Bloomberg Línea — Latin America’s e-commerce giant MercadoLibre (MELI) met analysts’ expectations with record revenue in Q4 2022 and improved default rates in its credit business, and which was prior to the implosion of Brazilian retailer Americanas (AMER3).
However, the e-commerce behemoth is still not comfortable enough with the macroeconomic situation to accelerate the increase in its credit portfolio after having reduced the pace of origination last year. That strategy differs from Brazil’s Nubank (NU), a fintech that also slowed its credit offering in 2022, but which has already seen a scenario to accelerate it again with more loans in 2023.
MercadoLibre released its results on Thursday after the market closed, and revealed it saw record revenue of $3 billion for the fourth quarter, in line with expectations of analysts consulted by Bloomberg.
The company’s shares rose 5.2% minutes after the disclosure on Nasdaq after trading hours.
Growth was 56.5% compared to the same period in 2021. Net revenue for Brazil in the fourth quarter was $1.5 billion, up 34% year on year, while analysts had estimated $1.3 billion.
For the year, total net revenue reached $10.5 billion and Brazil accounted for about 54% of the total, with $5.6 billion.
In an interview with Bloomberg Línea, Richard Cathcart, MercadoLibre’s director of investor relations, said the latest quarter was a record in terms of both revenue and profit, surpassing $1 billion in operating profits for the first time.
“That combination of accelerated growth with profitability is very important for us. It was well-balanced across all businesses. In Brazil, our e-commerce grew 22% year over year in constant currency, which is right in line with the growth we had in the first three quarters of the year. It was a growth level much superior to the market”, said Cathcart.
He said the company’s record revenue was driven by the e-commerce and financial services businesses. Total payment volume through MercadoPago, the company’s fintech arm, grew by more than 100% for the fifth consecutive quarter across Latin America.
The operating margin in the fourth quarter came in at 11.6%, up from the 6.8% expected by analysts.
“We were able to deliver a significant year-on-year improvement, exceeding market expectations, and we were able to improve margin a little bit when comparing the fourth quarter to the third quarter,” he said.
He attributed the result to greater efficiency in the e-commerce business, mainly in spending on promotions, marketing, and logistics, coupled with the performance of fintech.
“We managed to offset the negative impact of seasonality in commerce with the performance in fintech,” he said. The company had a gross merchandise volume of $9.6 billion in the quarter. Analysts had expected $9.44 billion.
MercadoLibre had commerce revenue of $1.7 billion, while Bloomberg analysts expected $1.64 billion. Revenue for the fintech segment also beat estimates, totaling $1.3 billion, against the $1.28 billion expected.
The company also beat estimates for unique active users, at 96.6 million versus the 90.4 million expected, and in payments volume with $36 billion versus $35.11 billion estimated.
The estimate for payment transactions was in line with expectations: $1.6 billion.
Impact of Americanas’ crisis
After Brazilian retailer Americanas went into bankruptcy protection in January, analysts expected MercadoLibre to benefit by gaining market share from its competitor.
MercadoLibre does not provide guidance for the current quarter, but Cathcart said the company has already been operating “in a super competitive market, which continues to be very competitive.”
“Our strategy, even with these events at Americanas, has not changed,” he said.
Americanas start-of-year disclosure of “accounting inconsistencies” of 20 billion reais (around $4 billion) made banks more attentive in relation to the credit guaranteed to retailers.
Cathcart said that MercadoLibre also does “some supplier financing operations”, but that “the volume is very low, much lower than what Americanas was doing”.
“In addition, all the operations we do are allocated correctly to accounts payable, we are comfortable that we are doing the right accounting. There’s nothing that gets left off our balance sheet.”
Credit, the key word
With investors worried about rising defaults as interest rates remain high to curb inflation, MercadoLibre said its credit portfolio in the fourth quarter was flat compared to the third quarter
In 2022, MercadoLibre slowed credit origination to contain the risk stemming from a worsening macroeconomic situation in Brazil, which caused the delinquency rate for payments in arrears below 90 days to fall from 13% in the third quarter to 10% in the fourth.
“This is a sign that the measures we took in mid-2022 had the desired effect and we had a record level of profit in the credit market. We are pleased with the asset quality of the portfolio, and the growth potential of this business over the next few years,” Cathcart said.
He added that the company has increased the proportion of lower-risk consumers in the credit portfolio across all markets. “We are focusing on lower-risk customers and that was one of the main reasons for this improvement in defaults, it’s not just a matter of slowing growth,” he explained.
However, the company has not yet seen the time to accelerate credit again in 2023, unlike what Nubank said in its last earnings release, Cathcart said.
“We will continue to monitor the performance of our portfolio and external macroeconomic factors. We will only start accelerating credit growth again when we have full confidence that we can do that without taking risks.”
For now, the MercadoPago credit card is only available in Brazil, but is in a pilot phase in Mexico, launched for the families of people who work at the company. The plan is for the product to become available nationwide this year.
“We are very happy with the performance of the company as a whole, but I think particularly in Brazil and Mexico, where we have managed to gain market share in e-commerce and maintain an accelerated pace of growth in fintech,” he said.
The performance in Argentina, however, was weaker than expected. According to MercadoLibre, Argentina showed weaker volume trends, with growth in items sold slowing by a third.
The company attributed the situation in its home country to consumer budgets that are facing “headwinds from rising prices”.
In Chile, macroeconomic factors continue to impact the operation, but that sales volume growth is back in positive territory, the company said.
Expectations for 2023
MercadoLibre made a $165 million profit in the last quarter of 2022. Last year, the company processed more than $100 billion in payments via Mercado Pago and recorded more than $10 billion in revenue; and shipped more than one billion packages through its own logistics network.
The company also said that logistics continues to be one of the main areas for investment in Latin America. The focus is on its own network since more than 90% of deliveries in the region are made by MercadoLibre vehicles.
“In Brazil, we have returned to the peak of fulfillment penetration (40% share), which is the operation in which MercadoLivre has the sellers’ products in distribution centers and dispatches them as soon as it receives the order. It is the fastest way to make these deliveries”, Cathcart said.
Over the next few years, the company intends to increase this percentage in Brazil. In Mexico, it is already at 70%.
“There are no big new strategies in logistics, but we still have more to do within the current strategies. We continue to invest in technology to make our logistics network more and more efficient and faster,” he said.
The company has increased freight rates and those charged to sellers in December 2022. These changes are already in operation.
Cathcart also said the company plans to invest in Mercado Ads, the retail advertising business, which is gaining more traction worldwide in a move led initially by Amazon, which has moved forward with this high-margin revenue line.
“We continue to evolve the ads market, we have grown at a pace well above the average of the company as a whole. Ads revenue is equivalent to 1.4% of GMV and over 2022 we double the technology investment behind Market Ads. We have a plan of technology launches throughout this year,” he said.
He added that he is optimistic that the Argentine company will enter 2023 “with an even stronger and more competitive ecosystem”.