Mercado (Minutes): It is not yet certain whether the free shipping threshold will be lowered in other markets.

The following is$Mercadolibre(MELI.US) the Q2 2025 earnings call minutes, for financial report interpretation please refer to "Growth or Profit? The Choice of 'Latin America's Alibaba' Mercado"

I. Review of Core Financial Information

II. Detailed Content of the Earnings Call

2.1 Executive Statements on Core Information

Business Advancement Pace:

1) E-commerce Platform:

▪ In Brazil, the company has lowered the free shipping threshold for the third time in five years. This strategic move aims to attract new users to its e-commerce platform, increase engagement from existing buyers, and expand the range of products. Following the implementation of new pricing, the enhanced value proposition led to accelerated growth in Gross Merchandise Volume (GMV) in June.

▪ In Mexico, the second quarter performance was notable, with significant acceleration in GMV growth. The number of products sold on the platform grew at the fastest pace in nearly two years, thanks to the strong performance of the company's 1P (first-party) and cross-border business.

2) Advertising Business:

▪ In the second quarter, the company launched integration with Google Manager, marking an important milestone for Mercado Ads as a key strategic partner for brand-centric advertisers.

▪ Advertising revenue achieved a 38% year-over-year growth this quarter.

3) Fintech Services:

▪ Mercado Pago continued to gain strong traction in the second quarter.

▪ The company is encouraged by the quality of its credit business, with net interest income to average managed assets ratio (NIMAL) remaining roughly stable.

▪ The credit card business continued to perform well in Brazil and Mexico. Strong asset quality and continuously improved credit models enabled the company to issue 1.5 million new cards in the second quarter.

Market Outlook:

The company is satisfied with the performance in the second quarter and believes it reflects the benefits of years of disciplined investment continuing to accumulate.

Management anticipates increased engagement across all areas of its ecosystem, enhancing the strength of the company's platform and its long-term potential. The company will continue to invest disciplinedly to achieve its long-term goals in commerce, fintech, and advertising.

2.2 Q&A Analyst Questions and Answers

Q: Regarding the shipping policy, the company mentioned lowering the minimum threshold for free shipping while also reducing seller fees for order prices between BRL79 and 200. What returns has the company seen after lowering seller fees? Will these returns be reinvested in product prices? And how should we understand the dynamics of this shipping investment?

A: Before the pricing adjustment, there was a significant "cliff effect" in commission rates below and above BRL79, leading to a substantial increase in fees beyond this threshold, both in absolute terms and as a percentage of GMV.

Through this adjustment, the company smoothed the "cliff" in rates, making the curve above BRL79 smoother, and believes this is the right approach. The company tested and learned from this measure in a few categories last year, and experience shows that this initiative has had a positive impact, mainly from merchants lowering prices and bringing more product choices to the platform. These impacts may not be immediately perceived at the time of execution but will strengthen over time. Overall, the company considers this a positive change, is satisfied with early results, and expects greater positive impacts in the future.

Q: This quarter saw a significant increase in sales and marketing expenses, almost 50% in dollar terms. Considering the two high-profile campaigns in Brazil and promotional activities in Argentina and Mexico, should this be viewed as a one-time expense or a slight anomaly?

A: The significant increase in sales expenses this quarter is due to several reasons: Mercado Pago launched multiple celebrity campaigns in different countries, leading to positive user growth, doubling asset management scale, and increased downloads.

On the commercial side, the company conducted promotional activities similar to "Black Friday" to promote delivery services and invested in lowering the free shipping threshold in Brazil, which put short-term pressure on profits.

Additionally, paid advertising (POM) slightly increased to acquire more users, bringing positive returns. Finally, the company increased investment in social strategies through alliances and content creator programs, which will yield results in the coming quarters but put short-term pressure on profits. Therefore, this is a combination of ongoing investment in user acquisition and downloads, along with some one-time activities.

Q: How will artificial intelligence (AI) impact the efficiency and effectiveness of the company's own advertising spending, as well as the non-platform ad inventory presented to advertisers?

A: Regarding AI, the company clearly believes AI has significant potential to help improve marketing execution and advertising spending efficiency. In marketing, the company is testing and learning AI across multiple dimensions, such as in brand building and creativity, where AI offers the opportunity to generate multiple creatives for any given campaign and test and learn to decide what content to show to whom in the online world. Generating other content online rather than physical content is another area the company is working on. Similarly, the company is using AI to help sellers better understand the ad stack, guide them in using ad technology, and optimize bidding, etc. Therefore, the company is optimistic about the impact AI will bring.

Q: What are the company's long-term plans for low average selling price (ASP) product selection? How long will it take to reach the established goals? Is the low ASP strategy in Brazil different from other regions?

A: The company firmly believes in having the widest selection of products in Brazil. There is still an opportunity to continue increasing the number of effective product listings, and part of the work underway in Brazil is related to this. The company has already seen new sellers and new low-priced product listings gain good traction on the platform. This quarter only shows the results of the new free shipping policy implemented for four weeks. Overall, the company is positive about everything it sees and is encouraged by the response from sellers to the program and the number of product listings seen on the platform every day.

Q: Given the changes in delivery strategy, including the free shipping threshold and the "cliff effect" in commission rates, does it make sense to apply these policies to other countries like Argentina and Mexico? What are the key factors to consider when promoting such policies in these countries?

A: In Brazil, the company implemented two different measures: on one hand, it lowered the shipping fees for merchants, addressing the "cliff effect" and commission rates; on the other hand, it specifically lowered the free shipping policy threshold in Brazil from BRL79 to BRL19. As for whether these policies will be introduced in Mexico or Argentina, the company believes each market is different, for example, the level of cashback in different operating regions is different, and the penetration rate of fulfillment is different (Mexico is the highest, Brazil is in the middle, Argentina is the lowest).

No guidance will be given on future policies, but the company will consistently learn, evaluate, and ultimately decide where to introduce which policies, and there is currently no hard commitment to execute specific things in a particular place.

Q: The company mentioned in the letter that product sales in Brazil accelerated after the free shipping campaign and said GMV followed a similar pattern. Does this mean GMV in Brazil also accelerated after the free shipping campaign?

A: The company is very satisfied with the results seen in Brazil, especially the 34% year-over-year growth in product sales volume in June, which is a significant acceleration. Considering the company is accelerating the lowest ASP segment, the impact on overall GMV growth is relatively small, but both product sales volume and GMV accelerated. The comparison for the second quarter is against a very strong second quarter last year. Additionally, the plans implemented by the company also had a positive impact on traffic, buyer acquisition, new buyers, and engagement.

The company makes these investments based on the belief and commitment to bring offline retail to the online world. Since 2017, the company has repeatedly proven that providing more free shipping services to buyers has a direct impact on customer satisfaction, customer retention, and purchase frequency, creating long-term value for the company. The company has lowered the free shipping threshold three times, from BRL120 to BRL99, from BRL99 to BRL79, and this time from BRL79 to BRL19. The company is excited because all key performance indicators (KPIs) are moving in the right direction. Although it is too early to provide detailed numbers now, everything points in the direction the company wants.

Q: In terms of commerce, how much of the lower prices provided to sellers does the company believe is ultimately passed on to consumers?

A: Given the way the company implements fee reductions and the way sellers operate on MercadoLibre, most of the reduction in commission rates is passed on to prices. Therefore, after implementing the commission rate adjustment, the company saw a noticeable decrease in prices on MercadoLibre.

Q: Early delinquency rates have declined rapidly, but the non-performing loans (NPLs) ratio remains high and has increased quarter-over-quarter. Can the company explain this, and when will NPLs truly stabilize? How is asset quality evolving in these three geographic regions?

A: Regarding non-performing loans (NPLs), the company observed a quarter-over-quarter decline in 15 to 90-day delinquency rates, while delinquency rates over 90 days slightly increased but remained roughly consistent with previous levels. A year ago, it was 18.5%, and now it is also 18.5%, with a quarter-over-quarter increase of 0.5 percentage points, but the company has no concerns about NPLs. In fact, the company is very satisfied with their evolution and has been able to accelerate card issuance again because their performance is very good.

From the other side of the business, i.e., the income generated from the portfolio, the actual profitability of most of the portfolio has improved both quarter-over-quarter and year-over-year. This is also the reason for the accelerated growth rate of the portfolio. The overall credit portfolio grew 91% year-over-year, and the credit card business specifically grew 118% year-over-year. Because the credit card business has become more profitable, the company is very satisfied with its results. NPLs should not be viewed in isolation, although short-term NPLs are declining, longer-term NPLs have indeed slightly increased, but the profitability situation is good, and all indicators are moving in the right direction.

Q: The company's advertising business performed well this quarter, can you share more information about early trends in full-platform advertising?

A: The company performed excellently in advertising, with revenue growing 38% year-over-year in dollar terms and 59% year-over-year on an FX-neutral basis. Display and video advertising almost doubled year-over-year, although starting from a lower base, double-digit growth is still very good.

Product advertising performed well across countries and sites, thanks to improvements in user experience (UX) and seller tools, such as new question processes focusing on the benefits of advertising, smarter product selection, and improved budget recommendations using AI.

Overall, the company is very positive about everything happening in the advertising business, with the percentage of advertising in GMV accelerating growth this quarter. This is good news, but the future opportunities are still huge, and the company is both excited and cautious, needing to continue execution.

Q: Additionally, the company mentioned Argentina is closing the gap in advertising revenue with Brazil and Mexico, what specific factors are driving this catch-up?

A: Argentina performed particularly well, mainly due to the combined effects of macroeconomic conditions and team execution. Lower inflation and more inventory in the hands of sellers provided them with space to invest in promoting sales. In addition, the company's team did an excellent job in explaining the value proposition and helping sellers understand the value that the technology stack can bring.

Q: How does the change in the credit card business portfolio affect NIMAL (Net Interest Margin)? NIMAL remains at a good level of 23%, how does the company view this issue?

A: Regarding NIMAL, several effects are at play simultaneously. On one hand, the NIMAL of the credit card business is lower than other products and is growing significantly faster than the credit ledger, with an annual growth rate exceeding 100%. Although the NIMAL of the credit card business remains relatively stable for new segments and improves as the portfolio grows, this still impacts overall NIMAL.

Another related factor is the rapid decline in inflation in Argentina. Last year, Argentina's NIMAL was extremely high, but the company still considers it profitable, and to some extent, to offset this, Argentina's weight in all loan portfolios has increased. Therefore, although NIMAL has slightly decreased, the overall impact is still significant due to its increased weight in the portfolio.

Q: 15-90 day NPLs decreased from 8.2% to 6.7%, what is the company's overall view on credit and credit quality?

A: Regarding overall credit quality, the company is very optimistic about credit issuance. A few quarters ago, at the end of the fourth quarter and the beginning of the first quarter, the company was somewhat cautious, especially in Brazil, due to concerns about rising interest rates and the general increase in NPLs across the market, recently seeing similar situations in Argentina's overall market. Nevertheless, the company continues to improve models and is happy to accelerate card issuance in Brazil and Mexico (mainly Brazil). The company continues to see cohorts from two years ago or earlier achieving positive NIMAL, such as almost all 2023 cohorts and some early 2024 cohorts. Therefore, the company remains optimistic about credit issuance.

Q: Please clarify whether the credit card business has overall reached breakeven or only a subset of the business? Additionally, considering the company will soon launch credit cards in Argentina, should we assume that from now on, the NIMAL of credit cards will remain breakeven or even positive?

A: In Brazil, NIMAL has reached breakeven. Brazil is the country where the company has issued credit cards the longest and is the largest market. In Mexico, it has not yet reached breakeven. Whenever the company launches credit card business in Argentina, it will initially be negative, but it is expected to achieve breakeven within a few years. The company should predict the future, having issued some large cohorts in 2023 and 2024. Therefore, assuming the issuance speed slows down, these will have an impact in the coming years, but Brazil has already achieved profitability.

Q: With the rapid growth of the credit portfolio, how does the company expect the funding portfolio behind it to evolve? What impact does this have on NIMAL? Specifically, will the company shift from using its own funds to more external funding, and will this put pressure on NIMAL?

A: In the different credit portfolios the company has, the more mature portfolios, i.e., consumer credit and merchant credit, have always been funded through third parties, so most of the funding comes from third parties, which can be seen in the costs. The credit card business has so far been funded by the company itself, but the company is starting to fund it through third parties. Therefore, this will impact NIMAL in the way the company calculates NIMAL, but this will happen in the future.

Q: The company mentioned in the press release that it is expanding infrastructure faster and adapting to the expected growth portfolio of lower ASP. Expanding low shipping fees is one component, but it may also require expanding higher transit points. How is the company adjusting its infrastructure?

A: When considering the unit economics and profitability of lower ticket price products now offered with free shipping, the company's approach to this issue is broad. The company considers the relationship with users rather than a single transaction. This means that when evaluating the profitability of this initiative, it is also necessary to consider the downstream impact of higher engagement and purchase frequency in the context of this huge opportunity, which is to bring offline retail to the online world in a country with only 15% e-commerce penetration. The company's slow delivery and longer delivery commitments are just beginning, never done before, so there is a lot of room to continue improving the economics there. In the long run, the company does expect additional scale effects to help reduce unit delivery costs and seize productivity opportunities brought by slow delivery methods.

Q: How should we view the profitability of these lower ASP products and free shipping? When or if can they match the profit margins of higher ticket price products?

A: If you look at purchases between BRL19 and BRL79 separately, the profit margins of different price order volumes are not the same, not all are positive, and not all will be negative. Even so, the company expects that in the long run, from the perspective of the profit and loss statement (P&L), the profits of these order volumes will be net positive. More importantly, the company firmly believes this is the right investment to expand its position as the preferred e-commerce shopping destination in Latin America.

Q: Can you share more about the credit business in Argentina? Last quarter, the portfolio grew fourfold in dollar terms, can you provide more details on the growth rate this quarter? Given the sharp rise in non-performing loans (NPLs) in traditional banks in Argentina, especially in consumer loan portfolios, how does the company view the quality of operating assets, are there any concerns, and what is the future strategy? The change in reserve requirements for Argentine money market funds, will this affect the company's business there at some point?

A: The company's portfolio in Argentina has increased significantly, starting from a very, very small base. The percentage of private sector credit to GDP in Argentina is a single digit, very small, so there is a lot of room for growth. The company has seen a deterioration in market conditions, but its own situation is not like this.

The company believes part of the reason is its very strong core position in Argentina, which people use every day, helping ensure that when people repay debts, they repay the company's debts first. Therefore, the company has not seen a significant impact on NPLs.

Regarding the change in reserve requirements for money market funds, this happened last week, and almost all banks and money market funds' reserves changed. Simply put, the company expects the impact on interest paid to users to be about 2%, meaning the interest previously paid to customers was close to 30%, about 27%, and after this change, the impact will be about 2 percentage points, reducing to about 25%.

Q: With the lowering of the free shipping threshold (below BRL79), what behavior patterns has the company observed? For example, has there been a lot of purchases close to the low end of the free shipping threshold? Does the company expect this situation to change over time? Does it expect the average order size of those who start buying from Mercado to increase?

A: Regarding the lowering of the free shipping threshold: If the company had not built logistics infrastructure and launched the free shipping program in 2017, it would not be a company with GMV exceeding $50 billion annually today. The company believes the same situation is true now, firmly believing that the best way to serve Brazilian customers is to provide more free shipping. This service has only been launched for a few weeks, and it is still too early, but the company certainly expects the observed trends of increased traffic, improved conversion rates, increased engagement, and increased purchase frequency to continue in the future. Consequently, the company expects both order volume and order size to increase. This is not a marketing investment aimed at generating transactions in a short time but a long-term strategy.

Q: Considering some tightening policies and slowing consumer spending in Brazil, how confident is the company in continuing to issue credit cards at the current pace in Brazil?

A: Regarding the pace of credit card issuance: The company has continuously improved models and issues credit cards at a pace that can achieve a return period of about two to three years and will continue to do so. The company cannot determine what the future issuance pace will be, but believes that if you look at the market share of credit cards in Brazil, it is about 2%, so there is a lot of opportunity to continue growing. The company is willing to slow down if necessary based on market or model performance. So far, the company is very satisfied with the models, collections, NPLs, and the performance of credit cards, and as long as it can ensure a healthy, profitable business in the medium to long term, it will continue to grow.

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