Mercadolibre Inc
NASDAQ:MELI
Earnings Call Analysis
Q3-2023 Analysis
Mercadolibre Inc
The earnings call revealed a robust 58% year-over-year growth in the 1P (first-party) segment, particularly noting Brazil's performance which exceeded this average. This segment is seen as a vital component for competing and increasing market share, especially in certain categories like consumer electronics. There's been significant progress in managing pricing, promotions, inventory, and supplier relationships, all of which are considered structural improvements aimed at setting the business up for sustainable long-term growth.
In Mexico, non-performing loans (NPLs) on the merchant side have remained stable with healthy spreads, indicating good performance and increased origination. On the consumer side, there was an intentional acceptance of slightly higher NPLs accompanied by an increase in origination. The company has strategically priced these risks into their offered rates, maintaining strong spreads and a growth-oriented strategy.
The company's penetration rates, especially in Brazil, continue to improve, currently in the low to mid-single digits around 3% to 4%. There's a clear emphasis on expanding the business while simultaneously improving profitability, which has been successful in the recent quarter. A significant aspect of this improvement comes from getting smarter in the way the company buys—better negotiations, improved inventory management, working capital improvements, and tax efficiency, particularly in Brazil.
On the credit side, there was an expansion into the mid-risk segment, an increase in the issuance of credit cards, and an incorporation of more third-party data into credit models. These moves indicate a shift toward catering to a broader demographic while also enhancing risk assessment capabilities.
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Hello, everyone, and welcome to the MercadoLibre Earnings Conference Call for the quarter ended September 30, 2023. Thank you for joining us. Richard Cathcart, Investor Relations Officer at MercadoLibre.
Today, we will share our quarterly highlights on video, after which we will begin our live Q&A session with our CEO, Marcos Galperin; Chief Financial Officer, Martin de los Santos; Fintech President Osvaldo Gimenez; and Commerce EVP, Ariel Szarfsztejn.
Before we go on to discuss our results for the third quarter of 2023, I remind you that management may make in this presentation may contain statements. So please refer to the disclaimer on screen, which will also be available in our earnings materials on our Investor Relations website.
With that, let's begin with a summary of our results.
Hello, everyone. I'm Martin de los Santos, MercadoLibre's CFO. For those of you who haven't met me, I have been at Meli since 2007, first as a Board Member, and since 2012 as part of the management team. For the past 7 years, I have led the credit business until last August, when I took the position of CFO. I look forward to meeting as many of you as possible in due course.
I'm pleased to report a strong set of results in my first quarter as CFO. With a strong successful third quarter across geographies, 2023 continues to show an attractive combination of growth and profitability, with a record in income from operations. With strong momentum across geographies in both commerce and fintech, Meli's revenues growth accelerated. Mexico was particularly strong, with revenue growing above 60% year-on-year, while Brazil also posted a [ great ] performance with around 40% growth. These 2 countries have again increased their contribution to our total revenues.
This strong business growth, combined with cost discipline led to OpEx and SG&A dilution as the business continues to scale. Income from operations more than doubled year-on-year for the fourth consecutive quarter, with margins expanding once again. Brazil was the largest contributor to our profit growth, representing a significant portion of it.
During Q3, in the Commerce business, we saw acceleration in GMV and items sold growth in the 3 main geographies where we operate, with higher items [indiscernible]. This higher user engagement comes from continued experience improvements, especially on the logistics front, where we reached 48% of [indiscernible] penetration and offered better delivery promises, improving conversions and further development of categories through technology. As a result, we have a record of 50 million buyers and market share gains, especially in Brazil and Mexico.
At Mercado Pago, off-platform TPV accelerated in all main countries. We saw an increased number of users and higher engagement metrics as we position Mercado Pago as a comprehensive financial service provider. For the digital accounts, we are particularly excited about the engagement, with more people using the remunerated account and other asset management solutions in Brazil and Argentina, and better NPS in Mexico from UX improvements.
In Payments, the highlights for Q3 has been online payment solutions represented strong growth across the region. The great business continues to perform within our expectations with very healthy spread levels. As we saw NPLs improving, particularly in Brazil, we have accelerated the originations in all of our products. During Q3, we issued over 1 million credit cards and surpassed $1 billion [ TPV ] for the first time. As our underwriting models continue to improve, we can tap into new opportunities, such as offering larger credit lines with longer durations to the best coppers of consumers.
Overall, in Q3, we achieved a combination of rapid growth, scale gains and margin improvements, showing the strength of our economic model. To deliver these results, we have invested in technology that provides a world-class user experience that enables us to be more efficient in terms of our cost structure. These results give us confidence to continue investing in future growth opportunities.
And now let me get back to Richard with business news.
During Q3, MercadoLibre relaunched our loyalty program as Meli Mas, an important step to enhance our loyalty value proposition, with a simpler structure, more compelling shipping benefits and premium video and audio content. With Meli Mas, we now have a brand in which we can to raise awareness and increase engagement with Meli's ecosystem.
Meli Mas gives users access to a world-class content [indiscernible]. Free shipping above BRL 29 and 12 months with free music from Deezer, amongst other perks. Our content bundle for Meli Mas users includes Disney+ and STAR+ and special discounts to subscribe to HBO Max, Paramount Plus and Lions Gate Plus. Through Deezer, users are able to access a complete library of audio content and music, a service that we think users will be able to enjoy on a day-to-day basis. Users see the Meli Mas offering throughout our apps and website. where the value proposition becomes clear as they shop with us, with the Meli Mas logo clearly highlighted, building the brand of the loyalty program.
The shipping benefits are key to the program. Meli Mas uses cap-free shipping on millions of items above BRL 29, versus the standard free shipping threshold of BRL 79, if the product is in one of our fulfillment centers and chosen for delivery on the user's Meli delivery day. As consumers look for products on recovery rate, they will see the Meli Mas logo on the products that are eligible and they can filter that search for Meli Mas items.
As a new delivery option, loyalty users can choose a specific day of the week to receive all of their packages. This solution enables us to sell and deliver lower value items with the great experience that Meli is known for whilst maintaining cost discipline in our P&L. Users still have the option for same and next-day delivery if they want item delivered quickly if they are willing to pay for shipping on items below the free shipping threshold or for free for items above the threshold.
To access all of these benefits, users can subscribe or earn their way inorganically by engaging with Meli's ecosystem. Subscribing is quick and easy and users can choose between a credit card, automatic charge from their MercadoLibre [indiscernible] account, or a monthly invoice. So the subscription is accessible for different types of users. We're able to offer by the full benefits bundle for just the equivalent of 2 to 3 paid shipping charges. For users who earn points by shopping with MercadoLibre to get the Meli Mas membership, our credit card offers double points, enabling users to reach the loyalty status more quickly.
In August, we launched a big marketing campaign to raise awareness of the program, and initial results give us confidence that Meli Mas complements our value proposition, bringing extensive benefits to even more MercadoLibre users. We're confident in the program's long-term potential because, as always, at MercadoLibre, the best is yet to come.
Thank you. At this time, we will conduct a question-and-answer session. [Operator Instructions] Please stand by while we can file the Q&A roster.
And our first question this evening comes from Andrew Ruben from Morgan Stanley.
Welcome again, Martin. Perhaps, Marcos, taking advantage of your joining today. It's been a period of strength for the business. We've seen a lot of the past year's investments flowing through to results. So as you look from here, say, over the next 3 to 5 years, I'd be curious to hear what the opportunities you see for Meli that you're personally most excited about still.
Hey, Andrew. Good to be here. Yes, we are really happy with the way the business has been evolving the last 24 months, at least, really growing very nicely, gaining market share and lately also gaining scale and increasing margins. As you know, we don't guide, but there are many exciting things going on, particularly, obviously, AI. That hopefully will enable us to provide our users a better experience, enable us to launch innovative ideas, and also scale and gain efficiencies, whether it is in customer service, or whether it is in fraud prevention or whether it is in the way our developers, 15,000 developers, go about developing and performing quality control, et cetera. So obviously, looking forward for the next 3 years, I think that's a key thing to look into.
Our next question comes from Irma Sgarz of Goldman Sachs.
Congratulations on the results. Marcos, also taking advantage of you joining the call. If you're looking at the KPIs that determine compensation across the exact team or the leadership team, how do you think these will evolve from here, again, thinking maybe over a multiple year basis? And asking the same question maybe in a slightly different way, are there any incrementally new KPIs to watch for as you go into this next of growth and investment that you or the board feel should gain maybe perhaps more important to incentivize the right amount of investment versus risk taking?
So obviously, we try to compensate our -- myself and the key employees based on long-term results, not in quarterly or even yearly -- actually, our long-term retention program is a 6-year program. And obviously, we are in a very dynamic environment and a very dynamic business. If you look at MercadoLibre years ago, both in terms of scale but also in the scope of things that we do and where we are today, extremely different companies.
And I expect that to be the case in the next 6 years, whether it is in fintech that we are moving into, insurance that is already a business that has gained relevance and scale, whether it is assets under management that is growing so strongly across all of our geographies, whether it's our credit card business that didn't exist a few years ago and it's a very sizable business, our overall credit business.
So obviously, and there are new businesses that are coming along and that we expect them to gain scale and scope. And as they do, obviously, they will have a an impact in our results and in our compensation and in the KPIs, whether it is Mercado Play, which is our advertising supported streaming operation or whether it's [ Clips ] which is our short videos launch, which -- both of which are really gaining really nice traction.
So obviously, there are many things that we're doing. And as they gain scale, they become important in terms of KPIs and also in terms of results and compensation. I don't know if that answers your question, Irma.
And our next question comes from Marcelo Santos with JPMorgan.
I wanted to discuss a bit the profitability and margin. It was a very strong print that you had this quarter, above the previous one. And in the previous one, you were indicating that you might give some back to reinvest in growth. But actually things improved from the previous quarter. So I wanted to understand what happened so that the improvement came? And how do you see this trade-off going forward? There's something new element that allowed the trade-off not to happen and you to grow and have margins at the same time. I just wanted to touch on this point.
It's Martin here. Yes. In fact, we did have a great quarter in terms of profitability, reaching 18% EBITDA margin coming from last quarter of 16%. I would say that most of the businesses and countries performed extremely well during the quarter, particularly the 3P marketplace that was the biggest contributor to margin improvements, but also the acquiring business, the credit business, as well as the advertising business, in that particular order, also contributed to margin improvement.
We look at by country by country, most of the improvement come from Brazil, where we improved 12 percentage points year-on-year, and Mexico 6 percentage points year-on-year. And also, we are gaining scale by growing as we did, we gained significant scale, and we were able to dilute part of our costs, which we obviously manage with a lot of discipline.
Having said that, we have been investing behind our business, which is the main goal. We think that we are in -- we operate in an industry where we have a lot of investment opportunities that we need to make sure that we continue to look at the long-term prospects of the business. So we'll continue to invest in logistics where we increased 6 percentage points [indiscernible] penetration. We also, in this particular quarter, as we launched Meli Mas, we invested behind the brand to promote the new loyalty program. We continue to invest in smaller countries like Chile and Colombia. We have a team of 15,000 developers that continue to build our product and we're investing on our own product.
So again, we are managing the business not to a particular target -- margin target, but we're managing for the long term. But this quarter was a very good quarter, not only because we improved the margins, but also because we grew, we gained market share, in particular in Brazil and Mexico.
And the next question comes from Maria Clara Infantozzi with Itau BBA.
I'd like to start a bit about the credit business in Brazil. You mentioned that you just accelerated the penetration in the longer duration consumer products here. Can you please elaborate on that? Should we expect a shift in Meli's credit concession strategy in Brazil? And so far, how have you been receiving the evolution of the credit quality of those new cohorts, please?
Yes, as we mentioned, we saw an increase in the spreads we are seeing in Brazil and, therefore, felt confident to increase the pace of origination in our consumer business there. And we are -- so far, we're happy with the results we are seeing, and we continue to accelerate the pace of originations. And we have also increased the pace of issuing credit cards in Brazil. For the same reason, we are encouraged by the results we are seeing and how every time we create [indiscernible] we have better credit scoring and better solutions.
And it comes from Kaio Prato with UBS.
My question is also on the FinTech business, please. You mentioned during the presentation the importance of the credit card strategy, to be the main financial provider of choice of your users. So in light of this, my question is, out of your almost 50 million unique FinTech users, how many clients see Mercado Pago as a principal digital account nowadays? If you have some percentage of principality that you can share. And how much do you think you can achieve in the future, please? Thank you.
Kaio, we have not disclosed in the past principality. What we have disclosed, and this continues to be the case, is that when we look at all of our users in a given country, particularly in Brazil, which is the one country where we have more of our credit portfolio and more of our credit products launch, what we are seeing is a continuous increase in the amount of products that our users are using and in the availability, not only of consumer credit but also of credit cards. And these 2, together with asset under management, which is growing near triple digits in Brazil and Mexico and over triple digits in Argentina, are, I'd say, a key component of a user becoming principal.
So all of the metrics are going in the right direction. The other one is TPV generated both by a credit card and a debit card. But we have never disclosed a principality measure.
Okay. And just to follow up, my last question on the credit card business. How are you seeing the discussion about the change in the framework of credit cards in Brazil nowadays? And what could be the impact on your side, not only in terms of potential P&L impact but also in terms of your appetite for further increased origination on credit card?
Sure, Kaio. So I think that -- this is not the first time that this is discussed in Brazil. I think the jury is still out. There are many things that are being discussed. One of them is having a potential cap on interest rates. Other one is probably limiting to some degree [indiscernible] or interest-free interest rates. And the third one is probably putting a cap on the interchange each of those would affect us in different ways, still very early. Until we have the details, we are not able to tell. We believe that [indiscernible] is a key driver for consumption in Brazil and probably that should limit how much that is affected.
Our next question comes from Scott Devitt with Wedbush.
I had 2 questions. Maybe a different spin on the first question, which is, Marcos, back in 2019, this was like a little over a $2 billion revenue business, doing like $1.1 billion in gross profit. And you're approaching like 7x those levels now. So the growth through the pandemic, and comping the comps and everything else, it's almost unprecedented, and yet you're growing at rates that are similar to where you were growing back in 2019.
So I'm curious, as you think about like what's transpired over the last 4 years, if you can kind of frame how you think about the mainstream in e-commerce because of the pandemic and how that may have benefited a market like Latin America uniquely relative to other markets versus drivers of the business that were more company-specific like improvements in the e-commerce experience because of faster shipping times and things like that are the benefits of having a broader ecosystem with payments? Just how you think of the components or the build of how this business has gotten so big, so fast and just keeps growing at this pace. That's kind of the first question.
And then the second one, if you could just talk a bit more about the advertising business in the quarter. I didn't -- I may have missed it. I didn't see the absolute amount. But if you can just talk about how that's trending and how you're thinking about the ad business longer term. Thank you.
Okay. Thank you, Scott. So yes, obviously, COVID was, in general, around the world, very good for e-commerce companies. The same thing happened in Latin America. We basically doubled during COVID, during those 2 years, 2021 and 2020. But unlike what happened in other parts of the world, we continue to grow at a very healthy rate once life resumed to normal. We're very happy about that. We think that we had done prior to 2019 a lot of things. We had invested a lot of money and efforts on mostly technology, so got us at the right time, in the right place. We were able to benefit, I think, more than other players in the region when that happened.
And since then, when we grew in scale, obviously, the power of the ecosystem is very strong, and we continue to add features and functionalities and products to this ecosystem, advertising being one of them. Financing on the credit cards being another one, insurance being another one. And more recently, all the content plays, whether it's our partnership with Disney and other great content providers that we are distributing through Meli Mas, or whether it's Mercado Play or whether it's our Clips.
So we continue to add features and functionalities and products and brands. And I think we have a -- we have created something that is pretty unique in the region and around the world, and each part strengthens the other. And we have a lot of scale. As you mentioned, we are 7 times the size we had a few years back. And more importantly, our growth rate is still very healthy, and we have a very strong balance sheet, and we intend to continue innovating, continue investing and continue focusing in the next 5 to 10 years and not in the next 3 to 4 quarters. And then Ariel can give you more background on advertising.
Scott, Ariel here. So ads continue to grow well. We grew above 70% in revenue this quarter for the sixth consecutive quarter. with no major changes in strategy. We continue improving our product with feedback from advertising and promoting our solutions to different segments of sellers and brands. Product ads continues to be the main driver of growth, specifically the self-service sellers, but we are seeing more and more traction from other segments as well.
Overall, we had a quarter with 1.7% of penetration of ads as a percentage of GMV, but I think it's worth highlighting the case of Argentina. So structurally, given market dynamics, Argentina has a lower penetration. And if you were to factor in there the fact that inflation makes it even harder for advertisers to follow up our GMV growth, and also the effect of having a bit lower demand from advertising in Argentina because of structural context, more out of talks and some other effects, it's worth saying that if you were to take out Argentina of the equation, penetration of advertising in our GMV, would be roughly close to 2%.
Our next question comes from [ Melissa Byun ] with Bank of America.
It may actually be Bob Ford. Congratulations on the quarter. How much of the Brazilian GMV growth is coming from markets where you now have a distribution center and faster shipping within Brazil or before you were sending that from Sao Paulo or a more distant location? And then what percent of GMV is now being delivered on a Meli delivery day? And where do you expect that to stabilize as we move forward?
And then lastly, can you discuss your use of AI in search product recommendations and risk plays? Thank you.
Bob, this is Ariel. Thanks for your questions. I think we don't typically disclose demand data based on geographic segmentations or even logistics methods. But I would say more and more we are trying to grow on both of the segments that you have highlighted in your first 2 questions. So we are being proactive in trying to gain traction and market share in some of the regions where our market share today is underrepresented. That means that we do see increased demand coming from areas that are more far away from our fulfillment center. Still the main capitals and cities of Brazil do concentrate a big share of our demand.
Kind of same thing happens with Meli Delivery Day. It's still super early days. So not many data or not much data to be shared on that regard. But I do I want to say that it's slowly gaining traction, of course, aided by the launch of Meli Mas in Brazil and in Mexico. So more and more, we are seeing consumers actively choosing the Meli Delivery Day as a way to receive the packages.
Last question in terms of AI and search, we are working on that. I mean we are putting a lot of effort into building solutions around AI. I think we don't have much to disclose as of now, but search, reviews, questions and answers, buy box and products, as Marcos was saying, copilot for our developer. We're looking at the broad range of AI uses for MercadoLibre to boost consumer demand and efficiency. And we're happy with the progress that we have so far, but not much to be said yet.
And building on that, we have been using AI for a long time now for many, many years, both in terms of fraud prevention and credit scoring. Both 2 instances, they are pretty much use cases which are ideal for AI, because we have, in the case of fraud prevention, millions of transactions every day and with a clear outcome, either fraud or not fraud. So with the right variables, we can build a very strong model that has predicted and have really best-in-class fraud prevention. And with that knowledge and given the experience we have been building on credits, we have also been -- built our credit scoring models leveraging the AI.
Makes a lot of sense, Osvaldo. It seems like with the larger data lakes, faster processing speeds, more sophisticated LLMs, it just gets better. And then, Ariel, just to follow up, can you comment a little bit in terms of where you do have consumers choosing a delivery day, are you seeing materially improvements -- or materially improved densities and improvements in terms of average shipping costs? Or is it still a little bit too early to discuss?
Yes. So I think it is early to discuss. We are seeing some efficiencies in our operations driven by the fact that we can consolidate shipment and take advantage of some of our idleness when we operate, I think or density in distribution, I believe it's too early. So again, I'm sorry for this, but not many details to be shared. I would say the variables are moving in the direction that we expect, but too early to share numbers behind that.
And our next question comes from Marvin Fong with BTIG.
Congratulations on the great quarter. I'd like to ask maybe a 2-part question on cross-border. So in Mexico, I think your shareholder letter cited you grew very strongly there, which is interesting because I think [ Timo ] only recently entered the country, is also seeing some strong adoption. So could you just kind of discuss how you see the cross-border market in Mexico evolving? Is it that [ Timo's ] entry is actually growing the pie for everybody.
And the second part of the question is, how might this inform your strategy in Brazil, as I understand your cross-border penetrate -- or the mix relative to your GMV is very low, but that presents an opportunity for you? And then I have one other question.
Thanks, Marvin. So I'd say before going into the details first and foremost. Over the last 24 years, we've been always competing with players from all over the world. So in a sense, we are used to having new entrants trying to get a pie of Latin America. We've seen [ Timo ] get into Mexico, in particular, in May, more or less. We've seen them making progress in app downloads and monthly active users. They seem to be spending a lot of money on marketing on social media, directed consumers, has been trying to download their app.
We are obviously monitoring that closely. But our data suggests that there is a bigger overlap between that business and the one with other cross-border platforms. Our business in the meantime continues to perform really well, as shown by the acceleration of items sold to 38%. Unit growth has been strong across the board, including categories where some of those players are focusing on, and all ASP ranges.
And our competitive advantages remain untouched, I would say, particularly logistics, which enables us to deliver fast shipping and payments, which allow us to provide attractive financing to our users.
So in the end, our playbook remains the same. We continue strengthening our business with more sellers, more brands, more assortment, more financing, faster delivery, while we also continue investing in improving our own cross-border trade capabilities. And also through Meli Mas, we think we are also now offering free shipping on lower ticket items, which was not the case in MercadoLibre up until 2 months ago.
Moving into the second part of the question, which is Brazil. I think [ Remesa Conforme ] is still too new. So it's hard to say. We have applied the program. We got accepted just a few weeks back. So not so much to share. But we remain confident, as I was saying, for Mexico, that the combination of fast deliveries, local payments and financing, a strong brand, buyer trust will continue to differentiate MercadoLibre versus our other companies.
And simultaneously, if the new regulation allows so, we will continue building capabilities as to be able to compete in cross-border in Brazil as we are doing it today in Mexico, in Chile and Colombia.
And just my follow-up, a bigger picture question. I think it was a very strong quarter in terms of acquiring more fintech active users. And I was just curious beyond what you wrote in the shareholder letter, could you elaborate on what's driving that? Was it more internal initiatives? Or do you think it was some component just from the broader economy and whatnot? So just would love some color there.
So I think there are several factors contributing to that. One of those is our remunerated account [indiscernible] both in Argentina and in Brazil, which is doing very well. What we pay our users depends on what the risk-free rate is in each of the countries. In Brazil it's around 13%; in Mexico around 10%. In Argentina, given recent spike in inflation and interest rate, it has been close to 100%. So this gives users a huge incentive to move out of banks with savings accounts, which [indiscernible] pay 0 or only pay after 30 days, and move their money into Mercado Pago. I think that has been part of the driver.
Another part of the driver, I think, has been, as we were saying, the increased availability and offering of credits that we're giving out, in that case, I would say it's mostly, in the case of -- in Brazil and in Mexico, not so in Argentina, where we have been cautious given this rate environment.
And our next question comes from Trevor Young with Barclays.
Great. On the Meli Mas subscription plans, is there any color that you can share on initial subscriber counts here in the first 4 -- 2 or 3 months, excuse me? Is that ramping as you expected? And then second question, can you give us an update on where we are in terms of logistics monetization? I realize you've indicated it will be gradual over a number of years, but just any update over the last few quarters would be helpful.
Thanks all for your questions, Martin here. I think it's too early to tell. As Ari mentioned before, we launched this program a few months ago. We are seeing good engagement with the program as well as with the Meli Delivery Day, but it's too early to share numbers in terms of adoption. I think in the coming quarters, we'll be -- we will share more information. But we are excited about the program. Ari?
Yes, Trevor. So on monetizing shipping, I think our Q3 results and our year-to-date results show that we have been able to pull levers to offset some of the headwinds that we have in shipping from higher inflation rates in the logistics environment and higher fulfillment penetration that has helped us keep our total net shipping costs over GMV broadly stable in 2023.
I mean we still think that we have plenty of opportunities to improve our net shipping costs by focusing on productivity, efficiency, scale benefits, et cetera. But we also want to incentivize more sellers to use our fulfillment solutions, particularly in Brazil.
So in all, there is potential to monetize fulfillment, specifically in the future if we decide to do so. But as we have always said, we are not in a rush to do that. We are always mindful of what monetization might imply for consumer prices and competition. And we are happy with the way we are managing our P&L in general.
And our next question comes from Geoffrey Elliott with Autonomous.
I wanted to touch on the off-line POS business in Brazil, it looks like fintech services take rates were down a little bit. We saw that you rolled out some pricing there that is cheaper for the merchant, but clearly, less beneficial for you, it looks, in terms of the MDRs that you're charging. And the publicly traded competitors, obviously, the stock prices are a fraction of what they were a couple of years ago. Can you just remind us, how does that off-line POS business fit with the rest of Meli? What is the synergy there?
And then if you're thinking out 5 years, 10 years, how is that going to fit into the rest of what you're doing? Does it still really make sense for that business to be a focus? Or is it something that could become smaller over time or maybe doesn't make sense to keep over time?
We see the POS business, the in-store business as a big part of our fintech offering. We allow merchants to charge with Mercado Pago offline. Some are very small merchants, some are SMBs, and even some are larger merchants. And we have been able to provide this solution in, I'd say, in a very profitable way, and we continue to do so. The profitability behind our POS business has been very good throughout the quarter.
We have seen some -- have to make some changes as we move upmarket. Some of that is related to what we saw in terms of changing our go-to-market strategy. As we attract larger merchants, in some cases, what we do is we offer lower processing fees. But we get -- on the other hand, it's better for the merchant because they get lower fees, as you said. But it's good for us too, because what we see is higher activation rate and higher TPV per device. So not necessarily we're getting a lower margin in terms of margin on top of TPV, but we're getting a larger margin per device sold. And so I think that this continues to be very good for us.
I'd say I'd add to that on the POS front, in this quarter, we have been changing -- making some changes beyond pricing in terms of our go-to-market strategy, and we are very encouraged by the results we're seeing, again, in terms of activation and TPV per device.
And the synergy with the rest of the business with this POS machine operation, where is that?
So we are offering, I would say, on 2 sides. On the one hand, is many merchants, they sell online, they sell offline, through MercadoLibre they sell through the POS. So there's a synergy there in having pretty much all of their sales coming through Mercado Pago to them. . On the other hand, many of these merchants, in some cases, are individuals, and we are able to cross-sell different products to them and offer more banking products to them basically. So we offer them -- it's not only the device we're giving them and the process we're giving them. We're offering them a credit where they invest in [indiscernible]. We have started to offer them a credit card to individuals based on the business they run. And so really is part of our banking solution, and there are many products we're offering to them. There's a good synergy between all of the rest of the banking products we offer.
And our next question comes from Neha Agarwala with HSBC.
Congratulations on the strong quarter. Just 2 quick questions. First, on the 1P business, we talked earlier in the year about some acceleration, gradual acceleration in the 1P business. How is that going? And what is the vision going forward? . And my second question is on the credit quality. There was a little bit of an uptick for the early delinquencies. Could you explain to us where is that coming from? Despite some pickup in the loan growth, maybe Mexico is not doing as well. So if you could talk a little bit about the early delinquencies and about how the portfolio in Mexico is performing, that would be very helpful.
This is Ariel. So 1P grew 58% year-over-year on a consolidated basis. If you were to look at this by country, Brazil actually grew considerably more than this. So the way we think about it is that 1P remains a strategic priority for us. We see this as a key lever to compete and gain market share in certain categories, consumer electronics being one of the clearest probably examples of that.
We are very happy with the transformation of our 1P business over the last 12 months. We've had major improvements in our ability to manage pricing, promotions, stocks with the help of technology. We have also seen significant improvements in the way we connect and relate with suppliers and the way we negotiate with them. We think that all these progress are structural gains that will put the business on strong footing for long-term growth and market share gains. So we remain optimistic and keep investing behind that business.
Neha, and with regards to NPLs in Mexico, let me split that in 2. On the merchant side, NPLs have remained very flat. The spreads are very healthy. So very good results. And we have been able to increase origination.
And then on the consumer side, actually, they have increased a little bit, but by design. What happened is our spreads are very healthy we decided to take a little bit more risk and to increase the amount of origination, and that usually comes with slightly higher NPLs. But those have been priced in, in the rates we are offering. So spreads continue to be super healthy in Mexico. And that was part of the strategy, to grow faster, even though NPLs may increase, it's priced in already.
Perfect. If I can follow up on the 1P. Could you give us some numbers regarding the penetration as a percentage of GMV, where it was at the end of last year where it is now currently, just to get an understanding of the pace of growth? Thank you so much.
Yes. So penetration keeps improving, increasing, particularly in Brazil, we're in the low or mid-single digits, around 3% or 4% penetration. Again, we are extremely happy with the progress that we've made so far, and we'll keep investing in growing the business, while continue also improving our profitability, which has been the case this quarter.
Stand by for our next question. And it comes from Joao Soares with Citi.
I have 2 questions here. One, the first one, I just wanted to hear a little bit about Black Friday preparations. We've been hearing a lot of news how excited the company is, and maybe talk a little bit about any expectations in terms of the winning categories here. So any granularity in terms of our expectations?
And the second question is talking a little bit about the 1P, just to follow up on that. In regards to profitability, how that -- you talked about in the press release about improving profitability. So just wanted to hear a little bit about where we are right now and where do you think we could be? I know the company doesn't guide, but any qualitative message on this would be appreciated.
Yes. This is Ariel. So Black Friday penetration keeps us busy for sure. We are extremely excited with the way our company has been performing, and we think and are expecting to have a great big season. All of our teams, commercial, marketing, shipping, they are all preparing the work has to continue with the inertia that we had this quarter and this year and having a great event, both in Black Friday, Christmas, et cetera.
We know this is a relevant moment for our consumers, and we want to be there to satisfy their needs.
Regarding profitability, as I was mentioning before, we see very strong profitability improvements, particularly in Brazil. I think we are getting smarter in the way we buy. So having better negotiations, which give us better terms. We are getting better at managing inventory. So our days of stock are getting better and hence, our working capital as well. We are getting also smarter in the way we price the items we sell. And we are also working a lot in taxation efficiency, which is key to compete in Brazil.
So again, we are moving and pulling all the levers as to make this a strategic and profitable business for the company. We are yet not there, but we'll continue to be working in that direction.
[Operator Instructions] Our next question, that comes from Deepak Mathivanan from Wolfe Research.
A couple of questions. So first, can you give some additional color on the improved loyalty program? What are you seeing in the early days in terms of frequency, average spend compared to a nonmember from the program. I know it's in early stages, but any color there would be great.
And then the second one, the Central Bank interest rate is coming down in Brazil consistently. We just saw another cut today. Can you remind us the implications of this to your business on profitability? I guess, I mean we can wait for the Q to see the financing revenues. But wondering if there is a way you can help us the benefits to EBIT from the dynamic in the last few months. Thank you so much.
Deepak, Ariel here. So we don't disclose specific data on Meli Mas yet. But I would say, on the one hand, our old loyalty program, L6, already generated an increase in frequency and GMV per buyer whenever they decided to subscribe to our program. We are seeing the same or an even better trend with the new subscribers who are joining our Meli Mas program and also with the existing subscribers who are getting used to the new benefits and the new value proposition of our program.
So in general terms, we are excited with the engagement that we see in the platform. Again, too early to be seen. Communications has just started. Our product keeps evolving. So we have many, many things to continue working on as to make customers even more aware of all the benefits and the way they can interact with that program. So, excited, but I don't know, hopefully, we'll be able to share more details in the next call.
And with regards to interest rates coming down in Brazil. It tends to be good for us. for, I'd say, for several reasons. Mostly on the marketplace where interest rates are lower, we tend to see more transactions on those transactions where we charge our interest rate. And then for what we offer as [indiscernible] then the price tends to be -- the cost tends to be lower for us, so profitability improves.
And then on the fintech side, I would say it's also positive but closer to neutral because many times what happens is competitive pressures make that we have to pass those savings to merchants. That has been the case when rates increase and will probably be the case as we decrease. So overall, it's positive for us.
Our last question comes from [ William Kang ] with Susquehanna International.
Thanks so much for squeezing me in here at the last minute. I just wanted to quickly ask on credit. So last quarter, I think there were comments about expanding lending into mid-risk segments, no higher risk segments just yet. So I just wanted to ask what were you seeing there? Were there any surprises or adjustments that you encountered?
Actually, that is exactly what we're doing. We have been increasing originations in Brazil, both on the consumer credit side and on the credit card side. On the consumer credit, probably what's happening is, to some degree, we are -- remember, up until a year ago, we were issuing more credit, then we became more restrictive. So you don't yet see this impact in terms of the total portfolio. But originations are up, and we are expanding, as you said, into the mid-risk segment.
And also on the credit card front, we have been able to expand our offering, and that's where we are issuing more cards by -- also by addressing this mid-risk segment and incorporating more information from third parties into our models.
And this concludes the question-and-answer session. I would like to turn it back now to Martin de los Santos, Chief Financial Officer for MercadoLibre.
Thanks, everybody, for your questions. I'm looking forward to reporting back to you next year with our fourth quarter results. Good night.
Thank you for your participation in today's conference. This does conclude the program, and you may now disconnect.