MercadoLibre (MELI) Q4 2021 Earnings Call Transcript

MercadoLibre (MELI 1.98%)
Q4 2021 Earnings Call
Feb 22, 2022, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the MercadoLibre Q4 '21 earnings conference call.

Lissa Schreurs -- Investor Relations

Hello, everyone, and welcome to the MercadoLibre earnings conference call for the quarter ended December 31, 2021. I am Lissa Schreurs, investor relations officer for MercadoLibre. Our chief financial officer, Pedro Arnt, will be leading today's prepared remarks. Joining him on the line as chief executive officer of Mercado Pago, Osvaldo Gimenez, who will be available during today's Q&A session.

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 included in this conference call for a variety of reasons, including those described in the forward-looking statements and Risk Factors section of our upcoming Form 10-K for the year ended December 31, 2021, and any of MercadoLibre, Inc.'s other applicable filings with the Securities and Exchange Commission, which are available on our Investor Relations website.

I will now turn the call over to Pedro.

Pedro Arnt -- Chief Financial Officer

Hello, everyone, and thanks for joining our earnings announcements for this past quarter and the full year 2021. Before we delve into our Q4 performance and financial results, I'd like to begin by sharing some reflections on fiscal year 2021. Last year presented us with challenges and with those also came many more opportunities. With our team's resilience and focus on delivering on our strategic objectives, we've been able to overcome shifting pandemic lockdown measures, rising inflationary cost pressures and a highly competitive environment in the digital commerce space.

The final outcome was a year with record results across the board, sustained strong growth in key business metrics and top line, and improving margins and operating income for a second consecutive year. In commerce, we had another very strong year, reaching $28.4 billion in gross merchandise volume, a full year growth of over 48% in GMV on an FX-neutral basis. This represents an additional $7.4 billion over 2020's GMV, positioning us well ahead of competitors and market share in the region for yet another year. More importantly, we saw a sustained shift in consumer behavior on our platform.

Customer loyalty and retention are improving consistently, and our clients are buying more with us. On average, items per buyer were up by 17% on a year-over-year basis, growing over a strong 2020 baseline. Even with the reopening of physical stores, customers in Latin America have embraced shopping online, paving the way for further long-term growth in the region. We attribute this growing engagement and improving cohort behavior on our free shipping program that already delivers over 80% of GMV on our network at no cost to our buyers; continuous improvements in delivery speed; a robust buyer protection program and customer service; an enhanced loyalty program; and our increasingly wide assortment of products sold on our marketplace as we push into new categories.

All of this, in turn, has resulted in more than two-thirds of our GMV coming from organic, nonpaid traffic, mostly through our app, cementing our position as a pull rather than push business. On the fintech side, growth comes from both our established strength in the payments businesses and increasingly from our newer consumer-facing financial services businesses. Total unique fintech active users topped 51 million annually, with transactions per unique fintech active user also increasing steadily throughout the year as our product suite became more comprehensive. Originations on our credit book surpassed $3.8 billion this year as we improved our credit underwriting capabilities.

The credits business has become a core piece of our ecosystem, enabling merchants to invest in more inventory and working capital and consumers to finance their consumption needs in all of their touch points with our platforms. We also distributed over 1 million insurance policies during the year, and began rapidly expanding the portfolio of savings and investment products available to our users toward the latter half of the year with the launch of our crypto wallet in Brazil. Our payments business delivered consistent growth throughout 2021. Total payment volume reached $77.4 billion for the full year, growing 78% on an FX-neutral basis.

Considering just the off-platform total payment volume, we reached over $48 billion and FX-neutral growth of 97% year over year. We continue to onboard more merchants into our ecosystem, doubling the number of off-platform merchants year over year, reaching over 20 million unique payment collectors in 2021. We sold over 4.7 million mobile point-of-sale devices this year and are expanding greatly in Brazil and Argentina, while making important strides in Mexico, and we also launched the MPOS business in Chile at year's end. Regarding our financial model, we are increasingly focused on efficiencies and operational leverage across our expenses and cost basis while continuing to invest appropriately in our long-term growth to maintain our competitive leadership.

Our decided outcome is to construct a financial model that can gain overall market share while growing our profits. During 2021, net revenues grew by 78% year over year, reaching $7.1 billion on a consolidated basis. The revenue expansion was coupled with margin expansion at the EBIT level, improving by 300 basis points year over year, reaching a 6.2% EBIT margin in 2021, up from 3.2% in 2020 and a 6.7% loss in 2019. Our EBIT dollars reached $441 million in 2021, which translates to over $330 million in incremental EBIT dollars, compared to 2020 and $594 million of incremental EBIT when compared to 2019.

While there may be oscillations between quarters to accommodate for seasonality and product launches, we aim to deliver consistently growing profits over time on a full year basis. With that broad overview of the year, let's now jump into a deeper review of our fourth quarter results, starting off with the commerce business. During the fourth quarter, gross merchandise volume reached almost $8 billion, growing 32% on an FX-neutral basis despite challenging comps. Our two-year CAGR trend on an FX-neutral basis was relatively stable compared to the prior quarter, with a 71% growth in Q4, compared to 74% growth in the prior quarter of the year.

Our unique buyer base continues to grow year over year and sequentially, with 40.5 million unique buyers on our marketplace during the fourth quarter. Not only are we expanding our user base, but we are also increasing the number of purchases per unique buyer. In Q4, items per buyer grew by 14% year over year and are now over 50% higher than they were during pre-pandemic times. The higher engagement levels throughout the year were sustained across all of our key geographies.

The improvements in buyer experience are also linked to our relationship with sellers on the platform as we continue to increase assortment and improve the quality of our merchant base. We had close to 300 million live listings in Q4, and our seller base is diverse. Sales from official stores represented over 23% of GMV during the fourth quarter, and the remainder comes from an array of mid- and long-tail sellers. For the promotional season, we also ramped up our first-party assortment, reaching almost 5% of our total gross merchandise volume during the quarter.

During this promotional season, we also saw improvements in our logistics network. During the fourth quarter, we shipped over 275 million items, while decreasing our average delivery times and simultaneously lowering average shipping costs per order. Almost 90% of all our volumes were delivered through our managed logistics network, compared to 77% in the fourth quarter of 2020. The evolution of efficiencies and delivery times has also been significant.

For the fourth quarter, almost 80% of the volume was delivered within 48 hours and close to 60% of the volume was delivered within the same or next day when the purchase was made. Particularly for the items within our fulfillment centers, average delivery times are less than 24 hours. Volumes in fulfillment increased sequentially in Brazil, Mexico, Chile and Colombia this quarter. We are now able to handle heavy and bulky items within our fulfillment network, unlocking our potential to execute better service levels in consumer electronic categories like home appliances and white goods.

These continuous improvements in productivity of our fulfillment centers have enabled us to deliver cost efficiencies throughout the peak shopping season compared to last year. And therefore, we are encouraged to keep scaling our warehousing operations. Moreover, we continue to invest in additional capabilities and efficiencies in our cross-docking network. MELI Places, our network of pickup and drop-off points, have been leveraged to provide more services to our customers.

90% of our places are enabled now for both package pickup and drop-off. And we have already started using the technology rollout to receive returns from buyers in these MELI Places. MELI Places' network spans Brazil, Mexico, Argentina, Chile and Colombia already. The reliability of our shipping solution has thus become a key driver behind our Net Promoter Scores and we continue to believe that shipping is a key lever to drive higher e-commerce penetration throughout Latin America.

As a result, we remain committed to continuing to decrease delivery times and offering a wide variety of services to a larger range of customers across the entire region. Let's now turn to the FinTech business, starting with a review of our credit portfolio performance. We are very pleased to see that our credit book continues to grow as we expand our credit offering to a broader group of users without signs of behavior shifts in loan default rates. We closed the fourth quarter with a credit book of almost $1.7 billion after having originated close to $1.5 billion during the quarter.

Over 65% of these originations were consumer credit loans. In consumer credits, we saw for the second consecutive quarter, originations in the Mercado app outpacing originations from the Marketplace app, especially driven by personal loans offered through that Mercado Pago app. We finished the quarter with 7.4 million consumers with an active loan, and we have been consistently growing the base of prescored users with an active credit offer. This growth is driven by the strong combination of more user data from interactions with our ecosystem being fed directly into our risk and pricing models and continuous improvements in our technology models.

Looking into the future, we are excited about the role the credit business plays in our entire ecosystem. Growth will remain spurred on by increasing the knowledge we have of merchants and consumers and our continued access to several proprietary distribution channels to offer credit. We have developed an attractive and resilient business model that allows us to grow sustainably and adapt quickly when uncertain circumstances arise. We have been managing the default risk levels in our credit book very closely and observed sequential improvements in nonperforming loans during the fourth quarter.

Total nonperforming loans as a percentage of the outstanding portfolio have improved from 28% in the third quarter to 24%. And the allowance for uncollectibles has also reduced relative to the size of the portfolio sequentially. Our funding strategy has also evolved as the portfolio has matured over time, having ended 2020 with 20% of the portfolio being funded through external securitization while now having closed 2021 with 45% of the portfolio through external securitization. Our financial services offerings beyond credit are also showing important growth.

We reached 34.5 million unique active fintech users during the fourth quarter, growing 23% versus the previous year, and the new product launches are boosting engagement levels for these users. We had 22.3 million investment accounts in Q4, an additional 7.4 million compared to the same period in 2020. Users have also increased payment transactions for utilities and peer-to-peer transfers using the wallet throughout most of our key geographies. Digital account total payment volume, which includes these wallet payments, as well as card payments, reached $7.1 billion, growing 138% during the fourth quarter on an FX-neutral basis.

Within InsurTech, we launched the distribution of insurance for card and PIX payments in Brazil expanding on our insurance product offering. Our goal is to keep adding to these services such that the digital account becomes a more integrated offering, making it a seamless experience for individuals to concentrate their financial lives with us. Among the most recent launches is the trading function for cryptocurrencies. Within the digital account, all users in Brazil can now buy, hold and sell Bitcoin, Ethereum and the USDP stable coin.

Our cryptocurrency custodian partner will provide the blockchain infrastructure platform while we act as the distribution channel and user interface. Consistent with our other products, the crypto trading interface is very user-friendly, simple to navigate, secure, and inclusive, with a minimum investment value of only BRL 1. It is still early on in our crypto journey, but we are encouraged with the uptake we are seeing in the number of Brazilian users transacting with crypto in our wallet. Finally, I want to go over some of the highlights for our payments processing and acquiring business.

Acquiring TPV grew 51% in the fourth quarter on an FX-neutral basis, reaching $17.2 billion. On-platform and off-platform online merchants accelerated payment volume growth in the fourth quarter, surpassing 32% and 54% year-over-year growth, respectively, on an FX-neutral basis. The off-platform online payments are particularly improving in Brazil and Argentina, where we are adding new merchants to our base. In Brazil, the addition of PIX, as a payment checkout option online, is also gaining traction.

Our off-line payment solution with the QR network and MPOS devices are growing steadily, and the cross-sell opportunity for payment services is starting to come to fruition. The QR network continued to post triple-digit growth rates for TPV in Argentina, where we have our most matured QR network. And we are happy to see that we have been able to accelerate our expansion of the QR merchant base in Brazil and Mexico over the last few quarters. In Brazil, new active QR merchants are soaring as we leverage the PIX rails to introduce the QR network to long-tail merchants.

Furthermore, within SMBs, we have stepped up our go-to-market strategy and improved our capacity to convert MPOS device merchants to also use QR and vice versa. We also achieved some exciting milestones in the MPOS business in the fourth quarter, which grew 69% in TPV on an FX-neutral basis. We sold over 1.3 million devices across our core markets, a record sales mark for us. In addition, we made an important acquisition in the Chilean market by adding; Redelcom, a payment service provider to our ecosystem, allowing us to accelerate our expansion of financial services for local SMBs and micro merchants in Chile.

We are encouraged by the initial growth potential that we have seen as we ramp up our payment services in these new markets and transition SMB into digital financial solutions. With that, let's review the financial results for the quarter. In terms of net revenues, we delivered a record $2.1 billion on a consolidated basis, a growth rate of 61% in U.S. dollars and 74% on an FX-neutral basis for the fourth quarter of 2021.

Strong revenue growth on top of a record in absolute dollars was achieved despite headwinds in fintech monetization. Our fintech take rates over the total payment volume have been pressured by increases in interest rates, mainly in Brazil. The spread compression effect on take rate is about 10 basis points year over year. We recently announced a new pricing structure for our financing fees starting in 2022 to contemplate new interest rate levels and begin offsetting these pressured financing revenues and the subsequent impact to profitability.

On the other hand, we had a strong year-over-year improvement in take rates over gross merchandise volume in the commerce business, as well as the higher penetration of first-party sales, both of which are boosting our commerce revenues across many key geographies. Even more relevant than these two offsetting monetization trends is the increasingly positive impact on take rate coming from the credit business. Credit revenues reached almost $300 million during the fourth quarter alone, triple the value of the previous year. During the fourth quarter, our gross profit reached almost $853 million at a margin of 40%, a 320 basis point improvement, compared to the 36.8% in Q4 of 2020.

Our shipping operations were more efficient this quarter compared to last year, and we were able to further scale other costs associated with customer service, fraud prevention and collection fees for processing payments. Consolidated operating expenses represented 39% of revenues this quarter, similar to 38.7% in the fourth quarter of 2020, albeit with a different mix, and more importantly, with solid operational leverage across key expenses. General and administrative expenses were $148 million or 6.9% of revenues, down from 8.7% in the fourth quarter of 2020. Product development expenses were almost $180 million or 8.4% of revenues, compared to 8.8% last year.

We have scaled across our investments in product development, even while onboarding 4,000 additional software developers and data engineers to our employee base this year. Within sales and marketing, the 23.6% spending as a percentage of revenues, which is up from 21.3% last year, is explained by increasing bad debt allowances. Our credit books bad debt provisions, which are booked under sales and marketing expenses, have increased compared to the fourth quarter of last year due to the expanding credit origination. While this does add pressure to an otherwise scaling expense line, the incremental revenues I previously mentioned from the credit business more than offset the bad debt charges when looking at impact on dollar earnings.

Other sales and marketing investments in marketing activities such as branding, customer acquisition, buyer protection programs and other incentives and sales initiatives are showing operational leverage of 170 basis points as a percentage of total revenues when compared to the same quarter in 2020. Consequently, our fourth quarter EBIT was $23.3 million at a margin of 1.1%, an improvement, compared to the negative 1.9% EBIT margin loss we had in Q4 of last year. During the fourth quarter, our interest income was positively impacted by higher interest rates reaching $53 million and more than doubling compared to last year. Similarly, interest expenses were $54 million, offsetting gains from interest income.

We also had a foreign exchange loss of almost $57 million in the quarter, mainly due to the difference of the Argentine official exchange rate and the blue chip swap rate at which we effectively repatriate retained earnings from the Argentine subsidiary. The resulting net loss after income tax in the quarter was $46 million, a negative 2.2% margin over revenues which is an improvement, compared to last year's negative 3.8% net income margin. As I noted previously, we are closing 2021 with several important achievements in terms of growth, and our ability to deliver consistent improvements at the EBIT margin level for the full year marks our long-term commitment toward growth with sustained operating leverage and increasing earnings. To conclude this section, I'd like to reiterate that there remains a huge runway of opportunities ahead of us.

Even after the significant uptake in digital services we experienced over the last couple of years, e-commerce penetration in our region is still only at around the 10% range. In the same light, even with all of the recent advances in the financial technology space in Latin America, we still live in a context where most people have difficulty accessing credit, savings and insurance products and controlling their finances. This emboldens us to remain committed to our mission to democratize access to commerce and financial services throughout the region. There is still a lot to build, and we trust that our continuous investments in technology and human capital will be determining factors in our future success.

I'm also happy to announce that we are releasing our annual impact report simultaneous with our 10-K, allowing us to communicate with shareholders, both our financial and nonfinancial objectives and performance. We believe this allows for a more cohesive understanding of our value-creation capacity and its impact over time. We are also publishing our first sustainability bond report in connection with the 2026 sustainability notes issued a year ago, with 15.5% of proceeds already having been allocated this past year. Finally, we can now share an in-depth analysis of climate-related risk factors following the framework of the task force on climate-related financial disclosures that we conducted during 2021, and we will be deep diving into in coming years.

We are proud of this integrated approach and are committed to improving upon it year on year and encourage you to review the material to get a clear understanding of our sustainability programs and their impact. Thanks, everyone, again, for joining us today to review these results, and we're happy to take your questions and to connect with you over the next few weeks.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from Andrew Ruben with Morgan Stanley.

Andrew Ruben -- Morgan Stanley -- Analyst

Hi. Thanks very much for the question. It was helpful to hear about the commitment toward growth with sustained operating leverage. I was curious if you could please zoom in a bit on how 2022 fits into this narrative, namely your incremental investment focus areas for the year.

And conversely, any areas where you could see incremental expense leverage? Thank you.

Pedro Arnt -- Chief Financial Officer

Hi, Andrew. As you know, we don't guide. I think conceptually, we will continue to invest behind the key areas that are a part of our strategy: logistics, category expansion, the rollout of our different fintech products, our credit business, which we are very encouraged by. And as we've said, I think growth and making sure we're investing behind these many growth opportunities that still have significant run rate is our No.

1 priority. Having said that, given the size of the business and the operational leverage that is still inherent in the business model, we enter a phase where we think we can continue to invest, maintain our focus on share gains and sustaining our leadership and yet still deliver modest yet consistent increase in earnings over a multiyear cycle. So you shouldn't see any departure from what you've been seeing in terms of the area of focus. We're pleased with the portfolio of services we have.

We think it's ample and many of these are in the early stages and have significant room to grow. And even the more mature businesses where we see really strong capabilities to sustain and potentially even increase our leadership.

Andrew Ruben -- Morgan Stanley -- Analyst

All very clear. Thank you.

Operator

Our next question comes from Irma Sgarz with Goldman Sachs.

Irma Sgarz -- Goldman Sachs -- Analyst

Yes, hi. Thanks for taking my question. There was no direct mention of advertising revenues this quarter. I think there was maybe a comment about monetization.

And I know it's still a small percentage of overall sales, but with a very strong organic traffic numbers that you spoke to and the user engagement stats that you provided, it feels like 2022 could be a year where this is becoming overall more important, and I would imagine it's also accretive to the overall margin story that we're seeing play out. Could you just maybe sort of talk a little bit about what you're seeing in terms of new developments on the advertising front and what incremental maybe investments you're making?

Pedro Arnt -- Chief Financial Officer

Yeah, Irma. So thanks. We continue to see a very, very significant opportunity in the advertising business. It's a high-margin business with gross margins above 70%.

As we grow our first-party business and as we get into new product categories, such as consumables that have very large advertisers, we're seeing some really interesting work in combination with those advertisers, along with our 1P business, but also behind the marketplace. The advertising business as a percentage of GMV has crossed the 1% mark, which for us is the first big milestone in a multiyear trajectory that we think could deliver multiple times that. And then we see really good progress so far in a fast-growing, high-margin business that's very, very synergistic with what we're doing on the marketplace. And also, we began to now integrate some advertising placements and advertising features into the payments app and some of our payments products as well.

So we will report in the future when we think it makes sense, but it's yet another very encouraging business that is performing well and that we will continue to add engineering talent and innovate on because there's a lot of potential there.

Irma Sgarz -- Goldman Sachs -- Analyst

Great. Thank you.

Operator

Our next question comes from Thiago Macruz with Itau.

Thiago Macruz -- Itau BBA -- Analyst

Hi, guys. Thanks for taking my question. You guys seem to be at the very beginning of a monetization trend of your e-commerce business. And I wonder if you could give us some feedback on the initial reaction of sellers to your first attempt to charge for your fulfillment services in Mexico, in Brazil? And if I may, on the credit side of the equation, we already see some NPL deterioration for banks exposed to lower-income clientele in Brazil.

We're not seeing that for you guys. Is that a case to be made that your credit business in Brazil is more exposed to higher income clientele? Can you discuss that with us? Thank you.

Pedro Arnt -- Chief Financial Officer

So starting with monetization on logistics, we haven't seen a negative impact of this. Our logistics network as it's consistently driven better delivery times, better conversions, therefore for merchants, I think, justifies initiating monetization. Having said that, I think it's still early, so let's keep tracking that and see how the monetization efforts progress throughout the year. So far, so good.

And if you look at the Mexican business, you'll see that Mexico delivered in the first quarter -- fourth quarter, one of its best direct contribution margins in this multiyear investment cycle we've been in, in Mexico. That's a consequence of many factors of that improving P&L as it continues to execute toward profitability. But one piece of that is the better overall economics on the logistics business, and charging is a piece within that. So, so far, so good.

Osvaldo Gimenez -- Chief Executive Officer of Mercado Pago

Thiago, with regards to credit, we have continued to see improvements in our NPLs. Our clients, our users tend to be middle to lower income. So we are happy with how we have been improving our risk models and monitoring how much risk we take.

Pedro Arnt -- Chief Financial Officer

Yeah. I think just a quick conceptual complement there. At the end of the day, the reason that we think there is so much potential in the credit business is directly linked to our ability to underwrite credit for segments of the population that historically have been very difficult to underwrite for, either because of cost to serve or the actual underwriting capability. Again, we need to continue to monitor this.

It's early stage. But everything we've seen so far makes us very encouraged in the capabilities we've built in-house to be able to serve that very large portion of the Latin American population that has historically been starved for credit.

Thiago Macruz -- Itau BBA -- Analyst

Fantastic, guys. Thank you.

Operator

Our next question comes from Bob Ford with Bank of America.

Bob Ford -- Bank of America Merrill Lynch -- Analyst

Hey, Pedro, Osvaldo, Lissa, thanks for taking my question, and congratulations on all the operating strides. In the presentation, there is a mention of a strong scale up in the credit card business. Can you put some numbers around that in terms of the Brazilian credit card base today, average credit limits, the take-up of those limits and bad debt trends in that product? And are those card balances reflected in the loan book numbers that you gave earlier, Pedro?

Pedro Arnt -- Chief Financial Officer

Let me go from back to forth, Bob. Yes, they are part of the books that we disclosed. Roughly, 17% of the credit on the balance sheet is from the very nascent credit card business. It's very early, Bob.

We're scaling it well, hence the mention. As you know, MELI as a whole, is a phenomenal distribution platform. But let's wait a few more quarters. This is a very new product.

It's in one country, and then we can begin to give more disclosure and visibility. So far, everything we've seen is a part of our enthusiasm with our ability to efficiently underwrite credit and serve credit. So, so far, so good. but that's one of the newest products within the credit portfolio.

So again, another case of something that has enormous potential, but let's cautiously and diligently build that out and keep you guys posted on how it's performing.

Osvaldo Gimenez -- Chief Executive Officer of Mercado Pago

And without providing any numbers, probably, the other thing I want to add is that, we are very excited with how people who have a credit card are showing increased engagements with our platforms and also increased Net Promoter Scores.

Bob Ford -- Bank of America Merrill Lynch -- Analyst

And is it fair to say, Osvaldo, that you're starting off with relatively low limits and being very prudent in terms of the way you're moving forward? Because you really don't see this in the Pago kind of user numbers, whether it's unique users or frequency?

Osvaldo Gimenez -- Chief Executive Officer of Mercado Pago

That's correct. We're starting with low limits, and we will increase them afterwards.

Bob Ford -- Bank of America Merrill Lynch -- Analyst

OK. And then my second question, I'll make this the last one, is if you could comment, please, on the Mexico City mass transit deal, right? I just wanted to confirm that it's exclusive, as well as the reported transaction fee, which seemed a little bit high relative to what I would have expected. And I was just hoping -- or hoping to get a little bit of color around the service commitments that you're making? Are you required to make to win that base of business?

Osvaldo Gimenez -- Chief Executive Officer of Mercado Pago

Yes. We are very excited with the Movi transaction. And there are roughly 10 million daily passengers in Mexico City, and they will be able to top up their cards using our app or even using our POSes. We believe it's a tremendous deal.

The economics also are reasonable, and it would be profitable, and it will allow us to significantly increase, we believe, the number of active users in the city.

Bob Ford -- Bank of America Merrill Lynch -- Analyst

And Osvaldo, it's an exclusive contract, right? Two years? Is that correct?

Osvaldo Gimenez -- Chief Executive Officer of Mercado Pago

Exclusive. That's correct, yes. Yes.

Bob Ford -- Bank of America Merrill Lynch -- Analyst

Great. Thank you.

Operator

The next question comes from Marcelo Santos with J.P. Morgan.

Marcelo Santos -- J.P. Morgan -- Analyst

Hello. thanks for taking my question. The first question is regarding the new pricing structure for the fintech that you mentioned starting 2022. How much do you think this could offset the increase in interest rates? And could you give a bit more detail on how this will impact different products that you have? This is the first question.

And the second question is, if you could explain a bit more how PIX is helping the QR code payments? I couldn't understand that very well. Thank you.

Osvaldo Gimenez -- Chief Executive Officer of Mercado Pago

Hi, Marcelo. With regards to PIX, what we are seeing is I think there are -- there's a different effect online and offline and then offline also a different effect in the long tail and with large merchants. Let's start with online. We are very excited with online -- with PIX online because mostly, there was really no debit cards online in Brazil.

And so this is, we believe, incremental volume, that we are seeing not only on MercadoLibre, but also on merchant services and it already represents double digits of the PPV we are seeing in merchant services. So we are very excited with PIX there. With regard to offline, I'd say, in the long tail, what we're seeing is, in some cases, it's the same merchants who have an MPOS device who are using PIX, and in some cases, probably some merchants are switching and instead of using a POS device, they just rely on PIX. The usability is not great because in most cases, they are typing in either the mobile phone or the email information to make a PIX transfer rather than scanning a QR code, but we are seeing that it's taking some traction.

And furthermore, what PIX is allowing us is reaching out to large merchants. For example, we are working with Burger King over the CNA, and they are using Mercado Pago to collect PIX, and this is a small portion of their revenues offline because mostly it's cards to cash. But we are excited with how it is growing and it is allowing to reach these merchants.

Pedro Arnt -- Chief Financial Officer

Great. On the pricing piece, Marcelo, a couple of thoughts. So the first one, if you look at the presentation and you look at fintech take rates, you'll see that despite the compression, because of interest rates, the growth of the credit business, the fact that we did adjust some prices in December on the [Foreign language]. So the interest-bearing purchases by consumers, we had already started to adjust pricing, offset a lot of the take rate compression.

So I think we've been less hit than others. Second piece, as we rolled into 2020, we've also began to adjust prices on installment purchases on the [Foreign language] off-marketplace. And therefore, we are passing on a lot of the incremental interest rates to merchants who then can decide how much of that to eventually pass on to their consumers because it's the free installment product. We've done this also understanding what competitive movements have been -- and that's why we took our time and decided to not move too quickly in the fourth quarter, understanding that we had some interesting revenue streams that were allowing us to offset some of the compression.

So going forward, I think that's what's happening, right? There's clearly an environment of higher interest rates, primarily in Brazil, we think that's probably here to stay for some time, and we've intelligently adjusted pricing. On the marketplace, where as we had said in the last earnings call, we were going to hold steady during the shopping season and absorb a lot of those incremental costs. And you will see that in some of the commerce take rate evolution Q-on-Q. As December has finished and we've rolled into 2022, we've also began to adjust pricing on the marketplace.

We've done it in a more, I would say, surgical way where it hasn't simply been raising prices. A lot of that has been a more intelligent installment engine that will allow different lengths of installments depending on product profile, requirement of credit on that product and conversion rates, but that allows us to offset some of the interest rate spread compression by offering less lengthy credit on products where that doesn't have such an impact on demand elasticity. So that should also be something that helps us offset the spread compressions from the rising interest rates on the commerce business throughout the year.

Marcelo Santos -- J.P. Morgan -- Analyst

Perfect. Thank you very much.

Operator

Our next question comes from Kaio Prato with UBS Bank.

Kaio Prato -- UBS -- Analyst

Hi, everyone. Thank you for taking my question. So my question is related to Mercado credit solution. So we saw that the credit portfolio and revenues continues to increase steadily.

While amid this environment of higher policy rates, we have been seeing some announcements made by the company, as you mentioned during this call, such as higher prepayment rates for MPS business in Brazil. So having said that, my question is related to the level of interest rates that you are charging to consumers today. I would like to understand if you are increasing rates for new originations because of this environment of higher rates as well. Or as we are starting to see better trend in terms of NPLs, we could start to see some interest rate normalization, both for consumers and measurements going forward?

Pedro Arnt -- Chief Financial Officer

Great. So look, if you look at the aggregate numbers, the actual implied APRs in the consumer book in Brazil are down sequentially into the fourth quarter. Now you have to be careful because there are multiple products and multiple segments that we're expanding into. And so you really need to be able to look at this at a more segregated level, which we don't necessarily disclose.

But all in all, I think what we're seeing is longer legacy cohorts, better understanding of older cohorts, and also newer products with different risk profile and therefore, lower APRs. So it's not like we've simply adjusted APRs up across the board to reflect the changing macro environment. I think the complexity of the underwriting models and the overall diversity of the books has really been a big part of why we continue to be able to grow the business significantly and have seen an actual improvement in NPLs over the last few quarters.

Kaio Prato -- UBS -- Analyst

OK. Thanks.

Operator

Our next question comes from Marvin Fong with BTIG.

Marvin Fong -- BTIG -- Analyst

Great. Thank you for taking my questions, and congratulations on the quarter. Two questions, if I could. Just first, I guess, a high-level question.

Just we're seeing several competitors with marketplaces acquire more and more local sellers, Brazil-based sellers in that country. Just wondering if you could comment on your strategy there? What is it about the MercadoLibre marketplace that will keep local sellers allocating their inventory to your fulfillment centers? Is it -- is it a matter of your speed delivery and fulfillment capabilities? Or is there some pricing component? Just your thoughts there would be great. And then a second question on lending. You mentioned how you're leveraging your proprietary platform.

And I'm just curious if you could comment just how the launch of open banking is affecting that? Do you feel like open banking really isn't helping you expand the credit book and you're just going to primarily leverage your own data to make your credit decisions for both consumers and merchants? Thanks.

Pedro Arnt -- Chief Financial Officer

Great. So first of all, I think we continue to focus primarily on ourselves and what we can offer our merchant base, and even more importantly, our consumer base. Merchants will probably trial and test multiple marketplaces. At the end of the day, the determinant factor is where consumers are buying and why consumers are opting for one platform over the other.

When we look at the MercadoLibre value proposition for consumers, we are very confident that it is significantly improving from an already solid base. So the combination of widespread selection across a growing number of product categories that allow us to service more and more of the overall needs of households; our best-in-class, probably if you look at it regionally, logistics network that continues to lower cost and increase delivery speeds and amount of inventory delivered within 24 hours; the widest and most available free shipping program where over roughly 80% of volume is free shipping to the consumer; a loyalty program with expanding benefits; a very, very strong value proposition now in terms of content distribution of premium content; subscriptions to the highest level of our loyalty program are growing very nicely, which shows that Latin American consumers, as they see the offering and the loyalty program, are increasingly willing to pay to reach that level six, even before their behavior on MELI gets them there for free. And then the overlay with all the fintech offerings. So our ability to extend credit in different formats, whether it's the MELI credit card now that gives you longer-duration installments on the marketplace; if it's personal loans; if it's buy now, pay later-type products, is also a strong advantage because the visibility we have to that consumer and the way we can score him more efficiently.

So going forward, I think we will continue to focus on these areas of competitive differentiation for our consumers. And we think that if we do that, we will be able to continue to grow the business, sustain our leadership position and continue to offer what we think is a very, very solid value proposition to our users. And again, merchants, above else, they value volume. If you look at pricing, I think we have a solid pricing for merchants that reflects the value we add to them.

I think we've never been price followers; we've typically been price leaders. But the quality of the service and the volume that we offer, I think, allows us to charge what we charge without seeing significant churn to other merchants. So at the end of the day -- sorry, to other platforms. Merchants will be multi-platform, we're not seeing churn, and we're seeing a consistently better experience being delivered to our buyers.

And we think that that's what is the most relevant element in the competitive dynamic.

Osvaldo Gimenez -- Chief Executive Officer of Mercado Pago

Marvin, with regards to credits, I agree with you. Definitely, open banking is a significant upside. First of all, we believe there is a huge opportunity to expand credit throughout the region, and we are already doing that. And open bank will allow us to get more information from our users and also to initiate payment transactions.

Actually, Mercado Pago is among the first institutions that have been issued a payment initiation transaction license, and we are already testing that product with a few users.

Marvin Fong -- BTIG -- Analyst

Thank you so much. Thank you, both, and congratulations.

Operator

Our next question comes from Trevor Young with Barclays.

Trevor Young -- Barclays -- Analyst

Great. Thanks. Two, if I may. First, you saw a nice reacceleration in unique wallet payers and the strongest net adds in quite some time.

Can you help us understand what drove that reacceleration? Was it the crypto rollout, or something else? And then second question, on the consumer credit side, could you comment on average loan size and delinquency rates for loans originated within marketplace app versus the Mercado Pago app? Is there any notable difference as you mix shift more originations to the Pago app? Thanks.

Osvaldo Gimenez -- Chief Executive Officer of Mercado Pago

Hi, Trevor. Let me start with the first one regarding unique wallet payers. I think we have seen strong trends in all three countries. Particularly in Argentina, we have seen a reacceleration toward the end of last year.

But also, we have seen strong numbers coming from both Brazil and Mexico. Crypto definitely is another net positive, but it's still early. We only launched crypto in mid-December. So there's very little effort in the fourth quarter coming from crypto.

And with regards to the second question, I'd say that, increasingly, what we are seeing is a shift -- actually, not a shift. But as we rolled out lending in the Mercado Pago app that has been gaining share, and in some countries, it already represents over 50% of the personal loans we give -- of all the consumer loans that we give, so far, we have not seen a very significant profile between one and the other, yellow app loans and blue app loans. Although we do have this concern that you have that they-- are deemed to be a little bit more risky because it's money that the users can withdraw from an ATM or from their bank account and not necessarily buy something we did. However, so far, we have not seen very different numbers.

Pedro Arnt -- Chief Financial Officer

I think on the second question, we don't really disclose any data on the differentiating profiles of credit on-marketplace versus off-marketplace. The comments in the prepared remarks, I think, aimed at disclosing how our credit business is not any longer primarily an on-marketplace credit business, but it's actually a credit business that can aspire to the entire TAM away from the MELI marketplace. If you look at the size of our credit book and the potential size of the credit book, you'll see it's still a drop in the ocean in what the overall demand for credit is among these consumer segments that we're operating in. So the size of the addressable market is enormous.

And I would even venture to argue that it can accommodate for many quality players without affecting the growth of any of them. So this is far from a zero-sum game once we move into the open Mercado Pago app and away from marketplace consumers. And obviously, on the marketplace, we have significant advantages over any other credit offering, whether that be through a credit card. So I think that's what we were trying to disclose, how much of the credit origination already occurs away from marketplace and how that sets us up for significant long-term growth.

We don't give any granularity on how those consumer profiles or books defer.

Trevor Young -- Barclays -- Analyst

Great. Thank you, both.

Operator

Our next question comes from Deepak Mathivanan with Wolfe Research.

Deepak Mathivanan -- Wolfe Research -- Analyst

Great. Thanks for taking the questions. Just a couple of ones. So first, Pedro, a large portion of the volume is already on one-day and two-day shipping windows.

Where do you aim to take these service levels maybe in the next like 12 to 24 months? I mean I'm asking this because shipping and career cost is still delevering gross margins. But curious how we should think about the growth in these expenses? And then another question on the credit business. Clearly, you're integrating these into various products. But how should we kind of think about the sustainability of this in the next few quarters? Do you think whether any external factors like tightening credit maybe for cash advances and some of the other places outside of your platform that's helping it? Or like you said, is this still kind of like in early innings for you?

Osvaldo Gimenez -- Chief Executive Officer of Mercado Pago

Hi, Deepak. So let's start with the second question with regards to credit. I think that despite the tightening environment, I think that we are seeing improving NPLs, and we are comfortable we'll continue growing the business. What we have been doing is increasing the part of the portfolio, which is securitized or funded by third parties at the beginning of last year, that was roughly 25%.

And by the end of the year, it was more like 45%. So our share of the portfolio is diminishing, but we are comfortable that we can continue growing all of the credit products.

Pedro Arnt -- Chief Financial Officer

So Deepak, a couple of things. If you look at annualized gross profit evolution, so first point here is, yes, you do see compression. But when we actually look at the shipping piece, we see some interesting improvements in margin structure despite the significant improvements you mentioned in terms of percentage of total shipments delivered same day and next day. So we're at nearly 30% same day, another 31% next day, which is really very, very solid execution on the network, and that's for the entire region.

Individual markets are even stronger than that. And shipping costs, when we compare to Q4 of last year, actually scaled positively. A lot of the gross margin pressure you see is coming more from the scale-up and the build-out of the 1P business and a few other line items. So very encouraged with shipping.

I think we continue to look to follow that same pattern. How can we continue to drive faster shipping? We're seeing some really, really interesting results from our crowd-sourced shipping solutions that we've launched in Brazil and Mexico recently. So I wouldn't attribute the gross margin pressure entirely to the evolution of shipping, that actually, if we look at Q4 of last year to Q4 of this year, scaled despite the improvements in delivery times.

Operator

Thank you. Our next question comes from Richard Cathcart with Bradesco.

Richard Cathcart -- Bradesco BBI -- Analyst

Hi, guys. Good evening. Thanks for taking my question. So just a question here on direct costs in Brazil.

If we look at kind of quarter on quarter was a pretty large increase in direct costs in Brazil. So perhaps you could just give us a little bit of information about what was exactly driving that and whether it was more on the COGS or in the SG&A or a combination of the two? Thank you.

Pedro Arnt -- Chief Financial Officer

Yeah. So Brazil has, I think, I've mentioned some of them in the previous question, but just to give you greater detail. If you look at the evolution of the Brazilian P&L, first of all, if you just look at cost, you will see an increase in the provisions for bad debt from the credit book. Now remember that that's more than offset by credit revenues.

So in terms of net contribution at the EBIT level and net income level, the credit books are positive, but they do generate significant increase in sales and marketing year on year because of how much the credit books have grown. Second factor there is the first-party business. That has grown a lot versus prior year. But even sequentially, when you get into Q4, typically, we lean into the 1P business more aggressively during the holiday season, and that business is still subscale, and therefore, drives a lot of margin compression.

And then the third area that we continue to invest aggressively in and also generates some of the compression is the Q4 promotional season. So just if you compare it to Q3, there's clearly incremental marketing spend during Q4. That makes for the fourth quarter a seasonally weaker quarter than the prior three. And those three items explain most of the sequential compression in margins at a Brazil level, but also at an aggregate level.

Richard Cathcart -- Bradesco BBI -- Analyst

Perfect. Thanks very much.

Operator

Our next question comes from Stephen Ju with Credit Suisse.

Stephen Ju -- Credit Suisse -- Analyst

OK. Thank you. So Pedro, I think in your prepared remarks, you talked about units per buyer continuing to improve year over year. And maybe this is cutting things a little bit too fine, but can you talk about the behavior of your newly onboarded users versus existing users? And where you are getting most of this bump in transaction velocity from? And secondarily, now that Envios is handling the vast majority of shipped units, the optimist in me wants to start thinking about what you might do to combine deliveries over time to take down the shipping costs even further.

So you saw this with other global operators. You used to ship one order per box. And over time, you start to get multiple orders in the same box. So how far away do you think you are in terms of getting such a move implemented? Do you need greater order density to get that done? Thanks.

Pedro Arnt -- Chief Financial Officer

Thanks, Steve. Great question. So look, we don't share cohort analysis. We did -- we do show, and you can back into the math, right, the buyer frequency for the first time ever in the fourth quarter of '21 surpassed seven purchases per buyer in the quarter.

That's up from almost a whole one unit less per buyer per quarter a year ago. So even within two pandemic-influenced years, I would say this one less so because reopenings are much more widespread. And the successful items per buyer are up quite nicely versus fourth quarter of last year. Implicit in that is that there isn't any material change in cohort behavior that's worth disclosing.

Second piece on Envios, I don't want to get ahead of myself, but I think your readout is accurate. We are now very focused on interface and products that will help us drive larger baskets. That comes with tweaks to the interface, probably with certain monetization incentives for users to place more items into a basket. And it also requires that we get very good at where we route inventory from given the growing number of warehouses that we have that split inventory.

But that will be a significant focus during this year. And hopefully, we can see results in terms of greater items per order.

Stephen Ju -- Credit Suisse -- Analyst

Thank you.

Operator

Our next question comes from Ed Yruma with KeyBanc.

Ed Yruma -- KeyBanc Capital Markets -- Analyst

Hey, guys. Thanks for squeezing me in. Just two quick ones for me. I guess, first on the NPLs.

Obviously, some nice improvement quarter on quarter there. But bad debt expense is still higher. I guess, do those overtime converge, i.e., bad debt expense comes down as NPL comes down? Was there some kind of expensing that allowed you to pull the NPLs down? And then as a follow-up, just Pedro, on your prepared comments, you talked about kind of earnings, modest earnings growth. Are you talking about margin or earnings dollars? Thank you.

Hello?

Pedro Arnt -- Chief Financial Officer

Yeah. No, we're here. Sorry, we were just caucusing on your first question. So I'll tackle the second one first.

Yes. So look, at the end of the day -- first of all, certainly, we would like to manage the financial model for incremental EBIT power in dollars and earnings per share. To accomplish that, I think it would be ideal if we can drive enough operational leverage in the financial model, so that that also means modest margin gains. Now we're operating across multiple product lines with significant and different competitors across many of these in many different regions.

And because we don't give specific guidance, I want to be cautious. What we're saying here is there's a strong commitment on our part to increase our earnings capacity given the size and scale of our business. We believe that there are continuous operational efficiencies that if we focus on, we can deliver that growing earnings power. If that also means margin increases consistently over a multiyear period, excellent.

But the first order of priority is to secure that we're increasing our earning power, whether that comes through margin increases or potentially flat or down margin. But given the scale of our top line, that still means incremental EBIT dollars and net income dollars, then I think that still accomplishes the overarching goal that we're shooting for.

Osvaldo Gimenez -- Chief Executive Officer of Mercado Pago

With regards to NPLs and bad debt provisions, let's start with NPLs. The numbers are still high at 24%. But you have to bear in mind that the duration of our loans is pretty short, typically consumer loans having a duration of three months. So the denominator, the portfolio we have is rather short.

However, the bad debt stays there for a year. Now when it comes to bad debt provision, I think it's mostly related to the credit card business, which have been growing very fast. Since we only started that business six months ago, we don't still have enough track record and are being cautious in the provision of potential bad debt.

Ed Yruma -- KeyBanc Capital Markets -- Analyst

Got it. So just I'm clear, there wasn't any change in how you classify nonperforming? Because I think you changed it a couple of quarters ago. So that treatment is still the same as how you had previously treated it?

Pedro Arnt -- Chief Financial Officer

Right. So we've only changed it once, and we haven't changed that again.

Ed Yruma -- KeyBanc Capital Markets -- Analyst

Thank you.

Operator

And this concludes the Q&A portion of today's call. I'd like to turn the call back over to our host for any closing remarks.

Pedro Arnt -- Chief Financial Officer

Great. Thanks, everyone. A lot of great questions. We apologize we weren't able to get to everyone, but we'll make sure to cycle back.

And we look forward to being able to speak again in a few months and report the beginning of the year that we are very enthused about and where a lot is going on at MELI. So we will speak again in three months. Thank you.

Operator

[Operator signoff]

Duration: 74 minutes

Call participants:

Lissa Schreurs -- Investor Relations

Pedro Arnt -- Chief Financial Officer

Andrew Ruben -- Morgan Stanley -- Analyst

Irma Sgarz -- Goldman Sachs -- Analyst

Thiago Macruz -- Itau BBA -- Analyst

Osvaldo Gimenez -- Chief Executive Officer of Mercado Pago

Bob Ford -- Bank of America Merrill Lynch -- Analyst

Marcelo Santos -- J.P. Morgan -- Analyst

Kaio Prato -- UBS -- Analyst

Marvin Fong -- BTIG -- Analyst

Trevor Young -- Barclays -- Analyst

Deepak Mathivanan -- Wolfe Research -- Analyst

Richard Cathcart -- Bradesco BBI -- Analyst

Stephen Ju -- Credit Suisse -- Analyst

Ed Yruma -- KeyBanc Capital Markets -- Analyst

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