MercadoLibre Inc
BMV:MELIN
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MercadoLibre Inc
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Hello, and welcome to the MercadoLibre Earnings Conference Call for the Quarter Ended June 30th, 2022. I’m Lissa Schreurs, Investor Relations Officer for MercadoLibre. Today, we will share our quarterly highlights on video. After which, we will begin our live Q&A session with our Chief Financial Officer, Pedro Arnt; and Chief Executive Officer of Mercado Pago, Osvaldo Gimenez.
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 sections of our 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.
With that, let's begin with a summary of our results.
Hello, everyone. I'm pleased to present some of the highlights and key messages regarding the performance during the second quarter of 2022. Despite a challenging macroeconomic scenario, we delivered a strong quarter across all of our businesses. Our marketplace achieved consistent results despite the challenging environment for retail businesses with a gross merchandise volume of over $8.5 billion, delivering solid growth year-on-year despite tough comps for the second quarter.
We reached over 40 million unique buyers, during the second quarter with sustained levels of engagement and items sold per buyer, with a diverse seller base and an efficient logistics network for a wide variety of items. We have a differentiated user experience and product assortment to keep growing and drive further online commerce penetration throughout Latin America.
On the FinTech side, Mercado Pago continues to grow and gain relevance in our ecosystem, delivering strong results in Q2. TPV surpassed $30 billion for the first time, growing both in acquiring and digital wallet. Mercado Pago reached 38 million unique active users growing across all geographies.
Mercado Credito continues to grow its credit book, reaching more consumers and sellers and delivering an important ecosystemic effect for engagement and loyalty. With sustained healthy trends in the second quarter, the credit business continues to contribute to our operating margin expansion.
As a consequence of the consistent performance in commerce and FinTech, we delivered record results in net revenues and EBIT, with strong improvements in cash generation during the second quarter. Revenues for FinTech have surpassed $1 billion in the quarter for the first time ever as our FinTech products gain more relevance in our ecosystem.
In commerce, revenue growth comes mainly from our strength in third-party marketplace categories and the expansion of our advertising business. Our gross profit margin expanded year-over-year and quarter-on-quarter as we scaled our businesses and delivered operating leverage across most cost of goods sold.
As a result of this, our operating profit reached a record in the quarter with operating margins that were directionally in line with last years as we continue to balance investments mainly in product and technology and the credit business with cost leveraging across other operational expenses. The second quarter closed with net profit in our three main segments, including Mexico and with improvements in net income margin year-over-year.
We also optimized our cash conversion cycle, leading to improved cash generation for all business units and strong cash from operations results. We will continue to target growth with the correct profitability and cash generation profile. This will mean balancing our focus on the long term with a commitment to constructing sustainable businesses with scalable financial models.
A more detailed customary comment on the second quarter operational and financial highlights is now available in a management commentary letter to shareholders, which we release on our Investor Relations website.
Before initiating the live Q&A sections of tonight's earnings, we want to share with you some additional news and achievements from the quarter.
Our marketplace continues to grow. And technology has an important role to improve the experience of our buyers and sellers, deploying continuous improvements to selection, search and discovery. In our apparel section, we now have improved filters and brand searching.
We expanded the MELI places network enabled for reverse logistics to improve the shopping experience for our customers. We also keep improving our delivery service throughout Latin America. The MELI Air network reduced our delivery times by two to six days in the Northeast and Midwest regions of Brazil.
In line with improvements in our buyer experience, our loyalty program has been growing, reaching millions of subscribers and strong year-on-year growth. After reaching Level 6, the highest on the program, users have higher frequency, GMV and retention, enjoying multiple benefits from free shipping, special discounts and offers to access to content streaming partners.
Our loyalty program also plays an important part in connecting and raising engagement, both in MercadoLibre and Mercado Pago, offering benefits in all of our services for our users.
On the fintech side, our credit business also plays an important ecosystemic role, as a tool to provide our merchant base with working capital and our consumer base with personal loans and credit cards.
To continue to provide these solutions for our ecosystem. We recently announced new funding partnerships to expand credit lines in Brazil and Mexico. All of these initiatives that potentialize our ecosystem are a result of our tech DNA and execution focus. We believe times like this are ideal to invest and create sustained long-term differentiation, leveraging technology and we will continue to invest in technology and in hiring engineers throughout the next quarters.
As we grow, we watch closely our impact in the community and environment around us. That is why we’ve just launched another round of investments in our preservation program, Regenera America in Brazil and Mexico to preserve Latin American biomes and biodiversity. As always, the best is yet to come.
[Technical Difficulty]
…probably a combination of those, but maybe if you could just lay out which areas you're most focused on in terms of driving advertising revenues higher. Thank you.
Thank you, Irma. Let me take them in reverse order. So you're correct. I think advertising is beginning to scratch the surface of its potential. There's room to increase the number of advertisers across many product categories, but obviously, as we grow into more and more categories. And equally important, as we grow our first-party business, which has a much higher attach rate of advertising in terms of percentage of GMV, that should also help. There's room for increased engagement for advertising and all of this always driven by technology, so new formats and new positioning throughout our different ecosystems.
We've started experimenting with advertising in the Mercado Pago world and the Mercado Pago app. And we have other formats that we can launch going forward. So I think this continues to be an opportunity that we're very enthusiastic about. And as I always say, is a very high margin one with EBIT margins in the high 70s, low 80s.
In terms of what we're focused on going forward, correctly, we don't guide. I think we've shown that we have a good grasp right now of the cost structure in MELI. We continue to invest in a few critical areas like product development, where we're not looking for operational leverage, but we continue to deliver solid improvements in gross profit, if you look at H1 and so I think I'm confident in our ability to continue to balance cost management with investing in growth, where there's the greatest uncertainty going forward is just what happens to the health of the consumer in Latin America. But so far, everything we’ve seen despite, I think, concerns around the consumer having been around in the second quarter as well, we've continued to deliver solid results and I think the consequence of that is to the best of our assessment, we've accelerated our share gains in Q2.
Thank you.
Thank you. Our next question comes from the line of Andrew Ruben of Morgan Stanley. Andrew Ruben, your line is open.
Hi, thanks very much for the question. I appreciate the additional disclosure you gave around the credit portfolio. I was hoping if you could dig in a bit more on how you've seen performance by the main product line card, consumer, and the merchant loans. Just a bit more color how you're thinking about trends, both in loan performance and growth of those segments would be helpful. Thank you.
Andrew, I think that overall, when we look at our portfolio, there are, I'd say, nine main segments being those Argentina, Brazil, and Mexico on the countryside and they are part of the market -- the merchants, the small merchants and the consumers. And all of those nine segments are profitable and have remained margins similar to what we saw in prior quarters. So, we are very, very happy with that performance.
And the 10 would be credit card, which is a smaller product -- and we are still within the first year. We launched that a year ago, but is not yet profitable, but it's according to what we expected. So, I think both has been evolving very positively. And tomorrow, in the filing, we will make -- we will provide extra information, then we'll give more color to these details.
Thank you. Our next question comes from the line of Marcelo Santos of JPMorgan. Marcelo Santos, your line is open.
Good evening. Thanks for taking my questions. First question is, if you could talk a bit about the profitability ex-credit. So, you said, Pedro, that the gross margins are improving, but how do you see the business excluding the credit? Should that part also see profitability improving? And how were the gains on that front?
And the second question is how relevant is credit to GMV generation nowadays, could you give some ballpark idea on what's the penetration maybe per country or in a consolidated level of how many -- how much of your marketplace sales are done through credit? Thank you.
Hi Marcelo, let me start with the second part of the question. Regarding how relevant is credit generation. I'd say it varies on a country-by-country basis, but in some countries, it's and say, go from mid-single-digits to low -- very low double-digit.
Thanks
Thank you. Our next question comes…
In terms of -- sorry. Sorry, there was a second part of the question there. Look, the operating profit that we delivered is delivered from operational lever and improvement sequentially across most of our business units. Credit is obviously an important piece of that. We've given some disclosure on interest margin after losses. You can calculate a cost of funding. The operating cost is fairly small there to get to your own assumptions on profit from in terms of EBIT dollars from credit, but it's still significantly less than -- or maybe around slightly above one-third of the overall number. So the remaining numbers show growth in profit coming from the advertising business and some significant profitability improvements across the rest of the Mercado Pago products who are either improving their EBIT generation or for some of the still money-losing products that we're investing for the long-term like the digital wallet or the digital core bank account. Those are improving significantly their negative margins, and we see a good runway to towards eventually profitability there. So don't assume that our incremental EBIT is coming solely from the credit business, not at all. We're seeing good operational leverage sequentially across most of the product lines.
I think one last thought on this. The one where we are seeing the least amount of incremental EBIT if we look on a year-on-year basis is Brazil marketplace, but that is primarily driven by expansion in -- or actually the increase in interest rates that compressed some of the financing revenues on Marketplace. Off marketplace, we've been able to pass those interest rate increases on to the consumer across most of the Pago products on marketplace, as you know, the price of the parcelado sem juros, we have not changed it for competitive dynamics, and I think it's helped us gain shares.
Thank you. Our next question comes from the line of Kaio Prato of UBS. Kaio Prato, your line is open.
Hello, everyone. Thank you for the opportunity for asking question. I have two questions on my side, please, and also related to Mercado Credit Solutions. The first one is regarding to asset quality. So we saw that your 90 days coverage ratio actually decreased quarter-over-quarter. So just wondering if this concerns you at some point and could trigger a further increase in provisions going forward? And what is the level of coverage that you think would be a comfortable level without your growth level? And then I will follow up with my second question, please.
So we -- the question was why have the coverage ratio going slightly down from quarter-to-quarter. And the reason for that is that we provision on originations and as originations, we have decelerated a little bit from the past, we are originating credit and provisions have come down a little bit. Nonetheless, it's way over 100%. On top of that, in regard to -- give you a little more, if you want qualitative and color on a credit business. I think that throughout this year, we have been aggressive in being able to expand our credit business to riskier segment. And we have been able to do that by charging accordingly to those more retail segments and those are higher rates and therefore, our margin has been maintained or even increased and the contribution for Credito increased quarter-to-quarter. Having said that, as we see some deterioration in the market in the current quarter, we are starting to be a little bit more cautious and necessary offering prior to those segments, which we did riskier and which in the past we have offered Credito.
Okay. Perfect. Thank you very much. And the second question is related to the credit card business in Brazil. Just if you could provide any details, I don't know, the level of NPLs of this product and how this or at least how this compared to the overall industry in Brazil, especially the digital banks. And you also mentioned that this project is not positive yet in terms of margins.
So, if you could mention when do you expect this product to become profitable? And last but not the least, how -- comfortable you are nowadays in terms of increasing the pace of origination in this product? Thank you.
Okay. So you'll get some additional product disclosures on loan performance in the Q tomorrow. I think with a credit card product that is basically less than a year old, comparisons are not going to be very useful. I think the way you build out a solid and profitable credit card business is over multiple years, which has been the case of many of the neo banks. So this is very early for us.
We continue to see, I think, a product that will be very critical for our long-term strategy and that we're continuing to invest behind. Obviously, once we've distributed cards to the strongest and users we had, the deepest relationships with in the earlier quarters, we're now slowing down the rate of new cards, but it's still growing. And we're seeing improving profitability as those earlier cohorts begin to clean up and perform better and better. So, it's early. I think we're going at the right pace, making sure that we have the right underwriting capacity. And long term, this is still a critical product for us within our fintech ecosystem
Okay. Good. Thank you very much.
Thank you. Our next question comes from the line of Bob Ford of Bank of America. Bob Ford, please go ahead.
Thank you very much and hi Lissa, Pedro, Osvaldo congratulations on the quarter and thanks for taking my question. I'll ask them really quickly. What was behind the strong unique buyer growth rates in the quarter in Brazil, Argentina and Mexico, given the regional deceleration in e-commerce and we found them very noteworthy? And then can you also discuss the move into used car loans with credit card in Mexico? And maybe more broadly, the transition from a transaction or I should say, an insertion-based model into a transaction-based model across classifieds.
And then lastly, how does your deal with Western Union changed your strategy in remittances and maybe the functionality roadmap you're building out for Pago in Mexico? Thank you.
So Bob, I think, again, when we look at the consumer backdrop, when we look at the general, I think, e-commerce market data, and we look at our Q2 numbers. What we're seeing is the return on the investments that we've been carrying out over years in user experience in logistics and payments and credit. I think a unique buyer metric is a consequence of that. I think consumers when they begin to get tighter in their wallet, they will probably focus more and more of their spend on places where they can find selection, value and convenience, and we seem to be gaining a growing number of that user preference and choice throughout Latin America when you look at market share.
So I don't think I have any specific call out. Marketing and customer acquisition has continued to scale actually as a percentage of revenue. So this is not an uptick in investment, this is simply a consequence of everything we've done over the past multiple years in driving the best user experience possible.
The Credito’s experience in Mexico, I think, is a small pilot with a company that we think does a great job in that space. And I think it's a similar deals that we have with financial institutions in Brazil. It continues to inform our understanding of that space and is potentially a space that eventually Mercado Credito could look to expand with a combination not just of these partnerships, but also building a product for securitized lending, which is an interesting space throughout Latin America.
In terms of the transition to a more transaction-based model within Classifieds. I think we're still working on that. We see the potential of that space. We see that it's a high-traffic category within MELI. So one that we should be able to cross-sell very efficiently to. But I don't think we have defined or have really figured out how we move into the transactional model. Some of our previous intents around reservations and whatnot, I don't think have been the right solution. So in typical MELI fashion, we will continue to iterate and think through the business model until eventually we find something that sticks and we can see a reacceleration in Classifieds.
Remittances is a market that we've always identified as a large market. We think allowing remitters in the US to be able to send remittances direct into a Mercado Pago wallet which generates all sorts of use cases for the receiver. He can purchase. He can then use his debit card. He can pay utility bills, he can use in-store QR, is an interesting solution rather than driving that consumer to have to go to a Western Union Kiosk and extract cash. It drives further financial inclusion. So it's a win for Mercado Pago and it's a potential added service for our partners. We're pleased to have partnered with Western Union, but you will see other partnerships in this space as we look to grow our pie of the very, very large remittance business.
Very helpful, Pedro. Thank you very much
Thank you. Our next question comes from the line of also of Joao Soares of Citi. Joao Soares, Your lines is open
Thanks for taking my questions, Just a quick one on my side. I just wanted to Pedro, if you could talk a little bit more about the 1P if I'm not mistaken, we saw a slightly lower contribution sequentially when we look into the first quarter and now into this quarter, it seems, I don't know, it seems like if you could talk, maybe if there is any change here in the 1P strategy and talk about any changes or how you're seeing your relationship with consumer electronics, home appliances suppliers? I think would be interesting. Thanks so much.
Yeah. So when you refer to contribution, I assume you're referring to the mix of total GMV coming from the first-party business -- and you're correct, we have decelerated that business somewhat. I think I've addressed this somewhat.
Our 1P business overall is still a business that is money losing at the EBIT line. And in the current market context and as we've looked to tighten the screws and improve our efficiencies in terms of margin and also cash generation, that business falls under the bucket of businesses that we continue to believe are long-term critical, but that we will grow slightly lower -- at a slightly lower rate given the current market context, focus more aggressively on improving pure product margins and direct contributions and EBIT margins within the different 1P categories. And once those margins are, again, either breakeven or positive or very close to breakeven then we can reaccelerate growth there.
So we're pleased with the direction the 1P business is going, again we continue to see it as strategic long-term. But given current market context, we thought it made sense to slow down growth a little bit as we improved operational efficiency and got closer and closer to EBIT breakeven or even positive before we reaccelerate aggressively.
Understood. Thanks Pedro.
Thank you. Our next question comes from Marvin Fong of BTIG. Marvin Fong, your line is open.
Yes, good evening. Thank you for taking my questions. And I wanted to reiterate that I appreciate all the additional disclosure that you have made. Two questions, if I could, on the FinTech side. So first question, just looking at your disclosure about the average exposure per user, so for example, $1,400 for online merchant, $150 for consumer, should we think about these levels in the four categories you disclosed? Is that being about where you expect them to stay, or is there room for these average balances to grow over time in any other categories you're talking about? Just trying to understand what the opportunity for growth there is on a per user basis?
And then my second question on the IMO, the percentage, you mentioned in the shareholder letter averages around 30% historically. So should we view that as perhaps a level that you would consider to be the normalized margin? And in that case, if you're earning above 30%, like you did this last quarter, that you might see opportunity to get more aggressive with your loan growth versus slowing it down when that percentage is lower? Thank you.
So Marvin, I'd say with regard to our exposure for user, it depends on a couple of things. Probably the most important one is how fast we are growing our new profits. Typically, when we bring new users or borrowing, we get it to new either merchants or consumer's who starts with lower credit lines, and as those cohorts mature and we feel comfortable with users, we expand those plans.
So we expect for the older cohorts those numbers to continue funding and a lot of win for growth we have there, particularly, in the consumer side of the business because we really start very conservative limit.
On the other hand, we build new cohort and we are growing very fast. Typically, those -- the mix will change at these new clients, we have lower land. So FinTech will be the main driver.
On interest margin after losses, as you see from the new disclosures, those have fluctuated. And that's a consequence of new products, new segments, launches in new markets. And this is still the very early days of our credit business. And so we will continue to launch new products. We will continue to expand into new user segments, always prioritizing our confidence in the quality of the underwriting of our models.
So I don't think I would signal that this is a steady state. The more important thing and the reason we think that it's important to give this disclosure is that just looking at NPLs without understanding the pricing and the spreads is really an incomplete way of understanding our credit business.
And what you can see, if you look at any of the historical quarters, is that the iML [ph] are actually extremely healthy. And if you assume and cost of funding, you know it's close to market, and one of the big competitive advantages of MercadoLibre is that our cost to serve and our cost to acquire is extremely low because most of these users are already MercadoLibre or Mercado Pago users who we don't have to acquire and who we have multiple touch points with.
So this is a very profitable business for us and even as NPLs have increased, and part of that is just the math, we've been able to price risk very effectively, and the margins have been very healthy and have actually been better in the second quarter than the two prior quarters, which is why we continue to remain very confident with the credit business because not only is it a significant catalyst for more sales, for better sales for more working capital for our merchants, but it's also been a great business the way we've been managing underwriting and pricing.
Yes. I definitely agree based on the results. Thanks so much, Pedro and Osvaldo.
Thank you. Our next question comes from the line of Geoffrey Elliott of Autonomous. Geoffrey Elliott, your line is open. Geoffrey Elliott, your line is open. We'll go to the next question, it comes from the line of Neha Agarwala of HSBC. Your line is open. Neha Agarwala, your line is open.
Operator, it might seem like we have an issue with the lines.
Ladies and gentlemen, please standby.
[Technical Difficulty]
[indiscernible] Your line is open. Please go ahead.
Yes, hi. Good evening. Thanks for taking my question. Just a couple of quick ones here. So firstly, GMV growth in the other markets. So ex the big three market is down, I think, 18% year-on-year. So perhaps you could just gives us a few points as to what's going on there? And then the second question just on Mexico, very, very decent margin there. I think probably the highest you've delivered on a quarterly basis in Mexico. You've already talked about kind of the areas where you were leveraging. I just wanted to ask if anything specific that you would call out that has contributed to that margin in Mexico? Thanks very much.
Great. So the other segments, which includes all other markets, the largest market there is Chile. Chile is a market that had phenomenal performance last year. It grew 4x certain quarters. A significant part of that was driven by distributions on pension funds that spurred a very significant consumption boom last year. And so the comp is extremely, extremely tough. And the expectation was that that Chile would short-term decelerate because of the tough comp, when we take a longer-term look and we look at how that business has been growing over the two-year CAGR over a longer period of time, Chile is a significant outperformer and I think shows the increased potential that some of the smaller other markets still have for us. So it's entirely driven by comps in Chile, and slower growth in Colombia compared to other markets.
Mexico, I think what's interesting about Mexico since you asked the question is, this is the first profitable quarter out of Mexico in the last five years. If you recall, five years ago, we engaged in a very aggressive investment cycle, confident that long-term, if we invested in Mexico, given the size of the market, the potential of the market, eventually scale would kick in and Mexico would become a profitable business at a much larger size.
And additionally, it's allowed us to defend our leadership position where despite an incredibly competitive market, we still are market leaders. So I think this, for us, is a confirmation of the potential for Mexico to be a very large market and a profitable market as we emerge from the heavy investment cycle and start to reap some of the benefits of scale and of the investments made in the past.
I think this is a bit ahead of schedule. So this is not necessarily a trend in terms of short-term performance but it definitely confirms the conviction we had all along that Mexico will be profitable and also very large when we look at longer term.
Excellent. Very helpful. Thanks.
Thank you. Our next question comes from the line of Stephen Ju of Credit Suisse. Stephen Ju, your line is open.
So I think on the disclosure, you once again called out fulfillment penetration having reached about 40% across your network. So -- are you basically at a point where you can start combining multiple items per delivery as of yet, or do you think we need to see a higher level of order density or fulfillment penetration in order to start doing that.
And one more on the fintech side, if I may. I think in the past, you've mentioned really access to asset management products for your wallet users as another sort of pillar for growth of your fintech revenue. So our recollection is that this has been out in Argentina for some time. So maybe it's a little bit more mature there versus the other regions. So is there anything you can share in terms of your users propensity or willingness to keep a balance in the wallet? Thanks.
Thank you. Our next question comes from the line…
No, sorry, sorry, sorry. No, operator, sorry. We haven't gotten there yet.
Oh, okay.
So do you want to start with the asset management?
Yes. Let me start with the second part of the question with regards to user propensity to store balance in Mercado Pago. I think that we have seen increased balance in all of the countries, particularly -- so I'd say, in Argentina because on the one hand, we have the wallet where we're seeing easily lots of daily transaction and it's very convenient to have that store balance in order to pay those transactions easily. And what we have seen over the last year is an increase in the mix of payments that is to with store balance.
On top of that, we offer an Argentina Money Market Fund and that money market fund yields north of 30%, which is below inflation, but it's north of 30% larger that you get in the savings account, so it is really no ran as a user to have the money in Mercado Pago and being able to use it any time.
With regards to Brazil, the one thing we offer now is just interest on your balance in your account. But I'd say in the last few quarters, some of our competitors who used to offer this MT have stopped doing so, and that has made the Mercado Pago count more attractive. And we still, what we offer is pretty basic. And we are in the process of building better yielding products for Mercado Pago, and we expect this to increase. We believe that store imbalance in user account is a big part of our ambition to become -- to gain principality and being regarded as a full solution for basic banking.
Great. On orders per shipment, so obviously, we already do that. All orders where more than one product come out of one fulfillment center, obviously, our multi-item per order. I think there are many drivers that we still can act on to drive up orders per shipment. It's true that fulfillment penetration is one of them, but incremental fulfillment penetration also comes with a growing number of warehouses.
So it's more complex than that. I think a lot of it is tied to the user interface and how we can drive larger shopping cards, but then increase the number of items per order and decrease, obviously, the unit economics on each shipment.
So I think I mentioned this last quarter. I would say this is still a lever that we're working on and where we can drive incremental operational efficiencies going forward. I think the number has been relatively stable for a few quarters. So there is opportunity there.
Thank you. Our next question comes from Neha Agarwala of HSBC. Neha Agarwala, your line is open.
Hi. I hope you can hear me now?
We can hear you now.
Perfect. Thank you for taking my question. I have three questions. First, a quick clarification on the Creditas comment in Mexico. Did you say that you were looking to do securitized credit on your own balance sheet in the future, or would you stick to the partnership model?
I think we are open to having a combination of both things, but we'll have to wait and see.
Okay. Clear. My second question is on the funding cost. Could you talk a little bit about how you fund your credit and the prepayment business? And how has your -- the combination of keeping it on your own balance sheet versus using third-party funding? How has that evolved? And where should we see this going forward?
And my last question is regarding asset quality. In the recent months, we have seen -- what changes have you implemented in the credit business? And here, I'm talking in terms of maybe ticket size or approval rates, et cetera, to prepare for a potential worsening in the asset quality cycle. Thank you.
Great. So let me start with funding. The funding is done through multiple funding windows, and we believe that for the long-term health of the business, having available -- availability to multiple funding sources is the correct structure, and then we can vary between funding structures based on cost and depth of each different funding pool at different times.
So today, some of that is done through equity with a very attractive ROE. Some of that is done through SPVs or FIDCs specifically in Brazil, with some of our financial partners, Goldman Sachs and Citi being two of the largest.
And then increasingly in Brazil, we have, what would resemble retail funding, although, we are not a bank, which is the issuance of certificates of deposit, which is also one of our sources of funding.
In terms of the evolution over time, what you've seen is, increasingly over time a mix shift towards third-party funding as the business grows. And as the amount of equity that we're willing to commit to that, I think, has decreased.
We're confident that going forward, the combination of these third-party funding sources, plus incremental equity that we are willing to invest in the business, given the ROE, can fund the growth in the credit business for the foreseeable future.
With regards to asset quality, I would say that during the last year, we have been growing aggressively our credit portfolio, focusing mostly on profitability, not in growth itself, but in profitability, and we have been able to do so by reaching out to riskier consumers, riskier merchants, and pricing accordingly. That's why we have seen despite taking more risk, we have been able to maintain margins and grow profitably.
Now as the -- I'd say the credit environment is looking more cautious. We are also becoming a little bit more cautious. And what we are doing is probably focusing more of those consumers we be more creditworthy and being more cautious on lowering offers or removing offers to those segments that are riskier. -- and we have started doing this actually this quarter, the third quarter is early, very early in the third quarter in the consumer business, and we have already started doing so in the credit card business in the prior quarter -- in the second quarter.
Our next question comes from the line of Geoffrey Elliott of Autonomous. Geoffrey Elliott, your line is open. Geoffrey Elliott, please go ahead.
We'll go to our final question in queue, which comes from the line of Sean Dunlop of Morningstar. Sean Dunlop, your line is open.
Yes. Thanks for the question. Just a couple of quick ones on the commerce business. It looked like the third-party take rate declined a little bit year-over-year. I'm just sort of wondering what drove that, particularly given that the ads business is growing. Is that going to be category mix or higher shipping incentives, maybe higher-priced product that might see order fixed fees. It looks like that said the seller final value fees in the flat fee component. So, I've got one quick follow-up.
Okay, great. So, I think it's down very slightly. It's about -- what is it, like 30 bps, primarily on increases in interest rate that compress some of the take rate on zero installment financing listing types and then also different growth rates, especially Brazil with lower grade growth than some of the other markets. Brazil is the highest take rate market.
Those two factors account for that 30 bp compression. I think year-over-year, it's actually up by 10 bps. In general, I would say it's a solid level of monetization around 16.5% to 17% that we've been able to sustain.
Got it. That's helpful. Yes, I was looking specifically at that third-party business. But diving a little bit to first party, what's the long-term appetite for that? Obviously, a little bit slower here in the near-term, but is that still double-digit percentage of GMV in the long run?
Yes. 1P clearly has a role to play in -- I guess, one way to simplify the strategic thought is, there are certain subcategories in our very wide selection where market structure of the third party market might not be the most efficient, either because there are very few suppliers, because third party merchants don't have access to competitive pricing, and that's typically where we'll step in with 1P.
I think it's fair to say that our long-term ambition of percentage of overall mix is in excess of single-digits. Exactly what it will be will depend a lot on our capacity to execute and how also our third party business evolves. Where it's incredibly efficient and there's less need for us to step in, then I think we will remain 3P and asset like where we can better serve our consumers by stepping in with a 1P offering, we will see that. So we need to monitor that over time, but it should continue to grow.
Great. Thanks so much.
Thank you. At this time, I'd like to turn the call back over to Pedro Arnt for closing remarks. Sir?
Great. Thank you. So, really pleased with the quarterly results. I think we are delivering on a combination of growth above market with market share gains improving profitability. And one thing that hasn't been mentioned is also improvements in our cash conversion cycle, in our cash from operations and the increase in liquid assets that we have on our balance sheet. So, great quarter. I think the team has done phenomenal work, and we look forward to updating you after Q3. Thank you very much.
This concludes today's conference call. Thank you for participating. You may now disconnect.