Earnings

MercadoLibre CFO Calls Its 6.3% Operating Margin A Deliberate Trade For Engagement

The CFO tied the margin squeeze to shipping capacity and Brazil's affiliate push, and the CEO said the company has "accepted a lower margin."

Matteo Parrino Jonathan Ponciano

Matteo Parrino, Jonathan Ponciano

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MercadoLibre CFO Calls Its 6.3% Operating Margin A Deliberate Trade For Engagement

MercadoLibre's operating margin slipped to 6.3%, and Chief Financial Officer Martin de los Santos said on the company's earnings call Wednesday that the squeeze came from "deliberate investments" in shipping and Brazil's affiliate program. Income from operations was $676 million, with the margin down 40 basis points from the prior quarter.

Where the margin went

MercadoLibre runs a Latin American online marketplace and the Mercado Pago financial services platform. De los Santos said two factors compressed the margin: higher net shipping costs and higher sales and marketing spending on affiliates.

Shipping was a net headwind of about 60 basis points versus last quarter. He cited four causes: the lower free-shipping threshold set last year, which means smaller baskets and less revenue per shipment; almost 20% more fulfillment square meters added quarter on quarter ahead of peak; higher energy prices; and temporary recruiting costs booked in general and administrative expense. He split the 60 points as 40 in cost of goods sold and 20 in operating expenses.

Sales and marketing rose 40 basis points sequentially to 11.6% of net revenue. Orders through the Brazil affiliate channel grew 240% year on year, and the network now has more than 12 million affiliates across the region.

What comes back, what stays

Pressed by an analyst on whether the costs would reverse, de los Santos said he expects part of the capacity cost to come back in the fourth quarter. Capacity grew about 20% this quarter, against about 10% a year earlier. Energy costs were only partly passed on to consumers, he said, so that pressure should remain. Affiliate investment, he added, is an area where the company plans to keep spending.

He said improving affiliate unit economics "should contribute to margins eventually," and the company says it calibrates the spending up or down by market.

Chief Executive Ariel Szarfsztejn said the company has made the same argument on every call for 18 months: "We have accepted a lower margin" to build engagement. He said the company does not give forward-looking statements on margin trajectory.

The efficiency case

Management pointed to offsetting gains. In Brazil, cost per shipment on an FX-neutral basis fell 5% year on year and 14% since before the free-shipping threshold was lowered. In September, free shipments in the 19 to 79 reais range turned variable-contribution positive for the first time, de los Santos said.

Net revenue and financial income rose 41% year on year on an FX-neutral basis, with Brazil commerce volume up 36%. Items per buyer grew 16% year on year, against single-digit growth before the threshold change. A Yahoo Finance commentary noted profitability has been under pressure for two quarters and that the Brazil threshold fell from R$79 to R$19.

Szarfsztejn's closing pitch: users are doing more with MercadoLibre while it costs less to serve each of them.

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