MercadoLibre Inc  (NASDAQ:MELI)
Q1 2019 Earnings Call
May. 02, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the MercadoLibre First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's presentation, Mr. Federico Sandler. Sir, you may begin.

Federico Sandler -- Head of Investor Relations

Hello everyone, and welcome to the Mercado Libre earnings conference call for the quarter ended March 31st, 2019. I am Federico Sandler, Investor Relations Officer for Mercado Libre. Our senior manager presenting today is Pedro Arnt, Chief Financial Officer. Additionally, Marcos Galperin, Chief Executive Officer, and Osvaldo Gimenez, Executive VP of Payments will be available during today's Q&A session. This conference call is also being broadcasted over the Internet and is available through the investor relations section of our website.

I remind you that management may make forward-looking statements relating to such matters as continued growth prospects for the Company, industry trends and product and technology initiatives. These statements are based on currently available information and our current assumptions, expectations and projections about future events. While we believe that our assumptions, expectations and projections are reasonable in view of the currently available information, you are cautioned not to place undue reliance on these forward-looking statements. Our actual results may differ materially from those discussed in this call, for a variety of reasons, including those described in the forward-looking statements and risk factors sections of our 10-K and other filings with the Securities and Exchange Commission, which are available on our investor relations website.

Finally, I would like to remind you that during the course of this conference call, we may discuss some non-GAAP measures. A reconciliation of those measures to the nearest comparable GAAP measures can be found in our first quarter 2019 earnings press release available on our Investor Relations website.

Now, let me turn the call over to Pedro.

Pedro Arnt -- Executive Vice President and Chief Financial Officer

Thanks, Fede. Let me kickoff this earnings call by stating that we are encouraged by entering this new year with continued momentum in our business and are seeing our strategy delivering on multiple fronts in a sustainable manner. Case in point, some of the key metrics for the quarter: net revenues that accelerated for the fourth consecutive quarter on an FX neutral basis to 93% growth year-on-year as our payments business continues to grow rapidly while we also have become more efficient in marketplace shipping spend; operating income that was positive once again at $10.1 million; positive net income, after five quarters of loss, giving us confidence in our ability to dial up, or down the profit levels of our P&L as we see fit.

We continue to execute against a focused and strategic roadmap intended to capitalize on the secular trends of e-commerce and FinTech in the region that will allow us to extend our market leadership. We are transforming from a pure third-party marketplace business, to building the leading e-commerce ecosystem and digital financial services platform in Latin America. In the process, we are redefining our relationship with our customers, increasing our touch points with transactions through logistics and financial service offerings, strengthening our technology platforms and in doing all this, increasing our addressable market as we are able to serve our users in a more expansive manner than in the past.

So, let's begin our strategic progress report for the quarter with our FinTech business this time, a growing area of focus for the organization. Mercado Pago has kicked off 2019 on a very strong note. During the first quarter of the year, total payment volume reached $5.6 billion, a growth of 83% year-on-year on an FX neutral basis. As we increasingly focus our efforts on expanding our online-to-offline payments solutions in the markets where we are currently in, and expanding the financial services we offer our merchants away from MercadoLibre's marketplaces, off marketplace total payment volume already explained 95% of the incremental payment volume during the quarter. Off marketplace total payment volume reached $2.5 billion, and continued to gain incremental share from total payment volume reaching 45% of total this quarter versus less than a third only a year ago.

In line with that, in Argentina, where we have deployed the most complete payments ecosystem as of date, off marketplace total payment volume represented more than half of TPV for the first time ever. Also, during the first quarter of 2019, total payment transactions, in number not in volume, of the off marketplace segment on a consolidated basis represented over 60% of all payments transactions, growing for the six consecutive quarter above 100% year-on-year and accelerating to 251% year-over-year. These aforementioned off marketplace data points that I have just called out, give us increasing confidence that we are making meaningful inroads in growing and scaling our payments business well beyond our e-commerce marketplace, and look to replicate that success we see in Argentina throughout other markets.

Within that off marketplace segment, we continue to be very encouraged with the results of our mobile PoS business, as it is increasingly becoming a key driver of incremental off marketplace payment volume, a strong top line generator, and perhaps most importantly a key distribution tool for our other FinTech offerings. The installed base of MPOS devices in our main countries keeps growing at a steady clip. A testament to this, is the fact that

payment transactions from MPOS devices alone already account for almost half of the off platform payment transactions. In terms of MPOS payment volume, it surpassed the $1.0 billion mark for the first time during the first quarter, growing on a consolidated basis a solid 171% year-on-year on an FX neutral basis and an even strong 260% year-on-year in U.S. dollars. This growth of our MPOS business delivered during quarter was driven, for the most part by solid performances in Brazil and Argentina.

The buildout of our mobile wallet two-sided network also continues to scale and grow in size and frequency of use. During the quarter, we reached an important milestone as we crossed the 3 million active payer mark in a single quarter on our wallet, while active collectors accelerated to 420% year-on-year to over 0.5 million. Additionally, wallet total payment volume continues to grow triple digits both on an FX neutral and in U.S. dollars, while it also continues to gain share from off platform total payment volume reaching almost 20% on a consolidated basis, a gain of 400 basis points versus a year ago.

Continuing on our mobile wallet initiative, Argentina was also highlight as we begin to observe the powerful synergies present in our O2O payments ecosystem. During the quarter, Argentina QR in-store payments share grew 40 percentage points versus last year, coming to represent 43% of all wallet total payment volume. It's also important to highlight that QR in-store payments in Argentina are delivering meaningful customer satisfaction as when we measure Net Promoter Scores, we observe a significant gap versus other existing offerings. Additionally, we continue to see both a shift in funding from credit or debit cards to account money as we add usage cases and ubiquity of use, as well as growth in invested amounts in our Asset Management products, that already surpassed 50% of total available account money in Argentina. We look forward to launching this full stack of O2O solutions in Brazil and Mexico during the second half of the year.

Our merchant services business has also delivered encouraging results as this quarter was the second consecutive quarter of acceleration, growing 75% on an FX neutral basis across all sites. We are also pleased with our results on the credits front. In Brazil, optimizations to our collections and credit scoring capabilities have positively impacted merchant default rates, and consequently have accelerated the pace of originations in number and nominal amount during the quarter. In line with that, I am also pleased to report that in Mexico, merchant credits are tracking extremely well with positive adoption and the lowest default rate on any of the markets that we offer the product.

Finally, we also began offering our credit solution to our MPOS users in Mexico, which we believe should strengthen our value proposition in that country given how underserved this merchant base is when it comes to access to credit. It is also important to highlight that our consumer credit business in Argentina and Brazil continues to fire on all cylinders as originations are up Q-on-Q by a factor of almost 1.2 times. Our vision is that access to innovative technology must be an engine of financial inclusion and opportunity through Latin America, and we remain deeply committed to advancing on that goal. The region is rapidly accelerating toward digital payments, and we know that we have a huge opportunity ahead of us to make a real difference to the constituencies we serve across the region.

Let's move on to some of the highlights in our logistics business unit, a key enabler of greater transactionality, engagement, and conversion on our marketplaces. I am pleased to report that we continue to improve and have greater control over user experience as we shift more volume to Mercado Envios. Penetration of our shipping solution on a consolidated basis grew 10 percentage points year-on-year to 81% of all items sold. In line with that, we are also making progress in shifting volume to our managed network.

On a consolidated basis, cross docking efforts reached 17% penetration versus 7% last year, while dropshipping decreased to 76% and the managed network reached almost quarter of all items shipped. During the quarter, Argentina was a highlight as Mercado Envios penetration grew by 19 percentage points year-on-year to 56% of items sold allowing for more widespread adoption of free shipping in that country that is driving strong marketplace growth there.

We are also enthused by the results of our Flex solution, but first let me remind you what that is. Flex is a MELI proprietary technology that is ideally suited for local or intra city deliveries, where our technology overlay enables existing logistics partners that currently work with our merchants to scan, upload, and deliver packages through our Mercado Envios network. Through this solution, we are able to not only reduce our reliance on traditional carriers, but also drive penetration of Envios higher, while also taking care of the last mile in a much more efficient fashion, which is generally the more complicated part of getting goods from a merchant to a buyer's doorstep.

Since its Launch in late 2018, MELI flex shipping solution has already reached 5% of all items shipped and already representing over 50% of the shipments within the city of Buenos Aires. The shipments are not only meaningfully cheaper than dropshipping or cross docking, but they also have better lead times with over 90% of deliveries occurring same day or next day, which is resulting in more sales and better conversions for those merchants who adopt the product. We look forward to continuing to deploy Flex in several of the other large cities where we operate throughout the region during the remainder of this year.

On the fulfillment by MercadoLibre front, penetration continues to scale well in Mexico gaining 5 percentage points sequentially and reaching 20% of all items shipped, while in Brazil scaling up has lagged somewhat remaining flat quarter-on-quarter as we continue to build out product and processes to scale it. However, in Brazil cross docking does continues to grow steadily as it's reached 15% of items versus only 5% last year. The operational metrics on our managed network are also encouraging. On a consolidated basis, average lead times improved by 40% on a year-on-year basis, and median lead times improved by almost 25% versus last year. Also, shipments arriving in less than two days reached almost half of all Mercado Envios deliveries on a consolidated regional basis.

We've also made advances in growing the size of our managed network as the buildout of fulfillment capacity continues in full swing. During the quarter, we opened one fulfillment center in Buenos Aires with 200,000 units storage capacity, a second fulfillment center in Sao Paulo with 350,000 units storage capacity and a cross docking center also in the city of Sao Paulo with a processing capacity of 60,000 orders per day.

Now, let's move on to some of the highlights in the marketplace business. Despite increasingly tougher comps and continued optimizations in our shipping subsidies, the marketplace business continues to show great resiliency. Gross merchandise volume reached $3.1 billion. On an FX neutral basis, consolidated GMV reaccelerated to 27% year-on-year growth driven by solid execution in Argentina, and steady performance in Mexico. Argentina GMV on an FX neutral basis accelerated to 70% year-on-year and Mexico maintained momentum at 48% year-on-year growth despite the toughest comp of the year where it grew 77% in Q1 '18.

The solid performances in Argentina and Mexico were partially offset on a GMV basis by Brazil, which grew 18% on an FX neutral basis. However, average two year local currency growth for the first quarter in Brazil, remained around 44%, indicating that part of the slowdown can be attributed to very tough comps from the prior year. Additionally, the deceleration in Brazil is also explained by the implementation of free listing caps, resulting in a reduction of free GMV from 11% during the first quarter of 2019 to only 5% of GMV this quarter. It is also important to know that in Brazil that we exited the quarter at a higher growth rate than we entered it.

We continue to focus on category expansion as a catalyst for growth of our marketplace businesses. During the quarter, we have expanded and improved our supermarket experience in Mexico with already more than 18,500 consumer packaged goods SKU's available on our site. Although still on an early stage, we observe that basket size is also approximately 20% higher on orders that have supermarket items in Mexico, a clear indicator that this is a key vertical to increase purchase frequency on the site is trending in the right direction. In line with that, we have also improved the user experience in our apparel vertical by enhancing discovery engines, further facilitating returns, and strengthening our intellectual property program which has been instrumental in incorporating established brands that improve assortment and bring brand equity to our marketplaces. As a consequence, apparel is the fastest growing category growing at 79% year-on-year on an FX neutral basis consolidated.

Not only do we continue to expand categories, but we are also deepening product selection and assortment. Listings available on the platform, a measure of the depth of inventory surpassed the $200 million mark for the first time. This quarter also marks the ninth consecutive quarter of growth in this important KPI at a rate higher than 50% over the prior year. We also continued to make strides on our shift toward a mobile first platform. During the first quarter of the year, mobile app GMV represented almost 50% of gross merchandise volume, a 10 percentage point improvement versus a year ago, while 81% of all new registered users were also coming from mobile devices. If we consider web mobile into this mix, GMV coming from mobile experiences is 63% of gross merchandise volume.

Finally, we made meaningful progress in offering more robust search and discovery experiences to our buyers through our catalogue initiative. During the quarter, catalogued gross merchandise volume reached 29%, 38%, 25% of GMV in Brazil, Argentina, and Mexico respectively representing an improvement in the mid to low teens year-on-year for these markets. This is an important initiative for us, since cataloguing allows us to understand better the inventory we carry, enables us to better understand what products to show our buyers, and consequently allows us to highlight the second to none price and selection we offer to our users in the region. As we grow the percentage of gross merchandise volume that is catalogued, our buyers will be able to find the products they are looking for more quickly and this should result in higher conversion rates.

Before I move on to financials, let me give you an update on a recent secondary offering we performed during the first quarter of 2019, where we finalized a successful capital raise of $2 billion from both financial investors as well as a strategic investor, PayPal. This capital raise gives us greater balance sheet flexibility over the long run, and we expect to use this capital primarily to fund the growth of our payment initiatives, build out our logistics capacity and drive the adoption of these services, as well as for General Corporate Purposes. As we move forward in the year, we will outline in greater detail how our pace of investment will pick up, with specific call outs of areas where we are increasing spend levels. We maintain long-term opportunities such as payments and logistics as priorities, with potential for margin contraction in the short-term depending on the return windows of these investments that we carry out.

It's important to highlight that we very pleased that Paypal was a strategic investor in the transaction. The latter, we believe, not only validates the joint vision we share in terms of business and purpose to digitalize the economy and leverage technology to generate financial inclusion, but also to offer compelling financial solutions to those who are unserved or underserved by traditional financial institutions. The trust that has been built over the years with PayPal and the history we have of informally interacting, gives us the confidence that we will be able to find areas that will generate synergies with each other as we move forward into the future. In this regard, our teams are working on determining what commercial agreements can be put in place that complement PayPal's global merchant base, data, products, and technology with our local know-how and distribution capabilities.

Let me now move on to financials. During the quarter, we continued taking the necessary steps to recalibrate our P&L and rebalance our financial model to deliver sustainable growth. From a top line perspective, gross billings ascended to $547.8 million, the 20th consecutive quarter of gross billings growth above 60% on an FX neutral basis driven by improved monetization on our marketplaces and continued successful execution on our payments business particularly on our financing business and off platform revenue streams through merchant services and MPOS. On an FX neutral basis, our main countries also delivered solid performance from a gross billings perspective on an FX neutral basis: Mexico maintained momentum growing 113.5%, Argentina accelerated to 108.2% and Brazil sustained solid percentage growth of 50% reaching 50.9% year-on-year.

Consolidated Net revenues came in strong as well, reaching $473.8 million, and accelerating to 93% year-on-year in FX neutral basis as we optimized shipping & loyalty program subsidies. Gross profit ascended to $237 million during the quarter, representing 50% of net revenues versus 50.7% last year. Shipping carrier and operating costs explain most part the gross margin compression over the prior year. We've included a detailed breakdown of these, and also other OpEx margin evolution in the cover slides that accompany this presentation.

As reported, operating expenses grew to $226.9 million or 47.9% of revenues versus 59.9% during the first quarter of 2018. Main drivers of OpEx leverage this quarter were attributed to scaling marketing given increases in efficiencies on buyer protection payouts, lower loan loss provisions from our credit portfolio, as well as leverage in salaries & wages. As a result, Operating profit for the first quarter of 2019 ascended to $10.1 million an increase of $11 million versus last quarter.

Below operating income, we saw $15.6 million in financial expenses attributed for the most part to financial interest related to the convertible notes due 2028. Interest income increased by 166% year-on-year to $24.4 million mainly attributable to a higher float in Argentina and Brazil, as well as the proceeds from the convertible note issued in August of last year. Our ForEx line was negative $3.7 million mainly due to the U.S. Dollar revaluation over our Argentine Peso net asset position in Argentina.

As a result of all this, net income ascended to $11.9 million, an increase of $14.2 million versus last quarter resulting in basic net income per share of $0.13 cents. That wraps up our strategic report. We started the first quarter of 2019 on firm footing, and although we are very encouraged by the performance of our business and the opportunities that lie ahead of us, we still have plenty of work to do in order to deliver on our product roadmap and consolidate our leadership position. We have accelerated our revenue growth and earnings growth with positive cash flow, while we continued building superior experiences for our users. The sustained momentum we see in the business gives us the confidence to continue investing behind high potential areas, such as FinTech and logistics.

We are very pleased with our progress, and look forward to keeping you updated next quarter as we continue to democratize commerce and money in Latin America.

With that, let me turn it back over to the operator for your questions. Thank you very much.

Questions and Answers:

Operator

(Operator Instructions) Our first question or comment comes from the line of Deepak Mathivanan from Barclays. Your line is open.

Mario Lu -- Barclays -- Analyst

Congrats on a great quarter. This is Mario Lu on for Deepak. So we noticed that you currently started charging low-value item shipping surcharges in Argentina similar to the program you have in Brazil. So should we expect to see meaningful revenue benefits from this? Are lower ASP items a large portion of free shipping in Argentina? Thanks.

Pedro Arnt -- Executive Vice President and Chief Financial Officer

Hi. The mix of low ASP and high ASP is fairly consistent. What you need to bear in mind is that the actual amount we are charging on low ASP items in Argentina is materially lower than Brazil. So from a point of view of how many items this will impact, and therefore both the revenue increase, but the slowdown in units, we expect it to be less impactful than Brazil was.

Mario Lu -- Barclays -- Analyst

Got it. That's helpful. Thank you.

Operator

Our next question or comment comes from the line of Robert Ford from Bank of America. Your line is open.

Robert Ford -- Bank America -- Analyst

Hey, thank you, and good evening, everybody, and congrats on the quarter as well. I was very impressed with the increase in the contribution margin in Brazil, I think more than doubled. And I was wondering if you could maybe break it down in terms of the contributors there, please?

Pedro Arnt -- Executive Vice President and Chief Financial Officer

Okay. So just to make sure we're looking at the same thing. The improved contribution margin in Brazil is the question, right?

Robert Ford -- Bank America -- Analyst

Yes, Pedro, it's close to 26% and about 11% last year, I'm sorry, I'm not looking at Brazil, I'm looking at the wrong one. But there's nevertheless there's a big improvement and I was just wondering what the factors were behind that?

Pedro Arnt -- Executive Vice President and Chief Financial Officer

So we just want to make sure to some of us here thought it was a decrease, so you'd asked about. So definitely there are optimizations in shipping costs both at the level, but also at the actual cost level. There are slightly above 400 basis points of improvement sequentially and about 1,000 year-on-year in more efficient marketing spend. Those are really the two biggest drivers.

Robert Ford -- Bank America -- Analyst

Those are big numbers. And then, Pedro, could you touch a little bit on maybe some of the wallet functionality across your major markets? You mentioned the launch of full stack of O2O solutions in the second half, but I was wondering if you could tell us a little bit of what you have now in the major economies? And how you see that -- what you need I guess in terms of bank approvals and functionality to go live?

Pedro Arnt -- Executive Vice President and Chief Financial Officer

Yes. It's a great question. Thanks. So I would say that Argentina is really the country where the O2O efforts have been rolled out in a set of both actual live product functionalities, but equally important enough business development and onboarding of the merchant side of the network whether that be what we call single-player cases. So utility payments telephone top-ups transportation agreements. So large agreements with anchor used cases and also a multiplicity of smaller merchants that start accepting the QR code. So Argentina that's a fairly robust, although still early stage ecosystem, and hence we're seeing the results we're seeing in Argentina. Brazil although most of the functionalities are live product-wise. There are still improvements to be made in terms of the ability to fund wallets.

And more importantly, we are not as far along in the business development and rollout of the merchant side of that network. Yes, so we'll be going to begin aggressively start pursuing the commercial efforts in Brazil during the ongoing quarter in terms of building the merchant side of the network. And Mexico, I would say, is the third phase where there is still features to be rolled out and we're not yet -- have not yet began to aggressively rollout merchant adoption and that also starts to pick up during this quarter.

Robert Ford -- Bank America -- Analyst

That's very helpful. Thank you, and again, congratulations.

Operator

Our next question or comment comes from the line of Ravi Jain from HSBC. Your line is open.

Ravi Jain -- HSBC -- Analyst

Hi, Pedro. A couple of quick questions. So first on the Brazil GMV growth. Are you happy with the 18% growth in this quarter? Of course, we understand that the comp was tough, but on a quarter-on-quarter it has slowed down. And we also see the shipping subsidy has come down. So is there space to increase the shipping subsidy in reaccelerate that business in Brazil? What are your thoughts on the Brazil GMV?

And the second question is on the Payments business. We of course have seen a lot of aggressive most by competitors in the MPOS business. If the prepayment revenues come down materially over time, how does that change your investment plan? I mean do you start using more of cash on the balance sheet instead to invest in the Payments business? Thanks.

Pedro Arnt -- Executive Vice President and Chief Financial Officer

Great. So I think the prepared remarks tried to convey clearly that we think that the headline Brazilian GMV growth number was probably the low point of the quarter, certainly not something that we are contend with. As you mentioned part of that is a consequence of the optimization around shipping. Bear in mind also that January and February of last year were the two highest growth months in a multiyear cycle, so there's still is an element of very, very tough comps. And then, as March rolled around, especially the back end of March, the comps get easier, and so we already exited the quarter at a better growth rate than that.

As we've revamped our shipping capabilities, I think, there is now the intelligence in place to invest equal amounts in shipping, but in a more efficient manner. And so that hopefully will be an incremental way to try to reignite growth in Brazil. And then, obviously, the flip side of the slowdown in the business was the positive contribution in Brazil. We just walked through Bob's question on marketing spend. So I think a combination of simply more efficient investing, additionally easier comps and potentially more investments on an absolute basis are the three levers with which we will try to reignite growth in Brazil.

Marcos Galperin -- Co-Founder, Chairman, Chief Executive Officer & President

Regarding the payments question. I'd say that, we continue to have an aggressive growth platform for Brazil and the other markets going forward. I'd say that over the last few weeks some of our competitors have started doing specific actions that even though have been more aggressive. When we look into situation, we don't feel that the segment of micro merchants where we mostly operate. We don't see that -- we don't anticipate a significant impact there, and therefore we didn't modify our process. Bear in mind that we settle our taxes in most cases in 3 plus 0. So (inaudible) from a merchants already very, very good. And so far we have reduction in volume. Having said that, we will continue to monitor what other players do and we'll look on pricing in order to remain competitive, if necessary.

Ravi Jain -- HSBC -- Analyst

Thank you. That's helpful.

Operator

Our next question or comment comes from the line of Marcelo Santos from JPMorgan.

Marcelo Santos -- JPMorgan -- Analyst

Hello, thanks for taking the question. I wonder if you could discuss a little bit more on the opportunities of Mercado Credito, so that you start reaccelerating and already appeared in the balance sheet. So what are the main changes made, and then what's the potential you see for the coming quarters, for the coming year in the various markets that you're in?

Marcos Galperin -- Co-Founder, Chairman, Chief Executive Officer & President

Okay. Marcelo, so I think that the last few quarters we have seen two changes. On the one hand, we have introduced consumer credit in Brazil, which will be only available in Argentina and it has been growing very, very nicely. And second on the merchant credit front, what happened last year was that we had a peak in the first quarter and that was due to above roll out, the first quarter last year, with the first time we offered hundreds of loan to get a second loan, and therefore we had a huge increase or large increase in the number of credit. This most credit card for Goldman Sachs, we have a second peak now in the first quarter and that is related to those second loans expiring and being renewed. I think those are the two main driver behind a great volume in terms of credit.

Marcelo Santos -- JPMorgan -- Analyst

Thank you.

Operator

Our next question or comment comes from the line of James Friedman from Susquehanna. Your line is open.

James Friedman -- Susquehanna -- Analyst

Hi, thank you. It's Jamie at Susquehanna. Congratulations on the great numbers guys. Can you hear me, OK?

Pedro Arnt -- Executive Vice President and Chief Financial Officer

We can hear you.

James Friedman -- Susquehanna -- Analyst

Yes. So I just wanted to ask a couple of things mostly on the payment side. So Pedro in terms of growing at or approaching or above now in Argentina and across the company, the 50% threshold of payments coming off-platform, is that more of like a mythical level, or is there something really strategic about that we should contemplate? That's sort of the first question.

I'll just ask the second one. With regard to PayPal, and you used the same language that the use, which is commercialization. I was wondering is it too early to ask on used cases of how you guys might work together? Or if that's too specific like, is it fair to assume that it's going to be more on the merchant as opposed to the consumer side like you described in your need to commercialize the merchant side of Brazil with internalization or with QR codes. Anyway a couple of used cases on the PayPal side would be helpful.

Pedro Arnt -- Executive Vice President and Chief Financial Officer

So the first one there is no scientific relevance to the 50% threshold. I think it's just a notion that the off-platform business which is by far the largest TAM (ph) continues to grow faster than on-marketplace, but that's all there is to it.

Marcos Galperin -- Co-Founder, Chairman, Chief Executive Officer & President

The only thing I'll add to Pedro's comment is that more and more we are targeting off-line transactions. And since e-commerce is only 5% of in Latin America the total addressable market for the offline is really significantly larger than online, so we expect this to continue.

Pedro Arnt -- Executive Vice President and Chief Financial Officer

And then in terms of PayPal, I think, we need to continue to hold off until the actual agreements are hammered out. They do not imply a focus on merchants versus consumers. I think we're looking at areas where we can be synergistic to each other and drive win-win business combinations and those could be either on the consumer side or the merchant side. But I think we'll be able to address those in detail once we actually get them signed.

James Friedman -- Susquehanna -- Analyst

Okay. If I could just sneak in one more. I would probably on the just the early settlement or the prepayment, maybe this one. So you are calling out some differences between the Argentina and Brazil market on the payment side. If MercadoPago could like invent the payments world, the future payments world of LatAm, would you prefer to be carded or not carded? And how does that play to your strategic strengths?

Pedro Arnt -- Executive Vice President and Chief Financial Officer

Look, so let me answer that with two slightly different takes. First of all, is we need to be where the consumer is and where the merchant is. So if marchants want credit cards we offer (technical difficulty).

Operator

Ladies and gentlemen, please stand by. The line disconnected. We'll check and getting back connected. The back-up line is connected. Ladies and gentlemen, please stand by. The conference will resume momentarily as soon as we get the speaker line back connected.

Pedro Arnt -- Executive Vice President and Chief Financial Officer

Hello?

Operator

You're on the back-up line sir.

James Friedman -- Susquehanna -- Analyst

Pedro, you cut out when you were saying you'll go where whether the merchant or the consumer goes, and then you cut out.

Pedro Arnt -- Executive Vice President and Chief Financial Officer

Sorry about that. So something happened with the line. So we were saying merchant and consumer choice is important to us. Now having said that, we believe that non-carded, so the QR network we're trying to build through IT technologies, so Internet protocols and mobile devices can offer much greater disruption to financial services in terms of lower cost more efficient distribution and more massive distribution than proprietary networks that are owned by Visa or MasterCard. So we will follow where consumer in merchant choice is, but if we have our say, we believe you can deliver a better experience and a more cost efficient experience in a non-carded world, and that's what we're trying to construct.

James Friedman -- Susquehanna -- Analyst

Got it. Thank you.

Operator

Our next question or comment comes from the line of Stephen Ju from Credit Suisse. Your line is open.

Stephen Ju -- Credit Suisse -- Analyst

Okay, thank you. Pedro or Marcos, if you want to weigh in here also, from a strategic perspective and particularly for Brazil, you are walking away from dealing with what looks like economically rational transactions. So if they're rational for you then chances are there probably irrational for your competitors as well? So do you think e-commerce growth in the country has entered a period of a structurally slower growth? Or are you seeing some of your competitors willing to underwrite the volume that from a unit -- economics perspective may be irrational?

And I think also in your prepared remarks, you called out consumer credit originations in Brazil and Argentina are up by a factor of 1.2. So then that speaks from guessing a very rapid pace of off-platform versus on-platform loans. So what are some of the friction headwinds you guys saw for recently that is driving this? Thanks.

Operator

Ladies and gentlemen, please stand by. The backup line just disconnected as well. Hold for just a second. And gentlemen please stand by, we're speaking to the speaker line right now. We will get them back into the room momentarily. Please hold. Go ahead sir. You're back in.

Pedro Arnt -- Executive Vice President and Chief Financial Officer

Sorry, apologies. We have our line and the backup line and for whatever reason they both fail at different moments, so apologies for that. I don't know if we still have faults on the line. I'll answer Stephen's question and then we'll see the other questions we have. So I would say that if you look at the evolution of the free shipping program in Brazil, we were probably the company that was most aggressive last year and was most willing to subsidize unit economics that in the short-term didn't make sense in an attempt to generate volume on certain routes, or by investing longer lifetime values. With the cost changes last year even those longer lifetime values stopped making sense for us. But I don't think that our rationalization of our program to a more intelligent and more rational player necessarily implies changes from other players. So I think you just need to look at the way we're trying to invest less in shipping or same amounts on percentage-wise, but any more intelligent way. And I don't think there is a read-through to what other players are or aren't doing.

Stephen Ju -- Credit Suisse -- Analyst

Okay, thank you.

Operator

Our next question or comment comes from the line of Edward Yruma of KeyBanc Capital. Your line is open.

Matt -- KeyBanc Capital Markets -- Analyst

This is Matt on for Ed. So you've done a good job improving search and discovery. I'm wondering if you can elaborate a bit about your catalog initiative. How exactly is this data being cataloged? And I assume it's being carried out by your sellers and how do you incent them to do this? And finally how does improving search and discovery flow through to conversion rate? Thanks.

Pedro Arnt -- Executive Vice President and Chief Financial Officer

Yes. Great question on catalog. High-level answer, yes, sellers have to share information with us. We have tried to build the data architecture in a way that we can with the least amount of data requested try to fill in gaps, but it does require some work from sellers. The efforts have been a combination of gammafication. So if you look at our sellers central is very explicit and the improvement that you can get from complete data sets that allow us to place your product on the catalog efficiently, and then also improvements in conversion either through a better search and sort algorithms and eventually hopefully some time this year actual view item pages that concentrate much more volume on cataloged items.

Matt -- KeyBanc Capital Markets -- Analyst

Thank you.

Operator

Our next question or comment comes from the line of Marvin Fong from BTIG. Your line is open.

Marvin Fong -- BTIG -- Analyst

Just two questions if I could. First one on Envios Flex. If you could just give us an idea about just the cost advantage of Flex versus some of the other last mile solutions that you guys currently use. That would be very interesting. And also in terms of the other cities, major cities you're thinking about entering, give us a sense of how much those areas represent in terms of GMV? And then secondly, on merchant services, the acceleration in growth. If you can just add some color on what exactly is driving that? Is just general improvement in online activity by the sites, or is there something you guys are directly going to improve the TPV growth in that channel? Thank you.

Pedro Arnt -- Executive Vice President and Chief Financial Officer

Okay. So, first of all, the current version of Flex is not a significant driver of improved cost. It is a significant driver of improved delivery times. Flex is what enables same-day delivery for example. And so, that's really the focus. And it's also in many markets especially for large concentrated urban areas a very quick way to onboard merchants, because they continue to use their same-delivery infrastructure, but now powered by our technology in our capacity to deliver.

In terms of what we're trying to accomplish with coverage of Flex, we're going to start rolling it out in the large urban areas in different countries. I don't think we have the data right here what percentage of our sales Sao Paulo, Rio Minas will represent in Brazil. But remember that, that doesn't mean that you get 100% of the volume in those countries. So I think if we look at Buenos Aires, that is probably a high-single digit, mid-single digit of total GMV in one large city. I think you can assume that even as we roll out other large areas, the initial phases are single-digits of our GMV if that. And then over time, we hope to be able to increase that adoption. Flex is one part of a multiple series of services. Fulfillment is another one; cross-docking is another one. And I think all of those combined is really what we're trying to grow in detriment of the DropShip model, which is the one where we have the lowest service levels and the least control over quality.

Marcos Galperin -- Co-Founder, Chairman, Chief Executive Officer & President

And going on to the merchant services question. I'd say that theme merchant services grew (ph) local currency (technical difficulty) 108% year-on-year. And we saw acceleration in all three markets, Argentina, Brazil and Mexico. So I think we have been improving (inaudible) that is what generated most of the growth is one extra factor. And year ago in Brazil, we had lost significant merchant and that lower growth (technical difficulty). So if you look at Brazil, we have had four quarters in accelerating growth. Q3 will grew more than Q4 -- sorry, Q3 will grew more than Q2, Q4 more than Q3 and now significantly more than Q4. That was have slight (inaudible).

Marvin Fong -- BTIG -- Analyst

Okay. Thank you, guys.

Operator

Our next question or comment comes from the line of Irma Sgarz from Goldman Sachs. Your line is open.

Irma Sgarz -- Goldman Sachs -- Analyst

Yes. Thank you for taking my questions. Congrats on the quarter. Regarding the marketing spend where you drove quite a lot of leverage this quarter specifically in Brazil. When we sort of think about that line going forward from here, how do you think about sort of the cadence for this going forward not just for the rest of this year but also for subsequent years. I would imagine that the building of the cited payment system and the building of the Pago brand, specifically in Brazil will require a little bit of marketing spend. Is that something that you'd expect to show up in that line or not really, and the same also for the deployment of the complete to suit of the Fintech solutions should that be something that impact your R&D line or your development line or again nothing too relevant to expect in terms of cadence of investments here in this line?

Pedro Arnt -- Executive Vice President and Chief Financial Officer

Okay. So as you know Irma, we try to not get into too much forward looking guidance, but I think they're both great questions, so I'll comment high level on them. I'll start with the R&D one. I think we continue to be very aggressive in trying to grow out the engineering pool and the number of engineers we hire. But I think even if we accomplish our hiring targets, there's a natural scale to the business. And so, I don't think you should seek too much margin compression from R&D spend. This is more about just focusing on reallocating engineers more and more to the new FinTech initiatives and of the incremental engineers more and more will get assigned to FinTech initiatives.

The marketing question is a great question. I think probably the best way to answer is your assumptions are correct. I think as we move into the remainder of the year and we begin to -- as I outlined begin to launch our commercial efforts in Brazil and Mexico to build out the two sided network that will mean incremental marketing spend. I think we're willing to acquire consumers for the wallet looking at longer term return profiles. So that could also generate greater marketing as a percentage of revenue investments.

And then, in general, the first quarter is one where we had very, very limited investments in brand advertising. If you continue to take a long-term view, which we do, I think brand advertising is an important complement to performance marketing and programmatic marketing. And we also have a second brand that we want to start building now, which is the payment brand. So that also means incremental investments. So I would assume that probably marketing is at a fairly high point in terms of efficiency and that there should be increased investment moving forward.

Irma Sgarz -- Goldman Sachs -- Analyst

That's great. Very Clear. Thanks.

Operator

Our next question or comment comes from the line of Tom Champion from Cowen. Your line is open.

Tom Champion -- Cowen -- Analyst

Hi. Good afternoon. I'm curious if you could talk about the revenue profile of off-platform TPV relative to on-platform. That's the first question. Also it seemed like shipping time improved a lot again. Could you just talk about the key drivers there? It sounds like Flex was a contributor, but anything else that might have contributed there would be great to hear. Thank you.

Pedro Arnt -- Executive Vice President and Chief Financial Officer

Sorry. As we try to gather some data points for the first question, can you walk us through the second one again, please?

Tom Champion -- Cowen -- Analyst

Sure. If I have it correct shipping times improved quite a bit relative to that to the fourth quarter, and it sounds like from your comments that Flex might have had something to do with that. I'm just curious if there were any other drivers there?

Pedro Arnt -- Executive Vice President and Chief Financial Officer

Sure. So Flex is still fairly small. Flex, like I said is mid-single digits of the Argentine GMV. So that's not really what's driving most of the improvements in time. I think most of the improvements in time are actually driven by improvements in the network both our managed network as we have better more percentage going through fulfillment, better delivery times in our cross-docking network, but also and this is important our transportation partners on the DropShip network have also improved significantly their delivery times. So sequentially, Q1 was the best quarter in terms of consolidated delivery times in the last five quarters, but it was fairly slightly better than Q3 and somewhat better than Q4. The dramatic improvement was over a year ago where Q1 of last year delivery times have really improved very much over the last four quarters as we built out the manage network.

Marcos Galperin -- Co-Founder, Chairman, Chief Executive Officer & President

Going to the first question regarding revenue (ph) profile off-platform that is off-platform, you mentioned revenue profile (inaudible) similar. There's on versus off-platform. In terms of revenue it's tricky because on-platform we don't charge, specific matter of policy for bundles (inaudible). Accordingly one difference there is that we usually see no useful financing and more product and revenues. The on platform and in MPOS unless the online merchant services, so there is one difference there. Another difference is that we look at frequency of use at probably wallet is a one where we see the (inaudible) impact is where wallet popular in terms of Argentina (inaudible) in those results versus other vertical.

Tom Champion -- Cowen -- Analyst

Got it. Thank you.

Operator

Our next question or comment comes from the line of Kunal Madhukar from Deutsche Bank. Your line is open.

Kunal Madhukar -- Deutsche Bank -- Analyst

Hi. Thanks for taking the question. Couple if I would. With regard to the payment launch or the more complete build out of the payments off in Brazil and in Mexico.

Pedro Arnt -- Executive Vice President and Chief Financial Officer

Sorry, can you speak up a little bit louder, we're having trouble hearing you.

Kunal Madhukar -- Deutsche Bank -- Analyst

Okay. Sorry. Thanks for taking the questions. Actually couple if I could. With regard to the new offerings that you're planning to launch within payment and logistics and in Brazil and Mexico, how does the comparative landscape kind of look in those countries for those services?

Pedro Arnt -- Executive Vice President and Chief Financial Officer

Okay. So let me start out with logistics very quickly. I think Mexico is a very competitive market in terms of the quality of the networks of some of the larger online retailers. Fortunately it's also by far our most efficient logistics network and so that allows us to be very competitive. But it is the market with the highest I think consumer expectation given what ourselves than other competitors are delivering. I think Brazil, both because of geographical complexity and distribution, but also the quality of existing networks, consumer expectations are probably a step behind as is the quality of service of our competitors still.

And so, maybe one way to characterize it is if we continue to deliver on our roadmap in Brazil, we think it puts us in a very competitive position as a leader in terms of quality of network. In Mexico, I think we need to deliver on our roadmap to continue to be among the companies with the best time, but it is a competitive scenario.

Kunal Madhukar -- Deutsche Bank -- Analyst

Thanks. And on the payment side?

Marcos Galperin -- Co-Founder, Chairman, Chief Executive Officer & President

The payment side I'd say, we are still in general is the most competitive markets in Latin America. As I said so, I think is the one that when we have grown with the most that usually an MPOS also is where we are growing out full bundle of quotes (inaudible) payments. We launch already those consumer merchant pays in the couple of quarters and we launched a functionality into asset management when we pay consumer the balance we had. So I think we have a very complete offering.

We are competing there with many players, but most of them are more -- have more of a niche approach where you get more focused on either acquiring or on the wallet side we believe that we have a more comprehensive approach. But Mexico, I would say, is less competitive than Brazil, but we also at an earlier stage and we're only now starting to invest more. We had growth on MPOS and we have (inaudible). And we have not yet rolled out the asset management solution which we will rollout in a coming quarters.

Kunal Madhukar -- Deutsche Bank -- Analyst

Thanks. And one other question if I could. You've done a great job kind of getting most of the different countries back into profitability. What's happening with Mexico? Why do we have lingering losses, of contribution losses from Mexico?

Pedro Arnt -- Executive Vice President and Chief Financial Officer

Two reasons. One of them I think you alluded to in your initial question. It's a more competitive market, where other competitors are also losing significant amounts of money. It's also a smaller market, so it doesn't have all the scale advantages Brazil or Argentina for example. And so, we've been fairly committed to continue to invest in that market, because the size of the opportunity is very large it's the second largest economy in the region. And additionally, we're fairly confident that at larger scale that business can have a healthy P&L as we see in other markets. And so it's a matter of continue to invest behind it, to make sure that we reach that scale as quickly as possible and hopefully faster and at more scale than competitors.

Kunal Madhukar -- Deutsche Bank -- Analyst

Thank you so much.

Operator

Our next question or comment comes from the line of Pedro (inaudible) from Bradesco BBI. Your line is open.

Pedro -- Bradesco BBI -- Analyst

Take comfort in knowing that its Latin American general that has communication problems not just start.

Operator

Mr. (inaudible) please go ahead with your question.

Pedro -- Bradesco BBI -- Analyst

Hello, can you guys hear me?

Pedro Arnt -- Executive Vice President and Chief Financial Officer

Yes, we can hear you now.

Pedro -- Bradesco BBI -- Analyst

Okay. Just wanted to come back to the comment you made on fulfilment in Brazil having lagged in the quarter. Just hoping you could maybe elaborate a little bit as to why that was? I mean are you seeing any kind of resistance from sellers? Is there any kind of friction, or maybe specific capability you guys are still building out at this point? And second question on the Brazil GMV. You guys mentioned apparel. Is there any specific focus from you guys at this point regarding specific categories to the extent you try to tap into these the second wave of growth for e-commerce. Thank you.

Pedro Arnt -- Executive Vice President and Chief Financial Officer

Yes. So I think that let's dig into numbers a little bit. Our fulfilment efforts in Brazil in terms of penetration and adoption by sellers were flat sequentially. That's not good. It's not that it's down. And I think information, yes, there still are friction points that we need to continue to solve for our merchants. In terms of onboarding inventory with us and that's what we're working on. And additionally, we also did pull back on the subsidies we were offering to fulfil through us. And that also had some impact on flat.

When we looked at the cross stocking network to packages that still work on our own network, but that are initially at the merchant location and we do both first mile and then cross dock and long haul and last mile that continues to trend positively and gained a few percentage points in terms of adoption last quarter. So I think to unlock once again the growth of fulfilment. It's a combination first and foremost the technology solutions to unlock the friction, and we could analyse and will be probably investing again in some incentives to get sellers to trial the fulfilment solution.

In terms of categories, I think we called out a few of the categories that we are focusing on building out, compelling user experiences to try to capture. Apparel was one of these and we called out is one of the fastest growing categories and I think we're performing very well there. But there's still room for more growth. It's a very large category. And we continue to work on consumer packaged goods, which is a very large category and a very high frequency category. We're still in much earlier stages there, but it's probably the next big one that we're focused on. Good stride there in Mexico in terms of selection, Brazil is the next market we begin to focus on.

Pedro -- Bradesco BBI -- Analyst

Great. Thank you very much.

Operator

Thank you. I'm showing no additional questions in the queue at this time. I'd like to turn the conference back over to management for any closing remarks.

Pedro Arnt -- Executive Vice President and Chief Financial Officer

Great. We apologize for the mess up on the communication, and we look forward to next quarter when we continue to give you updates on how the business is going. Thanks everyone, and hope to talk soon.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.

Duration: 73 minutes

Call participants:

Federico Sandler -- Head of Investor Relations

Pedro Arnt -- Executive Vice President and Chief Financial Officer

Mario Lu -- Barclays -- Analyst

Robert Ford -- Bank America -- Analyst

Ravi Jain -- HSBC -- Analyst

Marcos Galperin -- Co-Founder, Chairman, Chief Executive Officer & President

Marcelo Santos -- JPMorgan -- Analyst

James Friedman -- Susquehanna -- Analyst

Stephen Ju -- Credit Suisse -- Analyst

Matt -- KeyBanc Capital Markets -- Analyst

Marvin Fong -- BTIG -- Analyst

Irma Sgarz -- Goldman Sachs -- Analyst

Tom Champion -- Cowen -- Analyst

Kunal Madhukar -- Deutsche Bank -- Analyst

Pedro -- Bradesco BBI -- Analyst

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