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This is Matt Russell, and today we are breaking down the LATAM e-commerce giant MercadoLibre.
My guest is Daniel Wu of Bristle Moon Capital.
And when Bristle Moon wrote a deep dive on MercadoLibre, it caught my attention.
I was introduced to Melly about 15 years ago when it was still the eBay of LATAM.
And similar to a place that you revisit after a long time away.
Melly looks a lot different than those early days.
Just consider that, with a 120 billion market cap, Melly is three times the size of eBay today and has clearly evolved since those early days.
So Daniel walks us through the business as it stands today and how Melly paired this Amazon-like e-commerce approach with a complimentary but equally impressive fintech business to fuel the company.
We get very into the weeds of the segment.
So if you're into that business analysis, you're going to get a lot of detail in terms of all of the different engines that make MercadoLibre work.
This was a fun episode for me.
It's an incredibly interesting business with an incredible backstory and founder story.
So please enjoy this breakdown of MercadoLibre.
All right Daniel, we have MercadoLibre today, which is a business I know has evolved quite a bit since its origin story.
I think a great place to start would just be to lay it out, however you would, in digestible terms, about what MercadoLibre does and who they are in the market.
Just to level set us.
Hi, Matt.
Yeah, thanks for having me on.
I think the simplest way to think about MercadoLibre is that it is an amalgamation of Amazon, retail and Alipay in Latin America.
Melly is the largest e-commerce platform by market share in LATAM, with major operations in Brazil Mexico, Argentina and a presence in 15 other countries.
It is also one of the largest fintech platforms in the region, with its MercadoPago digital wallet and MercadoCredito credit business.
The e-commerce operation is very similar to Amazon.
The marketplace is predominantly third party merchants with a small but growing first party presence.
There's a scale logistics business that is largely unmonetized and a nascent on-site advertising business.
Melly even has its own loyalty program called Melly Plus, that offers free shipping, reward points and licensed entertainment content.
So it's very similar to Amazon Prime.
But Melly wasn't always built after Amazon's image.
And we can discuss the company's evolution over time when we talk about the founding story.
Yeah, I wanted to get to that because when I think of MercadoLibre, which is very much stuck in the past, it was eBay.
I considered it as the LATAM eBay.
Obviously, it has evolved away from that.
And in that very popular Amazon versus eBay and how their ultimate fates diverged.
They went with the right model, certainly here.
Bring us back to the beginning.
Anything around the founding story, the founder and the evolution of the business that you would hit on.
Because I think it is very unique.
In many ways, Melly has a classic Silicon Valley founding story.
The company was founded in 1999 in a Buenos Aires garage by Marcos Galperin and his two co-founders.
Hernan Caza, and Stelio Tolda.
Galperin was studying his MBA at Stanford when he came up with the idea of MercadoLibre after witnessing the explosive growth of online marketplaces like eBay, as you mentioned, during the dot-com boom.
So after the three co-founders finished their MBAs, they returned to Argentina to start MercadoLibre.
The initial concept of the business was very heavily inspired by the eBay auction model.
So it really wasn't that unique in any way.
And we have to remember that this is the dot-com era, and there was something like 80 e-commerce startups in LATAM, all pursuing the same or very similar business models.
And many of these competitors were growing faster and had more funding as well.
And yet here we are on the podcast talking about Melly's.
So I guess why is that?
Well, according to the founders, the difference between Melly and the other hot startups was that Melly was focused on building organic growth engines for the long term, instead of chasing a big IPO by burning through capital on user acquisition with negative economics.
In the early years, the founders were willing to let Melly grow at a pace that could be sustained by the existing infrastructure at the time, rather than forcing a level of growth that was economically unsustainable.
So when the dot-com bubble burst, Melly was one of the few survivors, and that's allowed it to reap two decades of demographic, technological and economic tailwinds in the region.
Yeah, it's quite interesting.
They did not drop out, it sounds like, of their MBA program.
So it's the Silicon Valley story, but with a finishing education.
So I admire that.
The evolution away from that auction model.
Was there a certain time period where that really took place?
I admire the focus on the underlying economics and not getting caught in that cash burning cycle that can leave you exposed to things like the dot-com bust.
But when did they truly make the transition away from being the marketplace in terms of moving more towards what looks like an Amazon today?
So I don't think that evolution necessarily happened at a point in time.
The team pretty quickly realized that they needed to expand beyond just selling used items on a C2C basis via the auction model.
And by the time of the IPO, fixed price marketplace was already the main format.
And through the 2010s, when the company used to report this metric, fixed price sales were, I think, 95 plus of GMV.
And when did they actually IPO?
They IPO in 2007.
Interesting.
So at that point, yeah, you had already seen that taking place.
And I certainly think that fixed price.
I don't know what percentage of GMV.
It is eBay today, but much more common to see that out there as things have transitioned.
It would be interesting to hear a little bit about the regional dynamics and how that might have differed from what was going on in the US.
Was there anything unique about what MercadoLibre had to do or tailwinds that they were able to catch that would have differed from just the natural Amazon eBay, e-commerce tailwinds that the US players benefited from?
So there were several regional dynamics that provided tailwinds to Melly's growth through the 2000s.
First and foremost, I'd say it was a rapid rise of internet connectivity in Latin America.
Between 2000 and 2007, the number of internet users in LATAM grew from around 18 million to over 122 million, which far outpaced the growth of US internet users.
But even with this tremendous growth, LATAM internet penetration was in the 20 range, compared to over 70 of the US population.
So this explosion of internet users in the region created a ripe environment to scale up an e-commerce platform.
And then you had the demographic tailwinds as well.
By the early 2000s, there was a rising middle class in countries like Brazil and Argentina that were seeking greater variety of products at better prices.
In many LATAM cities, physical retail options were limited.
So an online marketplace that connected buyers and sellers across the country, or even across the region, was appealing.
And in the US people saw the success of eBay and Amazon, which really helped to validate the model for both investors and for users as well.
Now I think it's important to contextualize that, even with these tailwinds, we're still talking about an emerging market that was years, if not decades, behind the US across many ease of doing business measures.
As a first mover in LATAM e-commerce, the company had to solve multiple friction points to drive that initial online shopping adoption.
And these include cultural skepticism towards online transactions, low credit card penetration and just an overall lack of secured digital payments infrastructure.
There was patchy logistic networks and a diverse set of regulations across the region as well.
So, for example, to address the lack of payments infrastructure, Melly launched the Mercado Pago digital payment platform in 2003.
To overcome the cultural skepticism and low trust in online transactions, the company introduced measures such as robust buyer and seller feedback system and escrow-like payment protections, as well via Mercado Pago.
So this is very similar to the role that PayPal played for eBay in reducing frictions in essentially low trust environment.
And then to address the shipping pain point, Melly launched Mercado Envios in 2013, which is their managed shipping service.
So, rather than leaving it up to the buyer and the seller to figure out how a package would be delivered, Mercado Envios basically allows sellers to print off shipping labels and use Melly's negotiated carriers for a more consistent delivery experience.
And as Melly continued to invest in its logistics network, that delivery experience has only improved for both the buyers and the sellers.
And me saying they were a copycat in any way would be massively downplaying the execution of what they accomplished.
But it's interesting to hear all of the examples, from eBay to Mercado Prago, looking quite similar to PayPal, to the logistics network.
Was there anything that they did that was innovative that was then copied elsewhere?
I am curious.
It certainly helps investors appreciate what you're doing when there is an example elsewhere in the world.
But just from your perspective, was there anything that they really innovated in this broader model before some of the global competitors did it?
So if you listen to the words of the founders themselves, they would admit that they weren't particularly innovative.
Essentially, they just took the idea that eBay presented.
I think if you look at the evolution of the business what Amazon did and then what MercadoLibre did you could probably say that yeah, they definitely took a lot of inspiration from Amazon over time as well.
But Melly, of course, has some of its own homegrown innovations as well.
For example, Melly Delivery Day, which lets buyers set a fixed day of the week to receive their slow delivery orders.
The slow delivery layer of the logistics network essentially stages a buyer's non-fast shipping packages to a single day, which increases delivery route density and the number of packages per stop.
This is what allows Melly to provide free shipping on orders below 79 reais.
Overall, I'd say Melly has succeeded largely by bringing existing innovations into the LATAM market at scale and then just executing better than other competitors in the region, and that includes Amazon itself.
So even though Melly may not have led any particular initiative on a global basis, that doesn't mean they can't do really well in their own region.
Absolutely.
Yeah, there's proof of that.
I attribute it to them finishing that education.
It allows them to study and then implement.
So plus one there for taking a different route.
Let's talk about the business model today.
I think you referenced it in the first answer.
But how do you think about the segments and just categorizing them, whatever way they either report or you would view the business?
Explain that.
Today, Melly's business consists of two segments, commerce and fintech.
Total revenue was nearly $21 billion in 2024, and that's up from $1.4 billion in 2018.
So the commerce revenue is just under 60 of total revenue, and that mix has stayed relatively consistent since 2018, except for the period immediately post-COVID, where commerce growth did see a sharp spike.
Within the commerce segment, we've got the marketplace, the logistics business and the advertising business.
And I'll go into detail on these when we get to the segment deep dives.
And then on the fintech side, the two main businesses are payments and credit.
From the consumer perspective.
Mercado Pago is a digital wallet that can be used on and off marketplace.
From a merchant perspective, Pargo is a merchant acquirer that processes payments and handles installments.
And we'll get to that later as well.
And then the credit business just offers personal loans and credit cards to consumers and working capital to merchants.
As you can imagine, these two complementary segments join together to form the MercadoLibre ecosystem.
Consumption on the marketplace drives payments, and then adoption of consumer credit and digital wallet drives consumption in the marketplace.
So there's that flywheel effect going on.
And perhaps surprisingly, in practice, these two segments have also been quite counter cyclical.
So when one segment is weak, the other segment has been able to outperform and carry the overall top line growth.
And I think this is actually one of the key reasons why Melly didn't experience a post-COVID growth hangover like a lot of other pandemic darlings, which includes Amazon as well.
When commerce growth slowed sharply in 2022, fintech growth accelerated to offset much of that commerce drag.
What would you attribute that to?
It's not logical to me why that would actually happen.
Was there something specific driving it?
Yeah, so I think in 2021, they launched the credit card business in Brazil.
And that has been the main driver of the credit business, which has been the main driver of the fintech business.
So that happened at a time just as commerce growth in Brazil and Mexico was starting to taper off from the initial very strong growth of 2020 and 2021.
So idiosyncratic.
That makes more sense.
And then LATAM exposure.
From a geographical perspective.
What are the big countries, and is there a way to isolate the weightings of those countries?
Yes.
So, if we just look at the business from a geographic split, Brazil is the largest geography at 52 of last 12 months revenue, followed by Mexico and Argentina at 22 each.
And then the rest of LATAM is just 4%.
So it really is these key countries that make up the majority of the revenue.
The mix of commerce and fintech also differs across these markets.
Argentina has the highest fintech mix at 65%.
Mexico is the opposite.
And then Brazil shakes out closer to the group average.
You can also see this mixed impact in the contribution margins as well.
Argentina has by far the highest contribution margin in the mid-40s.
Brazil is at less than half of that.
And then Mexico is even lower in the high teens.
Let's just get deeper into each segment.
I have a lot of questions that I want to talk about on each one, but we'll start with commerce.
What does the market share look like?
You referenced in the early days, there were a lot of competitors. going after the same opportunity.
Where does that stand today in terms of Melly specifically?
And then would you highlight any key competitors, whether it's in LATAM broadly or country specific, that are top of mind when considering the market?
Before I talk about Melly's market share, I guess it's good to just lay out the playing field in terms of e-commerce in LATAM.
So e-commerce penetration in LATAM is still quite low despite the post-COVID step change.
We've seen estimates in the sort of 13 to 14 range across the region, and this year it's probably call it 15.
And that compares to U.S. e-commerce penetration that's in the low 20s.
And then, if we go to the extreme, you've got countries like the UK and China where penetration is into the 30 range.
In terms of Melly's market share of that market.
That's a bit harder to pin down because of how fragmented the LATAM market is.
And also the fact that the company doesn't report GMV by country.
But we've seen sell side estimates indicating that Melly's LATAM share is in the mid to high 20 range.
And that spans from over 80 share in Argentina, where Melly is completely dominant, to around 40 in Brazil, and then negligible share in some of the other countries.
But overall, we understand Melly's LATAM market share is higher than the next 11 operators combined.
So they are in a very strong position.
But it also goes to show that e-commerce in LATAM is still a very fragmented market.
And is there anything that artificially caps the e-commerce penetration?
When you think about the drivers of that?
What would you point to as stopping it from being at the same level as the US, let alone as some of the bigger players?
Yeah, I don't see anything that necessarily is fundamental to preventing e-commerce penetration from getting up to those levels.
I think LATAM just started at a lower point compared to the US.
And as I mentioned, a lot of the infrastructure had to be built out over the past couple of decades.
And Melly was one of the ones or the main company responsible for doing that.
So, in many ways, I think that's why penetration has been lower compared to the US.
But then I don't think the fact that LATAM is an emerging market should put a cap on the potential for e-commerce penetration, because you look at a country like China where they managed to get to 30 in a very, very short period of time.
Now it's going to take longer for LATAM, but we do think that there's a lot more runway to go for e-commerce.
And then just on the competitive dynamics, e-commerce is incredibly competitive for periods of time where you will see aggressive land share grab, oftentimes sacrificing economics to capture more of the market.
And then that oftentimes fades away as the industry matures in its respective country or cycles turn.
Where would you put Latin America if you need to break it down by country?
Where would you put that, just in terms of the stability of that market share, maybe looking backwards and then thinking a little bit forward about their ability to either maintain that share or to grow that share in the future?
Yeah, so I think the market shares in LATAM.
There was certainly a lot of competition during the COVID period, especially from I guess you call them international e-commerce players that were trying to enter the market.
So you've got Shopee, which is C Limited's e-commerce arm, and you had Temu as well.
Amazon's been in the market for a long time, and they've got pretty stable market share.
I guess you could say relatively negligible for how long they've been in the market for.
And then there's a lot of, I guess, longer tail e-commerce businesses of physical retailers.
And they have been the ones that have mainly lost share to the pure play e-commerce players.
You mentioned the intense competition, particularly in the COVID period.
What did that look like in terms of having any impact on the business?
And then thinking about some of that competition that still exists in the market, it's always very interesting to me to see e-commerce in certain countries or regions And when they can be incredibly competitive and you see very low take rates, versus when there is a little bit more stability and take rates come up.
So what would you say happened then?
And then where does it stand today?
So in terms of the evolution of e-commerce competition, at least...
Over the past few years, the best example is probably Shopee.
Shopee, which is T-Limited's e-commerce business, entered Brazil in, I think, December 2019 as a cross-border marketplace.
And then it began to build out the local logistics and seller network in 2020.
The business competed pretty heavily during those years.
And I think, if you look at the app download data and the monthly active user data, Shopee actually exceeded Melly's monthly active users sometime in 2022.
So you could argue that it had actually gotten more traction than Melly, despite only being there for a couple of years.
Then the business basically went to hibernation during the 2022 global rate hike cycle, where C basically pulled out of all of their expansion markets except Brazil to focus on their Southeast Asia business.
Over the past two years, there's been a bit of a resurgence from that business.
And I think it's really caught the market's attention when C announced that Shopee Brazil was EBITDA positive in the third quarter of last year.
And since then, Shopee Brazil has been growing at a pretty healthy clip, taking market share while still remaining profitable.
That's the background.
Back in June this year, Melly lowered its free shipping threshold from 79 reais to 19 reais, which followed a reduction in their merchant fees in May as well.
And this was perceived as a defensive move by the market to stave off Shopee's growing threat, particularly at the lower value end of the market.
Now we'd argue that this is more of a reinvestment decision to drive higher engagement frequency and ultimately, longer term growth for the marketplace.
Melly has lowered its free shipping threshold twice in the past since launching it in 2017, and each time has led to higher sales and greater logistics efficiency that mitigated much of the cost impact.
So this is very much a page out of Amazon's playbook to pass on cost savings to consumers, to drive greater scale and lead to additional cost savings.
And I think that's generally pretty hard to argue against.
Free shipping is a key value proposition for driving e-commerce penetration.
So reducing the free shipping threshold and leveraging Melly's superior logistics network should further strengthen Melly's performance competitive position as the leading Brazilian e-commerce platform.
Shopee opened its first Brazilian fulfillment center in September 2024.
Meanwhile, Melly expects to finish 2025 with 22 fulfillment centers.
So the network scale and service quality is incomparable.
You mentioned just a little bit in terms of Shopee's inflection, in terms of being positive EBITDA in Brazil.
Is there a way to comp that against MercadoLibre's EBITDA numbers in Brazil?
I know they don't break it out, but do you have a sense of profitability in that particular segment, in that particular region?
Yeah.
So as I said earlier about the geographic split, the contribution margin.
In Brazil it bounces around 20 to the high teens range, depending on whether the company is reinvesting or not.
Now it's hard to know how much of that is coming from FinTech and how much of that is coming from commerce.
And Shopee at the moment really only has an e-commerce business in Brazil.
We can talk about the potential margin of fintech when we get to that segment deep dive.
But I think I would say that most of the margin is probably coming from e-commerce at the moment.
So you can call it in the mid-teens, maybe if you allocate the corporate costs to that country as well.
Yeah, quite interesting.
And then just going through some of the segments, the marketplace itself, third party versus first party, anything that you can share there.
And if there's noticeable difference versus what you've seen with Amazon, which I have some type of mental model, can you describe a little bit about that segment within the segment?
Yeah, it's probably worth, just at a high level, outlining how we think about the composition of the business.
Obviously, there's two reported segments.
You've got commerce and you've got fintech.
But within those segments, there's distinct business lines that the company doesn't report on.
But they do provide enough disclosures in their filings for us to sort of estimate revenue buckets with some reasonable degree of confidence.
And I think this is also just the best way, I guess, bottoms up to think about the drivers of revenues and earnings for the company.
So just decompose the commerce segment into the MercadoLibre marketplace, which includes a third party and the first party sales the MercadoMBO's logistics business.
And then Mercado Ads, which is the retail media advertising business.
And then just quickly on the fintech side as well.
I'd categorize that segment into Mercado Pargo Merchant Acquiring Mercado Pargo Digital Wallet and the Mercado Credito Credit Business.
So I go through each of these business lines and then we can tie it together with their revenue contributions.
But back to your question about the marketplace specifically, the marketplace is the core platform that sort of connects the buyers and sellers for MercadoLibre.
There was over 100 million unique active buyers in 2024 and the marketplace generated 51 billion in GMV.
That unique buyer number has, I guess, more than doubled since before COVID and yet still represents less than 40 of the adult population of Melly's three core markets.
Now you asked about how does the Melly marketplace differ to Amazon or where it might be similar.
It is pretty similar.
So on first party sales where Melly acts as a merchant is still a relatively new initiative from COVID.
And that was just over 6% of GMV in the most recent quarter.
And you compare that to Amazon, who's been doing first party sales for a lot longer.
And that's probably more in the call it 30 to 50% range.
Melly basically uses its first party sales as a way to just sharpen pricing in categories where third party pricing might not be sufficiently competitive.
So categories such as consumer electronics.
And then, more recently, they've also used first party sales to expand into grocery and supermarket categories where the economics currently don't stack up for third party merchants.
If we exclude first party sales from total GMV, the reported third party take rate has crept up to 21 of GMV in the first half of this year.
And that's up from a reported 13% in 2021.
It looks like a pretty big jump optically, but there's been some changes to how Melly calculates and reports that take rate.
So I think the equivalent 2021 figure by our estimate is more like 17%.
In terms of the actual fee structure, it is very similar to other online marketplace platforms.
If we take Brazil as an example, Melly charges a final value fee on successful transactions, and that ranges between 10 and 14 depending on the category.
There's a fixed fee per unit for any products that sold under 79 reais, which is 15 USD.
And then if sellers want to offer interest-free installments, there's an additional 5% fee.
So we estimate that the...
Core seller final value fee is just under 13%, and that's up from 12% in 2021.
So that means substantially all of the take rate expansion that we just talked about has come from value-added services such as logistics and advertising.
And that's what you want to see as a shareholder, right?
Take rate expansion that comes from driving adoption of value-added services rather than from squeezing merchants and core fees.
And I think that's also very similar to what's happened to Amazon as well.
Their core final value fees have stayed relatively stable.
And then they've layered on top FBA.
They've layered on top, which is Fulfillment.Amazon.
They've layered on top advertising.
They've layered on top various other services to merchants to drive that take rate higher.
It's hard to separate.
I know each of these segments because they do have such an impact on one another.
They're complementary and they're certainly complementary drivers.
I'm curious on the logistics piece.
As you referenced, there's been expansion.
There's a fulfillment center footprint there.
How has that evolution gone?
Again, I think sometimes it's overlooked how incredible what Amazon accomplished in the U.S. is.
And how would you categorize that for Melly in terms of their ability to expand that effort while also keeping the economics into consideration?
Mercado is Melly's logistics operation and that sort of provides storage, warehousing and delivery to marketplace sellers.
We can break that down into three levels of service.
You've got full, which is basically analogous to fulfillment by Amazon.
And that's where sellers store their inventory in Melly's fulfillment centers and they're picked and shipped by Ameli.
There's cross-stocking, where sellers deliver packages to Ameli cross-stocking or sortation center and then Ameli sorts and delivers the packages.
And finally there's flex, where the seller ships directly to the buyer using Ameli contracted courier.
When Mercado MBOs first launched back in 2013, it was basically the latter flex essentially.
So where Mercado would contract with existing third party carriers and get negotiated rates and then allow sellers to essentially use those rates, use those carriers and have a more consistent shipping experience.
Over time, Melly has invested in broadening out its logistics network.
So, right now, that logistics network in LATAM spans dozens of fulfillment centers, hundreds of smaller logistics hubs and thousands of pickup and drop-off locations.
The transportation network itself includes dedicated aircraft, trucks and thousands of last-mile delivery vans, and that's predominantly owned and operated by third-party carriers.
My impression based on that answer is that it feels like it's earlier stage of Amazon's larger logistics build out, prior to having the air fleet and a lot of the trucking and vehicle fleet, which was some of the most capital-intensive pieces of that logistics build-out in my view.
Is that fair to categorize that way?
And then where would you put the capital intensity of the logistics effort today and looking forward?
Is that something that they're investing a lot into?
There's the operating expense line, but then there's also the CapEx line.
I think the difference between the way that Amazon builds out its logistics network and the way that Melly does it is probably going to remain.
So Melly mainly leases its assets, whereas Amazon obviously invests billions and billions of capex into owning a lot of these facilities and also the transportation network as well.
You look at Melly's ongoing investments into its logistics network but realistically the business is still relatively capital light.
And again, that's because a lot of that logistics infrastructure is leased.
I'd say that management's hyper-focused on maximizing the efficiencies of the logistics network and expanding capacity more on an as-needed basis, rather than undertaking just heavy investment cycles ahead of demand, which is sort of what we saw with Amazon coming out of COVID.
Now, having said that, the company's also announced plans back in September last year to double its fulfillment capacity in Brazil by the end of 2025.
And that has contributed to some margin contraction in subsequent quarters, because apparently it takes a few years for new warehouses to hit peak utilization.
The other point that I make about the logistics business is that it's currently largely unmonetized.
So if you look at what Amazon does, they monetize logistics beyond just the shipping fee that they charge.
You've got the entire fulfillment by Amazon operation going on there.
For Melly.
The company in the last few years has said that they are essentially waiting for fulfillment penetration in Brazil to grow to Mexico levels before they start really hitting that monetization button.
And Brazil is currently at about 60% fulfillment penetration, and that's up from 50% last year, while Mexico is in the 70s.
So we could potentially see monetization of fulfillment start happening at some point next year.
That's interesting just in terms of future levers to pull.
Touching on advertising, it became such a huge engine for Amazon.
We've seen it elsewhere, Walmart, not traditional e-commerce.
But where this becomes such a major driver of revenue and growth.
Where does it stand within MercadoLibre as being a key component of what the business is today, but also, and more importantly, what it's doing in the future?
Yeah.
Advertising has been available on the MercadoLibre marketplace in some form or other for over a decade now.
So it may perhaps come as a surprise that advertising revenue as a percentage of GMV is only 2 as of last year, and that's up from 50 basis points in 2019.
So I think it's not unfair to say that seller adoption has been relatively slow for this product.
Over that same five-year period, if you look at Amazon's ad revenue, that grew from under 4 of total GMV to 7.
And if we just look at Amazon's third-party GMV, the ad penetration is probably more in the 10 range.
Now, we think there's a few reasons why advertising uptake for Melly has been slower.
It could be that the overall digital advertising adoption in LATAM is just lower and merchants are, I guess, less sophisticated or less experienced with performance advertising compared to the US or their Chinese counterparts.
Nelly's ad offering itself has been pretty rudimentary for a long time.
It wasn't until early 2023 that the company launched a full stack solution with self-serve console and measurement and reporting tools.
But we do believe that the company is very well aware of the size of the advertising opportunity.
On their Q4 call earlier this year, management talked about the dense product roadmap for ads, the work that they're doing with brands and agencies to expand up the funnel, and plans to expand inventory beyond Melly's ecosystem.
The way that we think about ads is that there's a very long runway of growth.
And while it might take some time to realize, there's no fundamental reason why ad penetration can't get up to 3% or 4% or 5% of GMV.
And if we think about the margins for an advertising business compared to the e-commerce side, that can be a pretty meaningful earnings driver, if not a revenue driver.
Absolutely.
And you mentioned loyalty within this broader commerce segment.
Is there anything to touch on their common strategy, almost of any business now?
But is there anything that stands out about what Melly is doing and how it's actually impacting their business?
The company provides no disclosure around Melly Plus, so it's quite difficult to determine the impact that it has on marketplace performance.
But just, I guess, taking a step back and summarizing what Melly Plus is.
It began, I believe, as a tiered points program where you collect points and get some perks from that, but it was relaunched in late 2023 to be more like Amazon Prime.
So for 2 USD, Melly Plus members receive lower free shipping thresholds and cash back on the marketplace, cash back on Mercado Pago spend and some other benefits.
And then for 5 a month.
Members also get access to Disney Plus and discounts on some other streaming services.
Now, given the recent relaunch, we think adoption is probably still quite early for this program.
But we also think that it's reasonable to believe that MellyPlus will ultimately achieve the stated goal of increasing ecosystem engagement and reducing churn.
And that's largely just based on what we have seen from other membership programs, particularly Prime.
Whether it can spin the flywheel to the same extent as Prime can, I think that remains to be seen.
In large part, I think it's because Melly Plus doesn't offer free shipping without minimums.
There's still a, I believe, 19 reais minimum to get free shipping there.
You answered my follow-up question there.
So just going through each of these, if you were to compile them all together and attribute whatever you might to each bucket, how would you lay that out or think about that?
Yeah, sure.
I will just caveat that these are all our estimates, because the company doesn't report any of this directly.
They do provide a few tidbits here and there, but you do have to make some assumptions to get to these numbers.
By our estimates commerce revenue, which was just over 12 billion for 2024.
We believe 6 billion of that comes from the third-party marketplace fees and 2 billion from first-party sales.
And then we estimate that approximately 3 billion comes from net shipping revenue, which is essentially the shipping piece of Mercado Envios.
And finally, there's about $1 billion of ad revenue.
So you take all of those numbers and you divide it by the 51 billion of GMV and you can get the approximate contributions to the overall take rate of 24.
Interesting.
And then to transition into the fintech segment.
Maybe we start with Mercado Pago, the digital wallet merchant acquiring payment processing straightforward description that you gave before.
Yeah.
Can you go into a bit more about the strategy there and then what's ultimately happening?
So I said earlier that there's two distinct businesses in there.
There's the digital wallet for the consumer and merchant acquiring for the merchant.
So within the merchant acquiring business, there's two sources of revenue.
One is the payment processing for off-marketplace merchants.
And then two is prepayments, which is also known as anticipation of receivables, for both on and off-marketplace merchants.
And the reason I'm calling out on and off-marketplace merchants is that the payment processing for on-marketplace transactions is incorporated within the seller final value fee.
So Melly doesn't explicitly earn any fintech revenue on that piece.
Total payment volume for 2024 was 197 billion, and that excludes peer-to-peer transactions, which is free.
There was 55 billion of on-marketplace volume, 88 billion of off-marketplace acquiring volume and then 54 billion of digital wallet volumes where Nelly wasn't the acquirer.
On the payment processing side, and we'll focus on that because that's where most of the revenues are.
The merchant acquiring business is pretty standard.
Melly charges merchants a fee, which is known as a merchant discount rate, to basically accept and process their digital payments.
A portion of that is going to be interchanged, that goes to the card issuer.
A portion of that is the network fee that goes to the card network.
And then the remainder is gross profit for Melly.
The merchant discount rate for Mercado Pago is is pretty much industry standard and that ranges from one to three percent for debit cards depending on the payment channel and the settlement time, four to five percent for credit cards and zero to one percent for instant payments such as picks.
In brazil these fees tend to be on the higher end because pago mainly serves micro and small merchants with limited payment volumes and negotiating power.
But I guess overall the merchant discount rates in LATAM have been structurally declining over time as competition for payment processing has intensified.
And specific to Melly.
We also know that strategically, management is actively trying to push up the merchant size spectrum, which is another headwind for the merchant discount rate but should be more than offset by higher processing volumes and revenue dollars.
And is this something that could expand outside of what's happening within the Melly ecosystem?
Yeah, they've already taken that outside the Melly ecosystem.
So in 2009, I believe, is when Mercado Pago launched as a merchant acquiring service for digital merchants that were not on the marketplace.
And then I'm not sure exactly when, but sometime later they also expanded into physical point of sale for off-marketplace merchants as well.
So, as I mentioned previously, 88 billion of GMV last year came from merchants that weren't directly on the marketplace.
And that has been the main driver of growth for the payment processing business.
It's just that expansion of marketplace, because then you've got a massive TAM there versus just the GMV of the marketplace.
And we'll see that when we talk about the credit business as well, that there will be even further expansion of marketplace just through products like the credit card, which can be used anywhere.
On the processing side, who are they competing against in that region?
The main payment processors are going to be the large banks.
And then there is the fintech processors, of which MercadoLibre is one of them.
And then a few other ones might be, say, Paxigro or StoneCo.
But generally speaking, the competition looks pretty similar to what you have in the US.
You'll have large banks that do a lot of the payment processing for, I guess, very large merchants.
So these are going to be very low fee, or it might be cents per transaction fee instead of a percentage take rate.
And then in the area where MercadoLibre plays, which is the smaller merchants, it'll be more for the fintechs to compete in.
You've referenced credit.
I find the credit business here quite interesting because it's very different in regions outside of the US, which I can appreciate.
Can you talk a little bit about not only how they've grown that business, but how they manage the risk of the credit business?
Mercado Credito is Melly's consumer and merchant credit business, and they basically just write short-term loans to marketplace buyers and merchants and then Pargo wallet users as well.
Ameli launched short-term loans in Argentina in 2016, before expanding it to Brazil and Mexico a year later.
And then in 2021, it began issuing credit cards in Brazil, expanded that to Mexico in 23 and is preparing to launch credit cards in Argentina later this year.
Credito has historically served underbanked users and micro and small merchants with limited or no access to credit.
By facilitating this access to credit to these underserved cohorts, Melly can basically strengthen the engagement and stickiness of users and drive consumption across its entire ecosystem.
Credit card adoption in particular brings significant ecosystem benefits to Melly beyond just the card spend itself.
And that's one of the key pillars to Mercado Pago achieving what management likes to call greater principality in its users' financial lives.
So essentially trying to bring Mercado Pago up to the top of wallet.
The credit business is arguably the most important growth driver for FinTech, if not the entire company.
Credit revenue was 33% of FinTech revenue in 2021, and that grew to 42% in 2024.
And this was entirely driven by the pretty phenomenal growth of the credit portfolio, up from 480 million at the end of 2020 to 93 billion today.
And within that, credit cards have gone from $0 to $4 billion.
Partly offsetting that growth of the credit portfolio has been this steady decline in the yield of the portfolio.
Gross interest margin after loan losses was annualizing at 50 at the end of 2020 and that's fallen to 28 today.
These days.
Meli just reports a net interest margin after losses or nine mile.
But the funding costs haven't really changed that much.
So there's other structural factors that are at play.
And the main one is that credit cards are just a structurally lower nine mile product.
And I'm going to give some background to the credit card business in Brazil, because this is not entirely intuitive that credit cards would be lower margin.
But if you look at Brazil, where the majority of the credit card portfolio sits, the average rate on credit card revolving balances is 15 a month.
And Matt, I'll let you take a guess as to what that APY is.
30 to 40%.
Yeah, it actually annualizes to 450% a year.
Wow.
Which is absolutely insane.
There's a lower rate for credit card installments with interest, and that's around 180%.
So then the question is, how can that be a low margin product?
Well, if we take a step back and look at the credit card data, so nearly 80 of credit card receivables in Brazil are interest-free installments.
And this means that 20 of credit card receivables that do pay interest need to earn enough interest income to cover the credit losses for the entire card pool, plus the funding costs for the entire card pool, plus the operational overhead, plus earn an acceptable margin for the card issuer.
If you look at the US, I think two-thirds of credit card balances are interest earning.
And then even in Mexico, that number is over 60%.
So once you blend that rate out and just adjust to the fact that there's effectively a 45-day interest-free period on any card balances, the gross yield ends up being something like 40.
And Compare that to the gross yield on personal loans that have been north of 80 over the past few years, especially in Argentina, and we can see why the credit card business is a lower margin product.
As a matter of fact, Melly's entire Brazilian 2023 credit card cohort only became nine-mile positive this year, and only 51 of the Brazilian credit card portfolio is currently nine-mile positive.
The Mexico portfolio is still nine mile negative.
And Argentina is also expected to be nine mile negative for the first few years after the product launches.
And then just the other reason as to why this is a structurally declining nine mile is the fact that the credit business continues to push up market into higher credit quality cohorts.
And that's obviously going to come with lower interest income.
But we do think it is necessary for the healthy, long-term growth of the credit portfolio.
And you mentioned credit risk as well, given the rapid growth of the credit business and the relatively high credit risk profile of the borrower base.
I think it is fair to be concerned about blow-up risk, especially in an emerging market where economic conditions tend to be more unstable.
If we look at the reported credit metrics, non-performing loans have been broadly stable since the launch of the credit card business, except for a few quarters in 2022.
The portfolio has been adequately provisioned in all periods.
For us beyond the reported metrics.
We think management has been very prudent when it comes to managing the growth of the credit portfolio.
So, even though originations have grown an extremely fast clip, the priority is on building a sustainable credit business over the long term.
So, for example, when credit conditions started deteriorating in Brazil and Argentina in mid 2022, The company immediately scaled back origination volume and significantly tightened its underwriting standards.
So, while there was some temporary degradation of the credit metrics, it wasn't anything concerning to us and the provisions were more than adequate.
What does the NPL percentage typically revolve around?
You mentioned it was pretty stable.
Yeah, I believe the NPL percentage is quite high relative to what we might think of in a developed market.
But I think it bounced around mid 30s to low 20s.
And for the past several quarters now, it's been around 28%.
So, if you think about it, a quarter of the credit book is essentially past due at any given point in time.
And that again also contributes to why the net income margin after losses can be relatively low for the credit business.
It can also explain those yields that are associated with those.
Some of those numbers were eye-popping.
This provides a nice basis for why that might be the case.
You also made reference to non-interest installment payments as being a big piece of credit.
I'm picturing this as the buy now, pay later program.
One, is that the right way to frame it?
And then two why would you use that approach, given the credit dynamics and challenges potentially with managing credit risk?
Yeah, that is absolutely the right analogy.
I would say that... prepayments are basically the original buy now, pay later.
So this is something that is unique to Latin America and more specifically Brazil.
The Brazilian credit market is, as we've already discussed, unlike any other market in the world.
So in Brazil, credit card settlement period is D plus 30 days.
And that compares to the international standard of D plus one or D plus two.
So this means that when a customer pays for a purchase using a credit card, the merchant only receives cash payment after 30 days.
So you can imagine the working capital challenges that this creates for any merchant that accepts credit cards.
And then culturally, Brazilians also love installment payments or what's called parcelados.
This feature is only available on credit cards and allows consumers to split their purchases into a number of interest-free monthly payments.
And that typically ranges from three to 12.
So, instead of charging the entire purchase to their credit card upfront and then having all of it fall due a month later, the card issuer will bill the cardholder in equal monthly installments, which each of the installments falls due, as per your standard credit card agreements.
Now, from the merchant's perspective, this just further exacerbates that working capital challenge.
So, instead of receiving full payment 30 days after the sale, if it's a three-month installment, the merchant will receive a third of the sale amount every 30 days.
And if it's four installments, then a quarter.
And for a 12-month installment, the merchant isn't receiving the final payment until 360 days after the sale, which is pretty crazy if you think about it.
So to get around this cash flow timing problem, merchant acquirers created a solution known as the anticipation of receivables.
For a fee that reflects the time value of money plus a margin to the merchant acquirer.
The merchant can elect to receive all of those installment payments upfront, which is why this business is also called prepayments.
This ends up being a win-win for all the parties involved.
The merchant gets a discounted upfront cash inflow.
The consumer gets to split large purchases into multiple interest-free installments.
And then the merchant acquirer receives a fat risk-free fee.
And.
And this is because ultimately, it's the card issuer that's the one that guarantees the receivables in the event of cardholder default.
Now, once the acquirer has bought the stream of credit card receivables from the merchant, it now has two options.
It can either put the receivables onto its balance sheet and collect each installment as they settle, or it can sell that receivable onto a bank.
So either option comes with its own funding costs, which then turns the anticipation of receivables into more of a spread business.
We estimate that Melly earns circa 3 net spread on its prepayment business, which is higher than the merchant discount rate that it earns on the payment processing business.
So if you dig into Melly's filings, there's actually disclosure around the percentage of TPV that comes from installment payments.
And they also provide net prepayment revenue as well.
So you can use that to calculate the net spread.
And, I think interestingly, we've observed that the net spread has actually widened to over 4 over the past three years, which on the face of it, looks pretty attractive.
But we think that this is actually because Melly has been increasingly turning to wholesale and deposit funding rather than discounting the receivables back to a bank.
So, by our estimates, the percentage of credit card receivables that Millie holds on its balance sheet has risen to over 40 of gross credit card receivables, up from around 11 in 2019.
And net prepayment revenue only includes the cost of discounting receivables to a bank and it doesn't include the interest cost of wholesale funding.
So that ends up overstating the net spread.
So essentially, we think net spread is probably still around that 3% range.
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 Ecommerce and marketplace.
So just how do you think about that and that exposure?
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 industry team have a KPI where you've got to grow the credit book by a certain amount every period.
Melly's also developed its own credit scoring and underwriting models because, as you can imagine, in LATAM, 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 standalone credit card issuer in say, Brazil.
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 Melly on a consolidated basis, how you think about those drivers going forward?
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 KGAR since 2019, which is pre-COVID, and then by 43 KGAR 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 NBOs 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 Melly 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, Melly also earns the interchange and potentially net interest income on that transaction as well.
So it's a pretty attractive model.
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 mixed shifts or whatever it might be?
Yeah.
So I'd say gross margin is probably not as relevant for Melly, 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 sort of 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, Melly was a mid 30% margin business.
And then, from 2014 to 2016, there were some hyperinflationary issues in Venezuela, which was Melly'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 Melly's long-term reinvestment strategy.
When free shipping was launched in 2017, the growth of marketplace items sold was still very healthy.
So it wasn't like Melly was responding to a slowdown of the business.
And yet we're fairly confident that, without turning on free shipping in 2017, Millie 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.
And you referenced a bit in terms of lighter capital intensity than you might see at somewhere like Amazon.
But how would you think about that margin flowing down into earnings, free cash flow and just some of the capital allocation framework in terms of how they think about it?
You mentioned the reinvestment into the business.
That can happen a few different ways, but just thinking more from the below the line and then free cash flow dynamics.
Yeah.
So I'd say, in terms of the incremental operating margins, they can be relatively high for the marketplace business, depending on, I suppose, where the reinvestments are being made, because obviously with the third party merchant business they're just collecting a fee.
So any growth and penetration of advertising, or when they eventually start monetizing logistics, that should all fall through to the bottom line at a pretty high rate.
But of course, the company is also investing more into its first party sales as well.
And I think that's pretty important for expanding the different categories that the marketplace is able to address, especially around the higher value consumer electronics pieces and then the much lower value value grocery business as well.
On the fintech side, I think, as we discussed, the biggest driver is going to be that compression of the nine mile.
But that, of course, ends up being offset by faster dollar growth of the fintech operating income.
Our understanding is that the company doesn't really manage the business margins either.
So they're much more focused on the long-term opportunity and they will basically sacrifice short-term profits if they can extend the long-term growth runway or just position the business to have stronger growth in the long-term.
Just lastly, on free cash flow and capital allocation.
Free cash flow, defined as operating cash flow less capex, is distorted by the credit and digital wallet businesses, given the non-cash charges, the changes in credit receivables and customer deposits.
The company started reporting an adjusted free cash flow number last year, which strips out the impacts of the fintech business.
And that figure was $1.3 billion for 2024 and $1.4 billion for 2023.
You also need to make some non-cash adjustments to net income to approximate a conversion ratio which falls between 60 and 80 for the two years we have available.
As for capital allocation, the priority is very clearly organic reinvestment, which includes funding the credit business as well.
Since the 2007 IPO, there's been just over 1 billion in buybacks and just over 200 million spent on MA.
So the majority of the reinvestment has been back into the logistics business and also the expansion of the credit business.
And I think we've laid out the risks throughout the discussion and there's some fairly obvious ones.
But, Sitting in the investment seat, what stands out the most to you in terms of the risks to the business that you would maybe worry about the most or the market worries about the most?
So I think the key risk is just around that international competition, particularly from Shopee, which we've already discussed.
So I won't touch on that again.
But I would just say this is probably more limited to Shopee specifically, because if you look at Amazon, I mean Amazon's been a very early mover into LATAM and it didn't really catch on anywhere except Mexico.
And then for Temu.
I believe they made a splash when they launched in Brazil last year, but As a cross-border e-commerce player, I think it's very hard to really compete with the local players on any meaningful metric, whether it's delivery speed or service experience or even product quality in Temu's case.
So really the only thing that Temu has going for it is just a very, very, very low price.
And Shopee, is also a strong player in that lower price segment.
So it's hard to see Temu having a real relevant market within Brazil where it can actually attack.
And I think the same could be said for Mexico as well.
I mean, we saw Temu launch in Mexico and there was a spike in downloads and MAUs and that's come back pretty quickly as soon as they stopped advertising and doing their user acquisition as well.
In terms of the other risks, I think there's a few other risks that are worth touching on.
Firstly, there's the saturation of digital payments in Brazil.
So, back in November 2020, the Brazilian central bank launched PIX, which is a 24-7 instant payment system that's operated by the central bank.
That's just been an absolutely massive success.
So today, over 90% of personal consumption expenditure has been digitalized.
And as a result of PIX, card payments have lost significant share in Brazil.
But credit card volumes have still grown on an absolute basis and at a pretty healthy double digit rate as well.
So it's mainly been debit cards that have lost share both as a percentage and in terms of dollars.
The other thing I'd say is that in the long run, this might even be a tailwind for credit card adoption, because once the underbanked individuals are pulled into the digital banking system via PIX, it becomes much easier for them to graduate onto credit cards, where most of the value lies for the fintechs that offer them.
The second risk is that there's occasional regulatory rumblings in the payments industry.
The Brazil Central Bank has been toying with aligning the credit card settlement period to international standards.
And there's also further regulation being touted for the extremely high rates of revolving credit card balances.
We think these changes would fundamentally alter the business models of all the parties that are involved in the payment system.
And also not necessarily for the better, because I think most of these changes will result in lower consumption expenditure from consumers.
So these regulatory proposals haven't really gained that much traction.
And then finally...
I think it's worth mentioning that there is some antitrust litigation happening in Argentina, where a consortium of banks has sued Melly for monopolizing the country's digital payments market.
And then Melly has countersued, alleging that the banks have formed a cartel.
So we would say that it's pretty hard to argue against Meli being a monopoly in Argentina, given its 80 share of e-commerce and probably more or higher share in the fintech space.
But it's not really clear to us who is being hurt by this.
And then on top of that, there's President Javier Melay, who disdains excessive regulation.
So it's also not clear what the regulators would actually do if Meli lost.
So those are the risks that I would highlight.
Obviously anyone investing in EMs.
You're going to face typical EM macro risk and also FX risk as well.
And particularly for LATAM.
I think that FX piece you just have to be mindful of, because some of these currencies can devalue pretty quickly and pretty steeply.
And it distorts the reported results formally.
And you have to just, I guess, dig a level deeper to understand how the business is performing.
Because, for example, if GMV growth is 20 in USD but then 80 in FX neutral, then you'd argue that the 20 USD growth is not really reflective of the underlying business and that you should look at the 80 FX neutral growth.
But, On the other hand, that 80 FX neutral growth.
How much of that is coming from the fact that say, Argentina is inflating at 50 a year or Brazil inflation is at 14?
It does mean that it is harder to track the underlying performance of the business.
And that's why I've referred to a few times the growth in units sold for the marketplace, because that's probably the best metric for underlying growth of the marketplace business.
Yeah, incredibly difficult to isolate the variables.
I think we touched on it early, but the execution is incredible, just in terms of how they've been able to evolve.
And you mentioned Marcus Galperin as the leader here.
What else, if anything, would you reference just in terms of the culture and leadership that went into executing on what is like an academic case study of learning from some of the other businesses around the world and applying it with your own unique approach?
For any founder-led company.
Ultimately, the culture is going to be largely a manifestation of the founder's own personality and beliefs.
Marcos Galperin has described the company's culture as one of a professional sports team.
Now unfortunately, I think that's become a bit cliche now after Reed Hastings popularized that metaphor, but I believe Galperin did almost become a professional rugby player.
So there's some merit to that metaphor.
He's described the culture as a very competitive meritocracy with a long-term focus, where people are incentivized to take risks because everyone wins or loses as a team.
And that willingness to sacrifice short-term profits in pursuit of long-term objectives is largely born out of surviving the dot-com bust and then having to build out, piece by piece, all the vertical components required to scale e-commerce in Latin America.
And that's why there's such a big focus on technology as well, because Melly has basically needed to build its own solutions to a lot of the problems and the frictions that it's encountered.
As a matter of fact, the company's mission statement is to democratize commerce in Latin America through technology.
And then if you just look at the broader leadership team, Galperin has definitely fostered a very long-tenured and talented group of executives.
Many of the C-suite have been with the company since the start, and departures have typically been succeeded by internal promotions.
And I think this level of leadership continuity is not only good for maintaining long-term strategic focus, but is also good for the culture of the organization as well.
The last thing that I'd say on the leadership topic is that earlier this year, the company announced a leadership transition.
So after 26 years, Marcos Galperin is stepping back as CEO and assuming an executive chairman role.
Ariel Scharfstein, who is currently the president of commerce, will be promoted to CEO starting next year.
Ariel has been running the commerce business since 2022.
So I think the fact that the commerce segment has delivered very strong performance compared to global peers coming out of that COVID boom is a strong testament to his capabilities.
And, as a matter of fact, if well, Marcos Galperin hasn't spoken on an earnings call for like five years, and if you listen to Ariel talk about the business in field QA, you would think that he was actually the CEO.
I think it's also interesting that It was the commerce president, rather than the more experienced fintech president, who was promoted to CEO.
And that suggests to us that the long-term opportunity for the company is still centered around the MercadoLibre marketplace.
And then just onto your outlook question.
In terms of the qualitative outlook for Melly, so I'd say we're very positive on it.
The e-commerce penetration across Latin America is still relatively low and we think that can support double-digit market growth for the long term.
And then you add on top the potential share gains by Melly as well, and then the take rate expansion from value-added services.
And it's plausible that the commerce revenues will continue to grow above 20 for the foreseeable future.
On the fintech side, payments-related revenue likely decelerates going forward, given the digital payment saturation in Brazil and the dominant position already achieved in Argentina.
But Mexico is still a growth market for them.
In fact, I think Mexico cash usage for consumer purchases is still in the 40% range.
We also expect that the revenue mix will continue to shift towards credit, particularly as the credit card business continues to scale in Mexico and also launch in Argentina.
And then just on operating margins, we would expect that the margins continue to expand on the long-term view, though that won't necessarily be linear, given management's preference to reinvest in the business to extend its growth runway.
But structurally speaking, the penetration of advertising and logistics monetization in the commerce segment and the continued improvement of credit card nine miles in the fintech segment should be long-term tailwinds for margin expansion and also for earnings growth.
This has been fascinating, Daniel.
There's a lot of things that I look forward to reading more about after this discussion.
But we close these conversations out with the lessons that you can take from this particular business and potentially apply elsewhere.
What would stand out the most to you about Mellie?
I think the key lesson from Melly that could be applied as a lens when looking at other businesses is just the power of reinvestment and reinvention.
Melly started life as an auction marketplace, quickly introduced fixed price sales to expand that market and then invested in payments and logistics to solve customer pain points, and that unlocked further growth.
Then the company completely reinvented itself, after nearly two decades in existence, by introducing free shipping.
At the time, the financial performance of the business didn't suggest that such a drastic change was necessary, but Marcos Galperin went ahead and did what was best for the customer anyway.
And that free shipping reinvention had a dramatic and negative impact on operating margins.
And yet investors were willing to look past that because of the long-term growth runway that it unlocked.
There's probably some patent recognition there from Amazon as well, but I think it still required very solid execution by management to pull it off.
For investors.
I'd say also that it's important to basically find and back an acceptable management team, and one that's focused on seizing the multi-year opportunity rather than managing the business to near-term expectations.
I don't know if Melly was ever objectively cheap, at least in the time that I've been following it, but shareholders have certainly done very well by paying a fair price and just letting Galperin and his team execute against the long-term vision.
Fascinating.
Well Daniel, this has been extensive and in areas deeper than we'll typically go, but I enjoyed every second of it.
So thank you very much for sharing the knowledge.
Thanks for having me on.
It was good fun.
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