MercadoLibre’s Credit Card Bet Pays Off in Mexico, Brazil as Q1 Profit Soars

Bloomberg Línea — MercadoLibre’s (MELI) credit portfolio grew 46% year-over-year in the first quarter of 2024, at a faster pace compared to the linked period, and driven by its Brazilian and Mexican operations. The driver of such growth for MercadoLibre’s loan portfolio was credit card issuance, the company said.

“We are very pleased with our credit card performance. Penetration continues to improve, especially in Mexico, where credit penetration is much lower than here in Brazil,” said Richard Cathcart, director of investor relations, in an interview with Bloomberg Linea.

Cathcart also mentioned the company is comfortable with its current delinquency indicators. “There was an increase in delinquencies from the fourth quarter to the first quarter, but that was a consequence of timing, as we had the Easter holidays. That means we can’t call people who are late. If you have an invoice that closes on the 29th, we had to extend it to the 1st, so it was a seasonal effect,” he explained.

Another reason for the increase in delinquencies was the acceleration of loan origination. “We’re taking on a little more risk,” Cathcart says, explaining that this means delinquencies are increasing.

“But that’s included in the fees we charge. When you look at the NIMAL metric, which is basically fee income, minus defaults and expenses, that was very stable, and even improved a little bit in the first quarter of 2024 compared to 2023″, he added.

Asked if greater credit origination was linked to the macroeconomic environment, Cathcart replied, “It has more to do with the data we are analyzing.”

“With this portfolio we are combining the internal data we have from consumers with some data we bring in from outside, primarily through Open Banking in Brazil. When we combine these two data sources it means we can increase the size of the credit lines,” he said.

MercadoLibre also noted that revenue from its Ads business in Q1 accounted for 2% of GMV (which would be US$228 million). “In the first quarter, Ads revenue grew 64% in dollars,” the executive said.

In the fourth quarter of 2023, advertising revenues represented 1.6% of GMV, compared to 1.4% in the first quarter last year.

In the Fintech segment, MercadoLibre experienced significant growth in the number of monthly active users, which increased by 37%, as well as in the volume of assets under management, which rose 90%. The credit card business played an important role in this growth, as Mercado Pago issued 1.5 million cards during the first quarter.

MercadoLibre’s fintech strategy continued to show strong growth, as Mercado Pago’s net revenues reached $1.8 billion, a 22% hike year over year.

Almost all estimates were beat

MercadoLibre reported significant revenue growth, mainly driven by positive results in Brazil and Mexico, despite economic challenges in Argentina. The company exceeded almost all estimates, with the exception of net revenue in Argentina, gross margin due to the local economic context in Argentina, and payment volume due to changes in the definition of POS.

The company is excluding Mercado Pago’s internal peer-to-peer transfers from TPV (approximately $7 billion in the first quarter of 2024) because it believes it creates a more relevant metric for investors to follow the business, “which has evolved from a payment wallet to a full financial services platform,” MercadoLibre said in a release.

The company is also reclassifying Mercado Pago’s interest income and interest expense lines from below operating income to above operating income. “These revenues and costs are operational in nature in a fintech business model, so this update improves disclosure and brings Mercado Pago’s reporting in line with its peers,” MercadoLibre said.

In the first quarter of 2024, this reclassification resulted in an increase of $99 million in net sales and $44 million in cost of sales, with a net positive impact of $55 million on gross profit and operating income. The reclassification has no impact on net income.

Another update in the company’s quarterly report relates to Mercado Envios, where the restatements had a $293 million positive impact on net income and a $308 million negative impact on cost of sales, with a small net negative impact of $15 million on gross profit and operating income and $10 million on net income. “Although the change is nearly neutral to profitability, there is some dilution to operating and net income margins due to the increase in net income. As this change follows our existing accounting policies, the 2023 financial results have not been restated,” the company explained.

Overall, MercadoLibre reported a 36% increase in net income in dollar terms, reaching US$4.3 billion. Net income also showed a significant increase of 71% compared to the same period last year, reaching $344 million.

Analysts polled by Bloomberg were looking for EPS of $6.20, but the company beat expectations with EPS of $6.78. GMV and net income also beat estimates, reaching $11.4 billion and $4.3 billion, respectively.

GMV growth was particularly strong in Brazil and Mexico, up 36% and 42%, respectively, in dollar terms. This growth was driven by an expansion in the number of unique buyers and increased item sales, reflecting growing demand in these regions.

“Brazil and Mexico saw GMV growth in constant currency of 30% year-on-year, and that’s based on last year’s comparison, which was already high. So we continue to see growth in both countries, similar to the second half of last year,” he said.

“Unique buyers grew 18% in Brazil and 25% year-on-year in Mexico. We have record levels of conversion, that is, how many people who enter the site actually make a purchase. Faster delivery means people buy more. So we haven’t done anything different this quarter, but it’s the result of a number of investments we’ve made over the last few years,” he said.

In Q4 2023, MercadoLibre saw an increase in logistics costs due to Black Friday and Christmas. “We had expected that this would be normalized in the first quarter and it actually was. Total logistics costs fell $90 million in Q1 compared to Q4,” Cathcart said.

According to the company, while investments in logistics increase costs, the company strives to be efficient. “In the distribution center, we have technology that tries to reduce the distance the person has to walk to pick things. If the person ends up walking less, they end up picking the products faster. We have also improved the routes to make as many deliveries as possible in a smaller area,” he explained.

Argentine impact

Despite the positive results, the company’s performance in Argentina was affected by the recession and inflation, which resulted in lower growth in that market. Sales in Argentina fell 20% from the previous year due to the devaluation of the Argentine peso and the difficult economic environment. He noted that the company achieved significant margin improvement in Brazil and Mexico, but that the negative margin impact in Argentina was “very large.

“Sales growth was more than 30% over the prior year. This was driven by excellent results in Brazil and Mexico,” Cathcart said. “Brazil grew more than 50% and Mexico grew as well. But the impact of the Argentine peso brought consolidated growth down,” he continued.

“If you look at the exchange rate, for example, in the first quarter of 2024 it’s over 800 pesos to the dollar. Last year it was below two hundred. So the effect of the devaluation of the exchange rate has been very strong,” explained Cathcart.

He added that it was too early to tell whether business in Argentina would improve this quarter. “We can see that the pace of inflation is starting to slow, but this is one month’s data. It is too early to say that this is a trend,” he said.

The company does not release specific numbers on the Meli+ loyalty program, but says it is seeing “the trends we wanted to see,” according to Cathcart. “When someone joins the program, we see an increase in purchase frequency, we see an increase in GMV.

And for MercadoLibre, the way the company is looking at the intensity of its AI investments is “business as usual,” Cathcart noted.

“It’s not a turnaround, it’s not a new investment cycle. We’re increasing investment, but it’s more of a continuation of what we’ve been doing on a recurring basis. To specifically support this artificial intelligence, we’re going to increase the number of engineers again this year.”

The company ended last year with 16,000 engineers and will hire another 2,500 this year.