listings coming from dealers kept growing to 28%.
This shows the transition from a fully (inaudible) model to a hybrid one that also encompasses the dealership segment is moving forward in classified with a strong degree of success. Moving on to advertising, our MercadoClicks advertising solution continues to gain traction and made up for the declining ad revenues brought about by our decision to gradually phase out most of the display advertising positions except for those available in free listings pages.
We see MercadoClicks beginning to gain the recognition among advertisers that we hope will eventually position it as a valid complement on existing investments in search advertising platforms. We have impressively doubled the number of advertisers using MercadoClicks over the last two quarters.
Represented within that group are non-retainers as well a smaller and medium sized businesses, and even merchants who already sell on our site but see the added value of tying their offers to well-connected key search words as well. Case in point, to the strong momentum we see behind MercadoClicks as based from our very small base is that of the top 25 Latin American retailers, we already have our clients: Wal-Mart, Casa (inaudible), (inaudible), (inaudible) with their brands Extra and ProntoFrio; (inaudible), (inaudible), (inaudible), Sony Style, Best Buy, Dell, and Apple Store among others.
Given the solid results we are seeing we will continue to focus on search advertising, prioritizing continued growth and the number of advertisers using the platform, improving click through rates, and making complaint management, particularly for large-volume complaints, easier through improved tools and features. And now I’d like to move on to the development in our payments and core marketplace businesses.
Possibly the highlight of our operations for the quarter was fulfilled, well executed in migration to the MP3 payment platform. This was timed to coincide with the implementation of our new bundled pricing schemes, and the transition was carried out seamlessly.
Our sellers responded very well to the new system and our buyers have demonstrated increased willingness to use MercadoPago now that they have no longer to pay for processing and have the product better integrated into their purchasing flows. Consequently we have seen a sharp increase in TPV penetration, that is, TPV as a percentage of GMV in Brazil for the quarter.
This figure rose from 33% to 39% in just the last three months. We are eager to keep witnessing this evolution going forward.
As buyers adopt MercadoPago in increasing numbers they are also proven more likely to choose financing options when they do so. As a result, buyers payment volumes increased along with general payment penetration in the quarter, contributing to overall revenue growth as well.
In the meantime, express checkout, launched along with bundled pricing, as also noticeably improved integration of MercadoPago and our marketplace, another driver for the increased production we are seeing. Buyers are finding a purchasing flow that is increasingly quick, simple, and integrated with payments, encouraging our marketplace and payments growth simultaneously.
The increasing choice of our payments solutions is also greatly improving the efficiency of transactions our sellers accomplish, and in fact they have readily accepted the value added in this new system. The results have been encouraging enough in our Spanish number of sales so far that we will be moving forward with the same initiative in Mexico in the next few quarters.
Now we have already covered MercadoPago in terms of its integration with our marketplace, but I would like to specifically address the growth we’re seeing in a few key metrics there. This growth remains crucial to our long-term prospects and I want to break it into its different components.
First of all, as called out previously, TPV saw an impressive 57% growth year on year. This was achieved primarily by adding MercadoPago into every MercadoLibre paid listing at no extra cost for the sellers from Argentina and Brazil.
As a result, MercadoPago had an impressive 86% share of all live listings in Q3, up 28 percentage points versus last year. This will keep approaching 100% adoption as we implement the same steps in other countries in turn driving TPV penetration up from the current 21% level.
Simultaneously to getting to the point where all listings on the platform offer MercadoPago we also plan to drive penetration further by creating incentives for buyers along the way. The stats so far show that one they try our payment solution they are inclined to keep using it for future purchases.
Increased usage will come with many opportunities in the form of stored (inaudible), stored payment and shipping preferences, and the critical mass of buyers which will be interesting to merchants inside and outside of our platform. As we continue growing the percentage of transactions that flow through MercadoPago, the benefits of MercadoPago gradually will reach all of our users, providing them with smooth settlement of transactions, a trustworthy buyer protection program, the advantages of clear records and stored balance.
Additionally, sellers see improved conversion and volume as buying and paying become integrated on our platform. This is the enormous opportunity ahead of us on our own platforms.
In terms of the off-platform segment, the opportunities for growth are also very large as we begin to reach out to more merchants, maintain and establish assistance of our off-platform partners as they see their volume grow along with the rest of ecommerce. Brazil off-platform payments demonstrates this perfectly.
(Inaudible) ecommerce payments volume grew 98% quarter over quarter, and we expect to keep a rapid growth rate for several quarters. As this happens, off-platform will become an increasingly important component of our business and we look forward to its evolution.
Before handing things over to Hernán, I would like to stress the solid progress we are making while preparing our new platform architecture which will allow us to advance even further. Certain parts will be running on new standards by year end, and over the next few quarters we hope to advance on the entire site.
As I detailed earlier, these changes will allow us to shorten development time for new site launches in the future while allowing us for possibilities with third-party developers. It implies no added investment but rather a redirecting of IT resources, a time cost which we believe is well worth incurring.
While on the IT front, I would also like to congratulate our engineering team for yet another reward received. On this occasion we were the recipients of the 2010 Oracle Enable, the Echo Enterprise award, announced by Oracle at their OpenWorld Conference in San Francisco this quarter.
This award showcases customers’ successes using technology to support green business practices as well as sustainability initiatives that improve business efficiencies while having a positive environmental impact. Oracle has honored 15 global customers and we are proud to be among them.
We believe this highlights not only our engineering excellence but our commitment to being a socially responsible and environmentally sustainable company. This is an excellent note on which to congratulate our entire team here at MercadoLibre for the hard work carried out so far this year.
We have just crossed the 1500 employee mark as we continue to invest in top talent to carry out our ambitious plans going forward. And as a management team, we are all extremely proud of each one of them for the work they are carrying out.
In the immediate future we are gearing things up for the year end shopping season, which is about to kick off in Latin America. We are confident that 2010 will see record numbers of both buyers and sellers coming to MercadoLibre for their holiday buying, selling and paying, placing us once again at the center of the growing tide that is ecommerce in Latin America.
I will now let Hernán walk you through the key financials and accounting points for the quarter, and I look forward to addressing your questions right after that.
Hernán Kazah
Thank you. As Marcos just mentioned, the Q3 of 2010 was another strong quarter for us, as our combined businesses generated solid results.
In the quarter we generated net revenues of $56 million, a gross profit margin of 79.5%; income from operations of $19.3 million, leaving operating income margin at 34.5%; and net income of $18.8 million, a net income margin of 3.6%. Resulting EPS for the quarter was $0.43.
As Marcos mentioned, I would like to provide you with greater clarity on two changes in our operations which have taken place in Q3. It’s important to highlight that these adjustments occurred as we have answered our users’ needs and captured opportunities to enhance our business.
Neither of these changes had any impact on our net income or EPS. The first of these operational changes is the consolidation of our segment reporting: whereas we previously reported marketplace and payments as separate business segments, as of the Q3 of 2010 we have begun to report them both as one single segment.
This is a result of the recent integration of our payments business and fees into the marketplace operation. As we have explained in prior calls, in the process of bundling our payment processing fees into our marketplace final value fees in all countries where we operate, in this way offering improved buyer experience provided by our payments service at no extra cost to our users.
It was carried out in Argentina at the end of last year, and has now been implemented in Brazil as well to coincide with the rollout of MP3 in that country. As a result of this pricing change in Brazil, our payments business no longer charges its own separate processing fee for transactions that occur on the MercadoLibre market based platform in that country, eliminating the principle source of revenues that justified reporting payments as a separate segment.
It should be noted that MercadoPago continues to charge a processing fee for off-platform transactions and a financing fee both on- and off-platform to buyers who purchase in installments. These sources of revenues are not yet material enough to justify a separate reporting segment, but as they continue to grow we will reevaluate this in the future as they increase their share of total revenues.
Therefore for the time being we will report consolidated revenues and direct costs broken down by geographic segment. The second operational change I want to address today is in our MercadoPago financing operations.
Due to the continuous growth of MercadoPago’s TPV and particularly in the growth in financed TPV as of July, 2010, we started to pre-sell a significant portion of our credit card receivables in order to better manage their growth volume and to generate increased predictability in the associated interest rate costs. Pre-sale of the receivables implies giving certain financial institutions advanced notice of our intent to sell to them a portion of the receivables that we will accumulate over the coming months.
This practice allows us to better forecast the expected financial costs on the sale of our future receivables to improve negotiations around the cost of the accounting of those receivables, and to limit the risk of not finding trading partners for those receivables. Consequently, MercadoPago consumer financing revenues are now the net amount collected from financial institutions as a result of pre-selling installment-related financing receivables and there is no longer an expensing associated with the cost of discounting them.
In our press release, we are providing a table that may prove helpful to analyze the annual evolution of the company’s top line as it shows consolidated net revenues since Q3 of 2008 net of MercadoPago financing costs. Having (inaudible) these two issues I will now provide a more detailed review of our key financial metrics.
All the growth rates are year on year unless I specific otherwise. During the Q3 we generated solid growth in all of our key financial metrics, starting with healthy growth in our revenues in US dollars despite a continued foreign exchange headwind versus last year.
Specifically, net revenues were $56 million, 11% growth in US dollars and 23% growth in local currencies, making revenues for the prior year quarter comparable. By subtracting $3.9 million of costs directly associated with MercadoPago financing, growth was 20% in US dollars and 34% in local currencies.
Gross profit margin was healthy at 79.5% versus 78.3% in Q2 of 2010, and 79.5% in Q3 of last year. Income from operations grew 2% to $19.3 million with an operating income margin of 34.5% versus 35.8% in Q2 of 2010, and 37.5% in Q3 of 2009.
Net income before income and asset tax expense for Q3 2010 was $19.8 million, representing 59% growth in US dollars. Net income was $18.8 million, a 91% growth year on year.
This represents a 33.6% net income margin versus 19.5% a year earlier. Revenue growth was driven primarily by volume.
Specifically we saw a 30% increase in items sold, taking marketplace gross merchandise volume to $888 million. This is a 12% increase in US dollars and a 26% increase in constant currency.
Leading this total, Brazil, with a 25% growth in items sold, grew local currency gross merchandise volume by 4% in the quarter versus a US dollars gross merchandise volume growth of 11%. Gross merchandise volume comparisons are particularly difficult for Brazil in the second half of 2010, as last year the Brazilian Real appreciated considerably over a very short period of time while the local currency prices of typically (inaudible) products did not adjust downward immediately.
The result was a concealed spike in US dollars ASPs at this time of last year, making for a very tough year on year comparison that extends into Q4. Another factor driving our revenue growth was expansion of our bundled pricing which is higher than the prior standalone financed value fee and which increased TPV penetration.
As TPV grows, financed volume in our site also tends to grow, and this contributes additional financing revenues. In local currencies on a country basis, consolidated net revenue growth was 7% for Brazil, 48% for Argentina, 11% for Mexico, and 61% for Venezuela.
In US dollars, consolidated net revenues grew 14% for Brazil, 44% for Argentina, 15% for Mexico, and declined 35% for Venezuela. Note that Brazil’s revenue growth is deeply impacted by the pre-selling of MercadoPago financing receivables.
Had we pre-sold receivables in Q3 of 2009 as well revenue growth for Brazil would have been 30% in US dollars and 22% in local currencies. Consolidated take rate declined to 6.3% versus 6.4% in Q3 of 2009, and 6.58% in Q2 of 2010, and in both comparisons, the decline in take rate is strictly due to the new pre-selling of MercadoPago receivables.
Turning to the P&L for the Q3, gross profit grew 11% to $44.5 million, representing 79.5% of revenues, the same as in Q3 of 2009. Operating expenses for the period reached 45% of sales, totaling $25.2 million, a 19% increase.
Specifically sales and marketing remained the largest item expense, growing 11% for the quarter to $12.3 million. As a percentage of revenues, sales and marketing reached 22% versus 21.8% for the same period last year.
Product and technology remains the principle focus for us. Expenses grew 28% to $4.2 million compared with $3.3 million for the Q3 of 2009 as we continued to build our team in this crucial growth area.
G&A grew 26%, including certain onetime costs associated with the closing of non-operating subsidiaries and with our new offices in Brazil. Resulting operating income for Q3 2010 was $19.3 million.
Other relevant items from the quarter were $1.4 million of interest income, mainly from conservative fixed income investments; $600,000 of interest expense and other financial charges; and a $354,000 foreign exchange loss driven by the effect of currency fluctuations on the cash and investment balances that our subsidiaries held in the US. Pretax net income was $19.8 million, 59% higher than in the same quarter as last year.
Tax expense was $1 million in Q3 of 2010. This represented a blended tax rate of 4.9% versus 28.6% in Q2 of 2010, and 20.5% in Q3 of 2009, as we benefited from a tax reversal of a tax evaluation allowance in Brazil resulting from our tax planning strategies to use our collected tax (inaudible) carry forward credits from acquired companies.
Net income for the three months ended September 30th, 2010, was $18.8 million, reflecting an increase of 91% when compared with $9.9 million in the same period of 2009. This represents a 33.6% net income margin and resulted in a basic net income per common share of $0.43.
Note that net income grew 109% versus Q3 of last year when measured in constant US dollars. Net cash provided by operating activities for the three-month period ended September 30th, 2010, was $15.9 million, 28.4% of net revenues.
CAPEX for the quarter was $6.6 million, including our investment to acquire a new office in Argentina. Consequently, for the three-month period ended September 30th, 2010, net cash provided by operating activities, CAPEX, an (inaudible) measure of free cash flow totaled $9.2 million.
Cash, short-term investments and long-term investments at the end of the quarter totaled $116.9 million. These results reflect the sound momentum of our business and the efficient management of our resources as we deploy initiatives against our stated plan.
The leverage to promote increasing use of our payments service, our MercadoLibre, are obviously in place and we’re eagerly awaiting for the Q4 which is typically a strong quarter for MercadoPago. We suspect improvements and volume moves from holiday season shopping on our marketplace.
Overall, MercadoLibre’s poised for excellent growth, our prospects are promising, and we look forward to managing our business in the context of this great opportunity. With that we will be happy to take your questions.
Operator
(Operator Instructions.) Our first question comes from Imran Khan from.
JPMorgan.
Imran Khan – JPMorgan
Yes, hi. Thank you very much for taking my questions.
A couple of questions. First, I was wondering how is your view about comparative conditions of Pago as Paypal is considering to increase its presence in the Latin American market?
So that’s question number one, and question number two is items growth rate was 30% and I think local currency GMV grew 26.5% if I’m correct. Can you talk about the driver of the ASP decline?
Thank you.
Marcos Galperin
Hi Imran, how are you doing? This is Marcos.
Imran Khan – JPMorgan
Good, how are we doing?
Marcos Galperin
Very well, thanks. Let me answer the first question on and that and Hernán will take the second.
So overall MercadoPago and MercadoLibre operate in a highly competitive environment, as you know, with many existing players and new players. And we expect that situation to continue to be like that for many years to come given the effectiveness of the market.
We have always operated in a very competitive environment and we have done pretty well thus far, and we expect to continue doing very well.
Hernán Kazah
The second question, Imran, about gross merchandise volume, that metric in constant dollars increased 26%; in US dollars it increased 12%. What we mentioned is that ASP in Brazil, particularly went down when you look at what happened last year, the Brazilian Real appreciated considerably over a short period of time and in Q3 and part of Q4 last year sellers did not adjust their prices immediately.
So in a way we had some benefits last year in terms of gross merchandise volumes were measured in local currencies that they’re now explained against that. But I think an important metric to look at in Brazil is the growth of successful items, of items sold, which grew 25% versus Q3 of last year.
Imran Khan – JPMorgan
Thank you Marcos, Hernán, and Pedro.
Operator
Our next question comes from Gene Munster of Piper Jaffray.
Gene Munster – Piper Jaffray
Good evening, and just another follow up on the GMV question. As you mentioned, 26% local currency growth, down from 35% last quarter but up against a really tough 52% comp a year ago.
Is there any just general thoughts you can help us with in terms of thinking about GMV growth over the next year? I’m not asking for guidance but is this a number that you think would go down over time in terms of local currency growth rate, relatively stable?
Any thoughts on that and then I have a follow-up question.
Hernán Kazah
Yeah, in terms of local currency gross merchandise volume growth we maintain the same position we maintained in the past, which is we think that ecommerce in the region will grow somewhere between 20% to 30% over the next few years and we should be able to at least maintain our share there. So that’s more or less what we’re forecasting locally going forward.
When you look at that in US dollars you have the currency playing there a role. This time around we still have some headwinds.
As of Q4, we’re going to be benefiting from that scenario if things remain as they are today, so we think that now with a more stable horizon of currency and exchange rates we should see in local currencies the same long-term growth that we expect to see for US dollar gross merchandise volume.
Gene Munster – Piper Jaffray
And just my follow-up question is we’ve gone through and kind of done a back of the envelope in terms of your take rate based on the new numbers, and it seems to be going up about 30 basis points per quarter over the last couple quarters. Is that kind of what you’re seeing and how should we think about the rate and the pace that you start to increase take rate, especially now that you’re accounting for Pago as a platform plate?
Does that change ultimately how you think about take rate? And then lastly just what a long-term take rate goal might be.
Hernán Kazah
Yeah, our main focus continues to be on growth, and whatever we do on pricing is what we think is best to ensure that our users get a good value for the services they are paying for and we ensure also future growth. We’re currently doing lots of initiatives.
On the one hand we’re bundling MercadoPago; our intention is to try to expand penetration as much as possible. On the other hand we’re also, as Marcos mentioned, expanding listings throughout the site.
And that in the short-term also may produce a decline in take rate. So while the calculation you did is correct, if we were to account for MercadoPago financing revenues as we did in the past, you would have seen an increase of around 30 basis points on our take rate.
But it’s not that we are working against that target. Again, our target is to continue growing, and with all the changes we’re doing on the platform and with the bundling of MercadoPago in Brazil and hopefully in new markets soon, we’re trying to see what’s the best (inaudible) for us to keep on growing, for us to capture more users, and not that much managing the business to a certain take rate.
Gene Munster – Piper Jaffray
So we may see a decline in take rate in the near term and then move up over time?
Hernán Kazah
You might see them going up or going down. As long as we see revenues growing in a healthy manner we won’t care much about our take rate.
Gene Munster – Piper Jaffray
And do you think it could get to 12% in the next five years or ten years? Any thoughts on that?
Hernán Kazah
Not really. At this point we don’t have a long-term view on what the target is for take rate, though we’ve been saying for a long while that assuming Latin America is a more inefficient retail market, you could argue that there’s lots of upside for us to try to have a higher take rate than whatever would be considered and equivalent take rate in a more developed retail market.
Gene Munster – Piper Jaffray
Alright, thank you.
Marcos Galperin
Sure.
Operator
Our next question comes from Robert Ford from Bank of America.
Robert Ford – Bank of America
Hello, everybody, and thanks for taking my question. I had a question with respect to payments, first of all, and you mentioned that the Brazilian off-platform payments was up 98% quarter on quarter, which is phenomenal.
And I was curious, you know, what the total payment volume was that’s associated with that, and then the number of total Pago users you have in Brazil. And where do you stand in terms of your PCI certification?
Marcos Galperin
Hi, Bob, how are you? This is Marcos.
So definitely off-platform volume is growing very fast from a low base as you know, but both number of users and volume is growing very fast and starting to gain some scale. We are not opening up those numbers as Hernán mentioned in his prepared remarks.
We are eventually going to be opening up the off-platform revenues from MercadoPago as they become more significant, but we are very, very happy and encouraged with the results we’re having with MercadoPago in Brazil, both on-platform and off-platform. And obviously we believe we have key competitive advantages there.
Robert Ford – Bank of America
And in terms of PCI certification in Brazil and other marketplaces, do you know where you are right now?
Marcos Galperin
Yeah, we’re extremely advanced there. We are in good shape.
Robert Ford – Bank of America
Okay. And out of curiosity, I know EBay has 2 million users right now in Brazil, right – kind of the individuals that typically buy for imported items.
I’m curious as to why you didn’t decide to joint venture with Paypal and go it alone.
Marcos Galperin
That’s an interesting question, Bob. Perhaps you should ask EBay, but obviously it’s not a question that we can discuss at this point.
But as I said earlier we’re very excited with the way our business is going and we think we have very solid competitive advantages. We don’t particularly focus on any one competitor at any given point in time, so as I said before there are many competitors, some new.
Probably other new competitors will be coming on board later on and I think the best thing we can do for us and our users and our shareholders is to focus on providing great value to our users and having great technology.
Robert Ford – Bank of America
Okay. And then just one last question.
That is, I notice you began offering free listings in Brazil. You started that in Argentina and I was curious what kind of traction you were getting in Argentina to expand the initiative out to Brazil.
Marcos Galperin
It’s going great. I mean we really like the philosophy which is the premium philosophy.
So you shouldn’t be surprised if down the road we have a free listing option in every country where we operate. And we believe that we will have many millions of new users enter into the marketplace, the internet and ecommerce in the next three to five years, and we don’t want to have any barrier preventing these new users from trying out our platform.
And the results in Argentina were very good. We saw growth in listings and in revenues, and that’s why we have decided to roll this out to every other market.
Robert Ford – Bank of America
Thank you very much, and congratulations.
Marcos Galperin
Thank you.
Operator
Our next question comes from Stephen Ju of RBC Capital Markets.
Stephen Ju – RBC Capital Markets
Good afternoon, everybody. So Marcos, we’re seeing some of the other marketplaces’ platforms around the globe starting to offer fulfillment services to its sellers if they follow the Amazon model.
Is this a business that MercadoLibre could think about offering someday? Thanks.
Marcos Galperin
Hi, good afternoon. Obviously there are two major friction points in ecommerce.
One is payments, the other one is fulfillment. We are extremely focused in solving payments and as I mentioned in my prepared remarks we aim at having 100% of payments flowing through our platform.
And obviously fulfillment is going to be our next focus, and we’re starting to look into it as we speak. We’re not, having said that we’re not stating whether or not we’ll be doing fulfillment ourselves as of yet.
Stephen Ju – RBC Capital Markets
Okay, so theoretically you could pick a logistics partner to handle some of the warehousing but it’s still too early to really say anything.
Marcos Galperin
When we have our strategy that ensures that fulfillment is speedy and adequate for our users.
Stephen Ju – RBC Capital Markets
Okay, understood. Thank you.
Marcos Galperin
Thank you.
Operator
Our next question comes from Jordan Rohan from Stifel Nicolaus. Jordan, if your line is on mute, will you please unmute?
Jordan Rohan – Stifel Nicolaus
Thank you so much. So my question is really one of direct contribution margin in the Brazilian market which (inaudible) as compared to, it looks like it fell from 51% to 38%.
But I just wanted to clarify that the decline is due to the inclusion of installment finance costs in the direct line which correlates to the changing accounting you discussed. Is that right?
And what would it have been otherwise? Would it have been flat, up or down slightly, something like that?
Hernán Kazah
Yeah, what you’re saying, Jordan, is in the right direction. With this change in the operation of MercadoPago where we are re-selling the receivables before we even get them, we’re basically eliminating the costs that we used to reflect in the financial expense line.
And those costs are directly subtracted from the revenue line, so that effects the redistribution level, the margins. And without that change it would appear to have some fluctuation because of the combination of MercadoPago with MercadoLibre fees, but not (inaudible) as the one you’re seeing.
Jordan Rohan – Stifel Nicolaus
Okay, one follow up question and it’s a bit long but I’m going to do my best to keep it tight, but essentially when you raise the take rate charge to the merchant in order to offset for the inclusion of MercadoPago services, you would have had to assume some kind of adoption rate by consumers in order to maintain revenue neutrality. So let’s just say that you raised it by 200 basis points and that covered you up to 40% TPV as a percentage of GMV.
So my question is with the big increase from 33% to 39% in TPV, if I heard that correctly, in Brazil, are you at the point where you have to institute another price increase in order to maintain revenue neutrality on that bundled approach? I hope that makes sense.
Hernán Kazah
Yeah, what you’re saying makes lots of sense. If we were to try to maintain take rates and profitability on a gross margin level at both businesses we should be doing the math that you’re doing.
That’s not necessarily the case. On the one hand, as MercadoPago grows we see that we can keep on constructing some scalability of that business and better negotiations with credit card processors, and at the same time we might want to offer a better pricing to sellers and to buyers, and discount a little bit the pricing we are charging them.
So if we were to maintain everything else equal you are right but again there are some savings that we’re getting, and at the same time we might want to be a little bit aggressive as long as again our revenues keep on growing at a healthy rate. We don’t want to extract too much value out of them.
We think that the current margins we have are quite large, so we might try to pass on some of that, of those points to the seller.
Jordan Rohan – Stifel Nicolaus
Alright, thank you very much.
Operator
Our next question comes from Steve Weinstein from Pacific Crest.
Steve Weinstein – Pacific Crest
Great, thanks for taking my questions. A couple questions for you.
One, it seems like the level of competition in Brazil has really increased over the last couple of quarters, and you talked about 25% growth in items sold. I’m wondering if you think that that is keeping up with the ecommerce growth in Brazil particularly right now or if you think you’ve lost any share or gained any share as the competition has gotten more intense.
Also I think you talked before about a mid-30’s or low-30’s operating margin. I’m wondering if you could kind of update that based on kind of the new accounting where you’d want that to be.
And then kind of a follow-up on Jordan’s question: it does seem as though the adoption of Pago is going really well, and that that would, even though it could push revenue higher because you increase the final value fee, you would have higher costs associated with that. Are you going to take a margin hit if the adoption continues to grow up over the next few quarters, or would you address pricing before that?
Marcos Galperin
Okay, Steve, let me take your first question and then Hernán will take the following questions. With respect to competition in Brazil, let me just clarify that.
In the marketplace business we continue being far and away the leaders there. We don’t see significant competition from other marketplaces.
With respect to the classifieds business we see our cars, our motors vertical gaining share very strongly as I mentioned in my prepared remarks with very strong growth in listings and in revenues. So in the marketplace business we believe we are extremely well-positioned.
Our growth rate of 25%, we don’t know exactly where the market is growing. We don’t think that is a bad growth rate to have.
We’ve seen this growth rate higher and as I mentioned also in the prepared remarks we’ve been very focused in developing our new software architecture and that implies that many of the things we could do to accelerate growth in the short term have been on the back burner. So this is a growth that is okay with us, we’re not worried with our growth right now, we’re not worried with our competitive position.
We believe we have an amazing competitive position and with respect to our payments business it grew 98% off-platform but it also grew very fast on-platform, 120% year on year on the number of payments. So we believe we’re doing quite well there as well.
Hernán Kazah
For the other two questions, on the one about our margins and the targets we have there, we’ve been saying for a long while that our operating income margin target was about 30%, and even with the growth of MercadoPago we thought we could maintain that. With this new operation in discounting MercadoPago receivables that might change a little bit, but nothing changes at the net income level.
So you can translate that to a more normal tax rate versus the great one that we had this quarter, and that should be a net income margin of about 20% or around 20%. So that should be the target.
In terms of final value fees and the impact of MercadoPago assets penetration growth over gross merchandise volume, certainly there are some direct costs that we need to cover as MercadoPago keeps on growing, but as I answered in the prior question we think that there are some savings that we can get from the growth of MercadoPago, some efficiencies that we gain also in the business in terms of bad debt and those types of things that disappear whenever we are using MercadoPago. And also we might want to pass on some of those savings to the users.
So net, yes – there’s some pressure in terms of direct costs as MercadoPago participation grows, but we will be misusing that again to make sure that revenues keep on growing at a very nice pace but not necessarily a take rate.
Steve Weinstein – Pacific Crest
Thank you.
Operator
Our next question comes from Aaron Kessler from Bank Equity.
Aaron Kessler – Bank Equity
Just a couple of housekeeping questions. On the tax rate, can you clarify what you view the tax rate for Q4 and also maybe going into next year?
And also the interest expense – I think you ended up at $500,000, $600,000 for the quarter. Just if you can give us an explanation of that what that was for.
And then also on the G&A, it looked a little higher. I guess there were some onetime costs there?
Hernán Kazah
Yes, so one question was tax rate. The last one was G&A.
The one in the middle I didn’t get.
Aaron Kessler – Bank Equity
Interest expense. You still have about $500,000 of interest expense, just what that relates to.
Hernán Kazah
Oh sure. Oh sure.
So tax rate, the normalized tax rate that we should expect for our businesses will be below 30%. This quarter in particular we could use some (inaudible) allowances that we had from acquisitions, from the companies that we did in the past.
We still have some other initiatives that might help us maintain that below the normalized level, but for modeling purposes I think that assuming something close to 30% is a sound rate. In terms of interest expense and our financial expenses, the most significant change there is that in the past there we used to reflect the cost of discounting MercadoPago receivables in Brazil, and now with the new operation that we have that we are re-selling those receivables to the finance institutions we no longer carry that cost, and basically that was discounted from the revenue line.
So…
Aaron Kessler – Bank Equity
No, I understand that. I guess my question is there was about $600,000 of costs in the quarter.
I’m just trying to figure out what’s left in interest expense.
Hernán Kazah
We have some taxes that are recorded there from the MercadoPago operations.
Aaron Kessler – Bank Equity
Okay, great. And then G&A?
Hernán Kazah
Yeah. G&A, we are having, we are moving our office in Brazil.
We’re also moving our office in Argentina to new buildings, and that has increased that line. And as I mentioned also we had a few subsidiaries that we were not using that had some accumulated tax benefits that they were basically going to give them away, and we rescued that in that line.
So we got like an extra, over half a million dollars in that line that are one timers. And also when you look at G&A as a percentage of revenues you have to bear in mind that now revenues from the financing part of MercadoPago revenues, they are discounted a little bit versus what they were last year.
Aaron Kessler – Bank Equity
Great, thank you.
Hernán Kazah
Sure.
Operator
I’m not showing any other questions at this time.
Marcos Galperin
Okay. Thanks, everyone, for your time and for your questions, and we look forward to further questions in the next quarter.
Thank you very much.
Operator
Ladies and gentlemen, that does conclude today’s program. You may now disconnect and have a wonderful day.
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