MercadoLibre, Inc. (MELI) Earnings

Management highlights

### User Engagement & Ecosystem Strategy - New lower free shipping thresholds in Brazil drove a sustainable 1.1 percentage point year-on-year conversion increase, faster growth in daily active users than monthly active users, 20% higher purchase frequency, and higher retention and broader category purchasing among new buyer cohorts after one year. - Ecosystemic users (active on both the MercadoLibre marketplace and Mercado Pago) generate meaningfully higher GMV, broader category purchasing, deeper fintech engagement, and dramatically higher profitability than the sum of marketplace-only and fintech-only users; these users are growing 37% year-on-year, the fastest growth of any user segment. - The integrated commerce-fintech flywheel is a unique, hard-to-replicate competitive advantage that increases engagement and value for both business lines. ### Credit Business Performance - Total credit portfolio reached $16.4 billion in Q2, growing 75% year-on-year with solid asset quality near historical lows: 15-90 day NPL of 7.0% for the total portfolio, and 4.6% for credit cards specifically. - Net interest margin (Nayimol) improved from 18% in Q1 2026 to 21% in Q2 2026 across all core markets, driven by normalized provisions and spread recovery in Brazil's consumer portfolio. - Growth is supported by a deliberate shift to lower-risk users and scaling of credit cards, which are only offered to lower-risk users, leveraging the large base of engaged high-quality marketplace users. ### Margin & Cash Flow - Q2 EBIT margin of 6.7% declined 550 basis points year-on-year due to the company's continued prioritization of long-term strategic investments over short-term profitability, and was sequentially stable from Q1. - Margin improvements from normalized credit provisions in Brazil were offset by acquiring margin compression (primarily in Mexico), incremental commerce investments, and lower take rates for strategic growth initiatives in Brazil. - Q2 generated $214 million in adjusted free cash flow even after $441 million in capital expenditure and $2.1 billion invested in growing the credit portfolio, demonstrating underlying cash generation strength. ### AI Investment & Productivity - AI investments totaled $80 million in Q2, up year-on-year, but are delivering clear returns: AI-powered search improves conversion and advertising click-through rates (CTR), with incremental revenue more than covering additional AI costs. - AI has driven large productivity gains: 90% of customer service interactions are now automated, reducing headcount from 10,000 to 7,000 representatives even as business tripled in size; most developer code is now AI-generated, allowing engineering headcount to stabilize after years of growth while scaling product development. - Product development as a percentage of revenue fell from 8.4% to 7.2% year-on-year even including incremental AI costs.

Guidance

Management did not issue explicit numerical forward guidance or formal upward/downward revisions to prior guidance. Key qualitative forward-looking statements include: - Management will continue its existing strategy of reinvesting profits from high-growth, profitable segments (credit, advertising, acquiring) into long-term strategic initiatives to deepen engagement and expand market position, rather than prioritizing short-term margin expansion. - All new investments are disciplined: each initiative has clear engagement, growth, and profitability targets with a defined path to profitability, and investment intensity is adjusted based on performance against targets. - Cross-border trade (CBT) remains in early stages with significant room for further growth and margin improvement, supported by the new Chinese fulfillment center. - The ecosystem flywheel is expected to continue accelerating, with long-term structurally higher profitability as engagement deepens and more users become ecosystemic. - Mexican near-term headwinds from tax reform and macroeconomic weakness do not impact the market's long-term secular growth opportunity.

Segment performance

The transcript does not provide separate absolute financial performance or revenue contribution percentages for individual product segments. Aggregated performance highlights across segments include: total credit portfolio of $16.4 billion, growing 75% year-on-year; Q2 adjusted free cash flow of $214 million, with $441 million in capital expenditure and $2.1 billion invested in credit portfolio growth; aggregate Q2 EBIT margin of 6.7%, down 550 basis points year-on-year but sequentially stable from Q1. Cross-border trade (CBT) GMV is growing ~60% year-on-year, with volume from the Chinese fulfillment center growing 170% quarter-on-quarter. Advertising business revenue grows 73% year-on-year.

Risks & headwinds

- Higher industry chip and memory costs have increased point-of-sale (POS) device costs, leading to incremental margin compression in the acquiring business, particularly in Mexico. - Higher energy costs have driven logistics cost increases, some of which the company has absorbed rather than passing to users, resulting in modest margin compression. - Investors are concerned about potential credit cycle deterioration in Brazil in the second half of 2027, though management reports no current signs of deterioration. - Near-term headwinds in Mexico from tax reform and weak macroeconomic consumption have slowed GMV growth, contributing to acquiring margin compression from upfront inventory accounting for POS devices sold at a loss. - A small, older credit product cohort saw greater-than-expected 90-day NPL deterioration, though management notes this cohort is small and the issue is already addressed by slower prior issuance, with no material impact on overall portfolio health.

Analyst Q&A

• Q: Sequential gross margin compression was larger than expected; what is the scope to pass higher costs (acquiring, logistics, chips) to consumers, and were these incremental headwinds included in prior Q1 margin expectations? /

  A: Sequential Q2 margins were broadly in line with Q1 expectations, as credit margin improvements from normalized temporary Q1 provisions offset offsetting headwinds. The largest headwind was strategic lower take rates and consumer discounts in Brazil commerce, which was a pre-planned initiative. Additional headwinds include higher chip costs for POS devices and a one-off margin hit from Mexico inventory restocking for fast-growing acquiring, which will reverse over the rest of the year. Modest logistics cost increases from higher energy prices were partially absorbed by the company, with only minor margin impact. Management has not raised POS device prices because payback periods remain on target and competitors have not raised prices, which aligns with the goal of fast growth and market share gains.

• Q: What drove the 29% acceleration in Brazil seller growth after take rate cuts, and do new sellers create a profit drag? How do seller economics mature over time? /

  A: Lowering seller take rates is a proven lever to accelerate seller growth, which supports the core strategy of offering consumers the broadest selection at the best prices, a core priority for e-commerce marketplaces. There are no material negative impacts on margin from the accelerated new seller growth, and no unusual profitability drag from the new cohort of sellers gained after this initiative.

• Q: What are your early reads on the new Brazilian gamification/points program, and what behavioral impacts have you seen from the agentic AI shopping pilot on conversion, engagement, and ecosystem adoption? /

  A: It is too early to share concrete results on the gamification and points program, though early engagement trends are positive. AI-powered search improvements have already delivered positive results, increasing marketplace conversion, total items sold, and advertising CTR, which directly drives higher ad revenue. The full agentic shopping assistant is still in A-B testing, but early results are positive for the small live user base. Beyond product results, the integrated commerce-fintech flywheel creates a unique competitive advantage that is difficult to replicate at the company's scale in Latin America.

• Q: How is the credit card ramp progressing in Argentina, and are early results meeting expectations? /

  A: Nine months after launch, the Argentina credit card rollout is exceeding expectations, with very strong demand, adoption, and usage. A large share of card usage occurs on the MercadoLibre platform, boosting Mercado Pago TPV and strengthening platform engagement. Payment performance has been exactly in line with initial projections with no negative surprises. Leveraging Mercado Pago's existing large daily user base allows the company to selectively issue cards only to lower-risk users even in a challenging credit environment, strengthening both the marketplace and fintech ecosystems.

• Q: What is the outlook for AI investments and ROI, and will AI continue to drive product development cost efficiency going forward? /

  A: The company proactively manages AI costs and is already seeing clear productivity and revenue ROI across the business. AI has boosted developer productivity enough to allow engineering headcount to stabilize in 2026 after years of consistent growth, keeping product development costs down even with incremental AI spending. The company's 27 years of proprietary cross-ecosystem data puts it in a strong position to capture AI value by improving personalization, underwriting, and transaction experience, with long-term expected gains in both revenue and efficiency.