Business Breakdowns
· Matt Reustle
[00:00:00] S0: Fascinating. I could go on probably for hours, just in terms of the dynamics going on here. But rather than derail us, I'll try to push us forward a little bit just in terms of managing that risk on the books, like you mentioned, and going the wholesale route. It does feel like it would introduce risk. And then from a cash flow perspective, it has implications. It's interesting to me that they would go that route. Do you think there's anything that drives that? Because it increasingly makes this a credit business which operating requires different muscles than e-commerce and marketplace. So just how do you think about that and that exposure?
· Daniel Wu
[00:00:00] S1: You're right, Matt, in the sense that as that credit business grows, it just continues to introduce a different set of risks versus what the original business around the marketplace has been. We get comfort around the credit piece of the business just based on the historical performance of that credit book and how management goes around managing the risks there. In particular, the number one priority for that business is to essentially control the risk rather than try to grow the credit portfolio as fast as possible. I believe management has said in the past that none of the leaders of the credit team have a KPI where you've got to grow the credit book by a certain amount every period. Meli's also developed its own credit scoring and underwriting models because as you can imagine in Latin America, where a lot of the population is underbanked, things like FICO or VantageScore aren't going to be applicable. And that means that essentially you do need to have a lot of proprietary data to feed into your underwriting models. And having that marketplace business where you can see the transaction history and the payment history for the buyers and also for the merchants as well, and being able to even sweep the merchant cash if you give them any credit, that reduces the risk a lot for the credit business compared to if you were just a stand-alone credit card issuer in say Brazil.
· Matt Reustle
[00:00:00] S0: Fascinating. Again, if we were to take everything together, look at the financial drivers, particularly on the top line. If you want to break it down by segment, that's great. Can you just outline, when you think about Meli on a consolidated basis, how you think about those drivers going forward?
· Daniel Wu
[00:00:00] S1: So if we put everything together. So all these business lines that we just discussed, we essentially have a company that has grown top line by 55% CAGR since 2019, which is pre-COVID, and then by 43% CAGR since the COVID peak of 2021. So there's barely been a growth hangover. Commerce revenue growth has been underpinned by very healthy double-digit growth in the number of items sold, the rise in share of first-party sales and also the take rate expansion from advertising and Envíos net shipping fees that we talked about. And on the fintech side, growth has been driven increasingly by off-marketplace merchant acquiring, which as we said greatly expands Mercado Pago's serviceable addressable market beyond just marketplace transactions and has also been driven by credit revenue which since the launch of credit cards in 2021 has grown at 65% CAGR. And I'd say that one of the remarkable things about the Meli ecosystem is that it has three opportunities to earn revenue on the same dollar of marketplace GMV. So firstly, you've got the marketplace fee from the transaction itself and then there's the prepayment fee if it's a credit card transaction. And finally if it's a Mercado Pago credit card, Meli also owns the interchange and potentially net interest income on that transaction as well. So it's a pretty attractive model.
· Matt Reustle
[00:00:00] S0: Absolutely, yeah. I find these businesses very interesting when there's complementary layers that can be stacked on top of one another. And that would certainly apply from a margin perspective as well. How would you frame whether you want to take it at a gross margin level or immediately go down into operating margins? How do you think about it on a consolidated basis in any of the key drivers, whether it's mix shifts or whatever it might be?
· Daniel Wu
[00:00:00] S1: Yeah, so I'd say gross margin is probably not as relevant for Meli, just given the growth of that credit business, where defining gross margin for credit is very different from gross margin for say, the marketplace business. So let's just go down straight to operating earnings. The first thing I'd say is that the company doesn't disclose operating income by segment, which is unfortunate because it would be very interesting to see how those operating earnings shake out between the two segments. But working with what we have, company-level operating margin is essentially a tale of two halves. So from IPO through 2013, Meli was a mid-30% margin business. And then from 2014 to 2016, there were some hyperinflationary issues in Venezuela, which was Meli's highest margin country, and that caused margins to fall down to 21%. And then with the launch of free shipping in 2017, margins got absolutely crushed, down to just 5%. And then they turned negative in 2018 and 2019. So since that 2019 trough, operating margins have made a steady recovery back to the mid-teens level in 2023, before the company embarked on another reinvestment phase. And with the free shipping changes that we mentioned earlier this year, we think the margins remain under pressure for this year and next year as well. But what I would say is that from this timeline of events, it's a good demonstration of Meli's long-term reinvestment strategy. When free shipping was launched in 2017, growth of marketplace items sold was still very healthy. So it wasn't like Meli was responding to a slowdown of the business. And yet we're fairly confident that without turning on free shipping in 2017, Meli wouldn't have been in a position to capitalize on the COVID disruptions and it would have a smaller share of a smaller e-commerce pie today.