MercadoLibre, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; balance-sheet comparisons are against December 31, 2017. Amounts below are U.S. dollars. The filing describes MercadoLibre’s Latin American e-commerce ecosystem, including its marketplace, payments, shipping, advertising, storefront and consumer/merchant lending services.
Financial performance
- Revenue: Q3 net revenue was $355.3 million, up 16.5% year over year; nine-month revenue was $1,011.6 million, up 17.8%. Payment fees were $143.9 million for Q3 and $432.6 million for the nine months.
- Profit and margins: Q3 net loss was $10.1 million versus net income of $27.7 million a year earlier; nine-month net loss was $34.2 million versus net income of $81.5 million. Q3 gross margin fell to 47.8% from 57.7%, and operating margin shifted to negative 3.1% from positive 9.0%. Nine-month gross margin was 48.7% versus 60.1%; operating margin was negative 6.8% versus positive 14.1%. EPS was a loss of $0.23 for Q3 and $0.77 for the nine months.
- Cash flow: Nine-month operating cash flow was $196.1 million, down from $242.4 million. Investing activities provided $22.1 million, versus $91.8 million; financing activities provided $570.6 million, versus cash used of $78.3 million. Cash, cash equivalents and restricted cash totaled $1,077.7 million at period-end.
- Liquidity and debt: Cash and cash equivalents were $1,028.6 million, restricted cash $49.2 million, short-term investments $67.0 million and long-term investments $2.8 million. Loans payable and other financial liabilities were $696.3 million, versus $368.4 million at year-end 2017. Total liabilities were $1,676.6 million and equity $341.8 million.
- Operating indicators: For the nine months, successful items sold rose 31.9%, total payment volume 40.1%, and items shipped 55.9%. Q3 GMV declined 2.6% year over year, which management attributed mainly to currency devaluations. Brazil generated 59.4% of nine-month revenue and Argentina 28.2%.
Material changes versus prior periods
- Revenue growth was led by non-marketplace services, whose revenue increased 67.3% for the nine months; enhanced marketplace revenue declined 11.5%. Higher payment activity contributed to the non-marketplace increase.
- Costs grew faster than revenue: nine-month cost of revenue rose 51.8%, sales and marketing 64.7%, and product and technology development 15.4%. Management cited shipping subsidies, payment collection fees, sales taxes, device sales, hosting, customer support, marketing, buyer protection and credit-related bad debt.
- Shipping subsidies, presented as a reduction of revenue under ASC 606, were $316.7 million for the nine months versus $102.6 million in 2017; Q3 amounts were $107.6 million and $65.7 million. The company retrospectively recast 2017 presentation.
- Venezuela was deconsolidated effective December 1, 2017, so 2018 results exclude its operations; 2017 comparatives include them.
- Argentina was treated as highly inflationary from July 1, 2018, and its subsidiaries changed functional currency from the Argentine peso to the U.S. dollar. The filing cites weak conditions, high inflation and interest rates, and substantial peso depreciation.
- The board suspended dividends beginning in Q1 2018, citing investment opportunities. 2017 dividends were $0.15 per share per quarter.
Financing, outlook and risks
- In August, the company issued $880 million of 2.00% convertible senior notes due 2028, with an initial conversion price of $443.40 per share. Proceeds supported the repurchase or exchange of $263.7 million principal amount of 2019 notes; consideration included $348.1 million cash and 1,044,298 shares. The company also received $121.7 million from unwinding associated capped-call positions. The 2019 notes mature July 1, 2019.
- Management does not provide traditional earnings guidance, citing uncertainty in forecasting near-term results and a long-term investment focus. It expects revenue growth to continue, but cautions that macroeconomic weakness, currency depreciation, high interest rates, Venezuela’s deconsolidation and continued shipping subsidies could weigh on dollar-denominated revenue and margins. Management said existing liquidity and operating cash generation should be sufficient for operations, capital expenditures and obligations.
- Key risks include foreign exchange exposure, inflation and economic conditions across Latin America, regulation, competition, service interruptions, security breaches, third-party dependence, credit losses, and litigation. The filing reports $5.4 million of accrued probable legal liabilities and up to $6.8 million of reasonably possible legal claims for which no loss was accrued. Estimated maximum buyer-protection exposure was $633.7 million, with a $5.1 million allowance.
- Other notable items: the company acquired Argentine machine-learning firm Machinalis for approximately $5.9 million; a further $4.0 million acquisition was completed October 26, 2018. Brazil’s central bank approved MercadoPago as an authorized payment institution on November 1, after quarter-end.
Most important facts for investors to verify
- Whether payment-volume and user growth can translate into improved operating profitability as shipping subsidies, marketing and buyer-protection costs rise.
- The extent to which reported revenue growth and margins are affected by ASC 606 shipping presentation, currency movements and Venezuela’s exclusion.
- Liquidity needs and refinancing or conversion outcomes for the remaining 2019 notes, alongside the economics and potential dilution of the 2028 notes and capped-call transactions.
- Credit quality and loss trends in MercadoCredito, including the adequacy of loan-loss and buyer-protection allowances.
- Exposure to Argentina’s inflationary environment and regional currency, regulatory and legal risks; the filing does not provide a clear quantified forecast for these effects.