MercadoLibre, Inc. — Q2 2016 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2016; statements are unaudited and amounts below are in U.S. dollars. MercadoLibre operates a Latin American e-commerce platform spanning its marketplace, payments, shipping, advertising and other services. Brazil and Argentina generated 82.9% of first-half revenue.
Financial results and liquidity
| Metric | Six months 2016 | Six months 2015 | Q2 2016 | Q2 2015 |
|---|---|---|---|---|
| Net revenue | $357.3m | $302.4m | $199.6m | $154.3m |
| Gross profit | $228.5m | $207.4m | $126.3m | $104.0m |
| Operating income | $62.7m | $60.2m | $32.2m | $34.6m |
| Net income | $46.1m | $21.2m | $15.9m | $19.5m |
| Diluted EPS | $1.04 | $0.48 | $0.36 | $0.44 |
- Margins: Gross margin declined to 64.0% from 68.6% for the first half and to 63.3% from 67.4% in Q2. Operating margin was 17.5% versus 19.9% for the first half, and 16.1% versus 22.4% in Q2.
- Cash flow: First-half operating cash flow was $44.9m, down from $96.8m. Investing cash flow was negative $38.6m and financing cash flow negative $17.5m; cash declined $22.9m to $144.0m. The company-reported non-GAAP free cash flow was approximately zero, versus $26.7m in the prior-year half.
- Liquidity: Cash and cash equivalents were $144.0m, short-term investments $251.4m and long-term investments $157.8m. Current assets totaled $673.3m against current liabilities of $422.4m, including $277.5m of funds payable to customers.
- Debt: Loans payable and other financial liabilities totaled $297.5m, mostly non-current. This included $330m principal of 2.25% convertible notes due 2019, with a $295.6m carrying amount. Noteholders’ conversion conditions had not been met at June 30.
- Other metrics: First-half successful items sold increased 42.2%, total payment volume 42.3%, and GMV 14.6%. In Q2, the respective increases were 44.7%, 50.6% and 21.2%. Non-marketplace revenue grew 30.9% in the first half, faster than marketplace revenue growth of 10.3%.
Material changes versus the prior comparable period
- Revenue rose 18.1% in the first half and 29.4% in Q2. Reported growth was partly offset by local-currency depreciation; management’s FX-neutral revenue growth was 73.7% and 72.5%, respectively. These measures exclude currency translation effects and are non-GAAP.
- First-half net income more than doubled, helped by lower foreign-exchange losses and lower income-tax expense. Q2 net income fell despite higher revenue, as operating income declined and foreign-exchange losses increased.
- Cost of revenue rose 35.5% in the first half, faster than revenue, reflecting increased payment collection costs, sales taxes and customer-support costs. Greater use of payments and shipping services also pressured gross margin.
- Product and technology expense increased 25.1% and sales and marketing expense 23.0% in the first half. The Q2 comparison also included a $13.7m impairment charge, versus none in Q2 2015.
- Operating cash flow decreased substantially, primarily due to working-capital movements, including growth in credit-card receivables and lower accounts payable and accrued expenses.
Outlook, commentary, risks and unusual items
- Management does not provide traditional earnings guidance, citing uncertainty in forecasting near-term results and a focus on long-term initiatives. It expects continued revenue growth but warns that macroeconomic conditions, currency depreciation, inflation and local regulation could reduce U.S.-dollar results. Management also cautions that investments in product, marketing and personnel may make operating-margin growth difficult to sustain.
- Venezuela’s SIMADI exchange rate moved from 273 to 628 bolívares per U.S. dollar during Q2. The company recorded a $4.9m foreign-exchange loss for the quarter and a $13.7m impairment of Venezuelan property under construction, reducing its carrying value to approximately $12.5m. Management describes further currency devaluation and government restrictions as material risks; Venezuelan operations represented 5.5% of first-half revenue.
- The Argentine software-development tax holiday contributed a $9.2m income-tax benefit and a $2.0m labor-cost benefit in the first half. Eligibility requires ongoing compliance with program conditions; the tax holiday is scheduled to expire December 31, 2019.
- The company acquired Argentine software developer Monits for approximately $3.1m and Brazilian logistics-software company Axado for approximately $5.5m. It also purchased Venezuelan commercial properties under construction for approximately $3.7m; these properties were subsequently subject to impairment review.
- Legal reserves were $5.4m. Management identified additional reasonably possible legal actions of up to $4.5m for which no loss was accrued. A Brazilian tax dispute of approximately $4.1m remained pending after a lower-court ruling in the company’s favor; a separate Brazilian tax matter involved $3.9m in court deposits.
- The board adopted a new cash-settled, six-year employee retention plan on August 2, 2016. The board also approved a $0.15-per-share quarterly dividend payable October 14, 2016. Management said it currently expects to continue comparable quarterly dividends, subject to board discretion.
- The company reported effective disclosure controls and no material changes in internal control over financial reporting during the period. It reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How much reported revenue and earnings growth reflects underlying transaction growth versus inflation, pricing changes and foreign-exchange translation in key markets.
- Whether the rapid growth in payment volume and credit-card receivables can be managed without further pressure on gross margins, working capital and operating cash flow.
- The sustainability of profitability after the Venezuelan impairment, and exposure to additional devaluation, asset impairment or exchange-control changes in Venezuela.
- The terms and potential dilution implications of the $330m convertible notes, and the cash and share-price exposure of the long-term retention plans.
- Progress and outcomes in the identified legal and tax matters, including the pending Brazilian tax claims and the company’s litigation reserves.