MercadoLibre, Inc. — Q3 2017 Form 10-Q
Business context and reporting period. This unaudited quarterly filing covers the three and nine months ended September 30, 2017, compared with the same 2016 periods. MercadoLibre operates an integrated Latin American e-commerce platform spanning its marketplace, payments, shipping, advertising, classifieds, webstores and merchant/consumer lending businesses. Amounts below are in U.S. dollars unless stated otherwise.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net revenues | $370.7 million | $230.8 million | $961.1 million | $588.1 million |
| Gross profit / margin | $175.8 million / 47.4% | $145.6 million / 63.1% | $516.2 million / 53.7% | $374.1 million / 63.6% |
| Operating income / margin | $27.5 million / 7.4% | $53.7 million / 23.3% | $120.9 million / 12.6% | $116.4 million / 19.8% |
| Net income | $27.7 million | $38.9 million | $81.5 million | $85.0 million |
| EPS, basic and diluted | $0.63 | $0.88 | $1.85 | $1.93 |
- Revenue grew 60.6% in Q3 and 63.4% for the nine-month period. Nine-month revenue from Brazil was $569.3 million, Argentina $250.7 million, Mexico $58.3 million, Venezuela $38.3 million and other countries $44.5 million.
- Marketplace revenue rose 69.1% in Q3 and 70.4% for the nine-month period. Non-marketplace revenue, including payment and shipping fees, advertising and classifieds, rose 48.6% and 53.7%, respectively. Payment fees were $92.3 million in Q3 and $232.4 million for nine months.
- Operating cash flow was $242.4 million for nine months, versus $147.7 million in 2016. Investing activities provided $91.8 million, primarily reflecting investment maturities exceeding purchases; financing activities used $78.3 million, including $67.3 million for capped-call transactions and $19.9 million of dividends. Cash increased by $227.1 million to $461.2 million.
- At September 30, cash and cash equivalents were $461.2 million, short-term investments $175.2 million and long-term investments $45.6 million. Current assets totaled $1.182 billion and current liabilities $822.8 million. Credit-card receivables were $406.9 million and loans receivable $51.8 million.
- Loans payable and other financial liabilities totaled $334.1 million, including $24.7 million current and $309.4 million non-current. The company also had $330 million principal amount of 2.25% convertible notes due July 2019; their net carrying amount was $311.1 million. Cash and investments exceeded these reported borrowings, but customer funds payable were $519.4 million.
- Capital expenditures were $52.1 million for nine months, down from $69.0 million. The company declared quarterly dividends of $0.15 per share and said it currently expected comparable quarterly dividends, subject to board discretion.
Material changes versus prior periods
- Despite strong revenue and operating-metric growth, gross and operating margins contracted sharply. Q3 net income fell 28.9%; nine-month net income fell 4.1%.
- Management attributed margin pressure chiefly to free-shipping costs in Brazil and Mexico, higher payment-collection fees and sales taxes, customer-support and hosting costs, and increased sales and marketing spending. Q3 cost of net revenues increased 128.7%, while sales and marketing expense increased 111.8%.
- Operational metrics were higher year over year: Q3 successful items sold rose 55.7%, total payment volume 73.5%, and gross merchandise volume 50.7%. For nine months, the respective increases were 45.8%, 76.9% and 39.6%.
- Brazil’s share of consolidated revenue increased to 61.9% in Q3 from 56.7%; Argentina’s share declined to 24.6% from 30.3%.
Outlook, risks and unusual items
- The company does not provide traditional earnings guidance. Management said it expects revenue growth to continue, but cautioned that macroeconomic weakness, local-currency devaluations, Venezuela’s currency conditions, price controls and high regional interest rates could weigh on U.S.-dollar results. It expects continued investment in product development, marketing and personnel and warned that operating margins may continue to decline.
- Venezuela adopted the DICOM rate for remeasurement from June 1, 2017. The company recorded a $22.0 million foreign-exchange loss in Q2 and a $2.8 million impairment of Venezuelan real estate in Q2, compared with a $13.7 million impairment in 2016. The filing reports the September 30 DICOM rate as 3,345 bolivars per dollar in its accounting discussion, but a later market-risk section states 41,478; the filing text is inconsistent and the correct figure should be verified. Management emphasized continued uncertainty over currency access, devaluation and government controls.
- The $67.3 million 2017 capped-call purchase was intended to reduce potential dilution from the convertible notes. The notes became convertible at holders’ option for Q4 2017 after the stock-price threshold was met; the company stated its intention to settle conversions in shares. No additional conversion requests were reported through the filing date.
- The Argentine software-development tax holiday contributed a $17.7 million income-tax benefit and $5.5 million labor-cost benefit for nine months. Eligibility depends on meeting annual requirements; benefits expire December 31, 2019.
- The estimated maximum potential exposure under the buyer-protection program was $663.1 million, against a recorded allowance of $1.2 million. Legal reserves for matters assessed as probable were $6.2 million; additional reasonably possible legal actions totaled up to $6.5 million. A Brazilian subsidiary received a $3.7 million tax and fine assessment, which management assessed as reasonably possible, not probable.
- Management reported no material change in risk factors from the 2016 Form 10-K and stated that disclosure controls were effective, with no material change in internal controls during the period. New revenue-recognition guidance was expected to have no material measurement impact, though presentation of certain incentives remained under review; adoption was planned for Q1 2018.
Important facts for investors to verify
- Reconcile the significant revenue growth with lower gross and operating margins, especially the trajectory and unit economics of free shipping, payments and marketing investment.
- Confirm the correct Venezuelan DICOM exchange rate disclosed for September 30 and assess potential exposure to further devaluation, exchange restrictions and asset impairments.
- Review credit-card and loan receivable growth, credit losses and funding needs, alongside the rise in customer funds payable and the buyer-protection program’s large stated maximum exposure.
- Check the convertible notes’ conversion status, potential dilution and capped-call coverage, including the $67.3 million cash cost of the 2017 transactions.
- Assess sustainability of cash generation, foreign-currency exposure, litigation and tax contingencies, and continued eligibility for the Argentine tax holiday.