MercadoLibre, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Amounts are U.S. dollars; financial statement figures are in millions unless noted. MercadoLibre operates a Latin American e-commerce and financial technology ecosystem, including its marketplace, payments, logistics, advertising, online stores and lending services.
Key financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net revenue | $545.2 | $335.4 | $1,019.0 | $656.4 |
| Gross profit | $272.4 | $159.7 | $509.4 | $322.5 |
| Gross margin | 50.0% | 47.6% | 50.0% | 49.1% |
| Operating loss | $(12.5) | $(28.2) | $(2.3) | $(57.7) |
| Net income (loss) | $16.2 | $(11.3) | $28.1 | $(24.2) |
| Basic and diluted EPS | $0.31 | $(0.25) | $0.45 | $(0.55) |
- Revenue rose 62.6% in Q2 and 55.3% for the first half year over year. Q2 Enhanced Marketplace revenue grew 84.6%; Non-Marketplace revenue, which includes payments, grew 43.4%.
- Six-month gross margin improved to 50.0%, while operating expenses rose 34.6% to $511.8 million. Sales and marketing spending increased, but declined as a share of revenue.
- Despite operating losses, the company reported net income, supported by higher interest income and other financial gains and income tax gains. Q2 interest income and other financial gains were $33.7 million; the six-month figure was $58.1 million. Income tax gains were $8.9 million in Q2 and $5.4 million for the first half.
Cash flow, liquidity and debt
- First-half operating cash flow was $165.9 million, versus $107.2 million a year earlier. Investing cash outflow was $1.415 billion, primarily reflecting investment purchases; financing cash inflow was $1.916 billion. Cash, cash equivalents and restricted cash ended the period at $1.128 billion.
- At June 30, cash and cash equivalents were $1.119 billion, short-term investments $1.789 billion and long-term investments $207.0 million. Management reported $2.569 billion of cash and short-term investments excluding $339.3 million held for a Brazilian Central Bank guarantee, plus $207.0 million of long-term investments.
- Loans payable and other financial liabilities totaled $782.7 million on the balance sheet. The company had $880 million principal amount of 2.00% convertible notes due 2028; their June 30 carrying amount was $563.4 million. The remaining $66.0 million principal amount of 2.25% notes matured July 1, 2019, mostly settled through conversion into shares.
- Loans receivable increased to $192.9 million from $95.8 million at year-end 2018; credit card receivables rose to $433.0 million from $360.3 million. These reflect the growing Mercado Pago and Mercado Credito businesses and require funding.
Material changes and business drivers
- March financing raised approximately $1.966 billion net: a public common-stock offering, a concurrent PayPal private placement and a $100 million preferred-stock placement. The proceeds contributed substantially to higher cash and equity; common shares outstanding increased to 49.3 million from 45.2 million at December 31, 2018.
- Brazil and Mexico were major growth contributors: Q2 revenue increased 74.0% in Brazil and 267.1% in Mexico. Argentina revenue grew 13.8% in reported dollars, but its Enhanced Marketplace revenue declined 2.2% amid peso devaluation.
- Payment volume increased 47.2% in Q2 and 41.3% for the first half. Q2 total payment volume was $6.517 billion; marketplace gross merchandise volume was $3.398 billion.
- Management attributed margin improvement partly to lower shipping subsidies netted against revenue and a flat fee on lower-value transactions in certain markets. Higher shipping, payment-processing and customer-support costs partly offset these benefits.
Outlook, risks and unusual items
- The company does not provide traditional earnings guidance, citing uncertainty in forecasting near-term results and a focus on long-term initiatives. Management said it expects revenue growth to continue, but warned that weak regional economies, currency devaluations and high interest rates could reduce year-over-year revenue measured in U.S. dollars. Margins could be pressured by continued investment and shipping costs.
- Argentina was treated as highly inflationary, with the U.S. dollar as the functional currency since July 2018. The filing cites volatile economic conditions, peso devaluation, high inflation and interest rates. Currency movements also affect reported results and asset values.
- Management identifies risks including competition, regulation, litigation, system interruptions, security breaches, reliance on third parties and the ability to attract customers and personnel. Mexico reported a segment direct contribution loss of $20.8 million in Q2 and $31.9 million for the first half, despite rapid revenue growth.
- Legal contingencies included $5.3 million accrued for matters assessed as probable and up to $11.2 million of reasonably possible claims for which no loss was accrued. The buyer-protection program’s estimated maximum exposure was $1.051 billion, against a recorded allowance of $4.3 million; management stated the maximum is not representative of expected losses.
- The company adopted lease accounting ASC 842 in 2019, recording $157.8 million of operating lease right-of-use assets and $161.5 million of operating lease liabilities. It also paid $88.4 million for a 2028-note capped call. The Argentine software-development tax law expires December 31, 2019; eligibility under a new Argentine promotional regime remained under assessment and subject to government approval.
- Management stated that disclosure controls were effective and that there were no material changes in internal control over financial reporting during the period.
Most important facts for investors to verify
- Whether payment, marketplace and lending growth can translate into sustained operating profitability, particularly given rising investment and fulfillment costs.
- How much reported growth reflects underlying local-currency activity versus currency movements, shipping-subsidy changes and revenue presentation changes.
- The credit quality and funding needs of Mercado Credito loans and Mercado Pago receivables, and the adequacy of associated loss allowances.
- Liquidity available for operations after accounting for customer funds, restricted investments, the Brazilian guarantee and debt or lease obligations.
- The eventual impact of Argentine macroeconomic conditions, tax-law changes, litigation and buyer-protection claims.