Business context and reporting period
MercadoLibre, Inc. (MercadoLibre) is a Latin American e-commerce and payments platform offering its marketplace, MercadoPago payments, shipping, advertising, classifieds and online-store services. This unaudited Form 10-Q covers the three months ended March 31, 2015, compared with the three months ended March 31, 2014. Unless noted otherwise, financial amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net revenue | $148.1 million | $115.4 million |
| Gross profit / margin | $103.4 million / 69.8% | $83.8 million / 72.7% |
| Operating income / margin | $25.6 million / 17.3% | $34.0 million / 29.5% |
| Net income attributable to shareholders | $1.7 million; diluted EPS $0.04 | $30.3 million; diluted EPS $0.69 |
| Operating cash flow | $38.2 million | $27.6 million |
| Free cash flow, as defined by the company | $29.9 million | $20.5 million |
- Revenue grew 28.4% year over year as reported; management calculated growth of 100.2% using prior-year exchange rates. Marketplace revenue grew 13.6% to $94.8 million; non-marketplace revenue rose 67.0% to $53.3 million.
- Gross margin declined as cost of revenue rose faster than revenue. Operating results included a $16.2 million Venezuelan long-lived-asset impairment. Below operating income, the company recorded an $8.6 million foreign-currency loss, versus a $3.1 million gain in Q1 2014, and $5.0 million of interest expense and other financial losses.
- Cash and cash equivalents were $219.8 million at March 31. Short-term investments were $148.1 million and long-term investments $190.2 million. Current assets were $588.2 million against current liabilities of $323.2 million. Cash and short-term investments totaled $367.8 million; management also treats long-term investments as liquidity.
- Total liabilities were $645.7 million and equity $331.1 million. Loans payable and other financial liabilities totaled $287.7 million, including the convertible notes. The notes have $330 million principal, mature in 2019, and carried at $284.9 million net of discounts and costs at quarter-end.
- Cash declined $3.4 million during the quarter, including a $37.4 million adverse effect from exchange-rate changes. Investing activities provided $3.3 million net, chiefly reflecting investment purchases and maturities; financing used $7.5 million, principally for dividends.
Material changes versus the prior comparable period
- Growth in Brazil and Argentina drove much of the reported revenue increase. Argentina revenue rose 69.6% and Brazil rose 30.6%; Venezuela revenue fell 27.9% in U.S.-dollar terms, largely reflecting currency devaluation.
- Marketplace gross merchandise volume (GMV) decreased to $1.649 billion from $1.797 billion, while items sold increased to 27.5 million from 21.7 million. Total payment volume rose to $1.037 billion from $664.0 million, and payment transactions increased to 14.8 million from 9.2 million.
- The impairment charge was absent in Q1 2014. Operating expenses increased to $77.8 million from $49.8 million; in addition to impairment, product and technology, sales and marketing, and general and administrative expenses all rose.
- Comprehensive loss was $20.2 million, compared with comprehensive income of $13.7 million, principally reflecting a $22.5 million currency-translation loss in other comprehensive income.
Outlook, management commentary, risks and unusual items
- No specific full-year financial guidance is provided. Management says it expects to continue comparable quarterly cash dividends, subject to board discretion, and anticipates continued technology-related capital investment. It believes available liquidity, receivable-sale capacity and operating cash generation will fund operations and planned capital expenditures.
- Venezuela adopted the SIMADI exchange rate for remeasurement effective March 31, 2015, at 192.95 bolívares per U.S. dollar; the reported first-quarter average was 52.46. The change generated a $20.4 million foreign-exchange loss and contributed to the $16.2 million property impairment. Management says it remains committed to the Venezuelan business, but warns further devaluation, tighter exchange controls, political or economic deterioration, price controls or restrictions on repatriation could materially harm results.
- Argentina also has foreign-exchange restrictions. Its software-development tax benefit expired in 2014; the application for benefits under a replacement law remained pending, and no holiday was recorded for Q1 2015.
- The company issued $330 million of 2.25% convertible senior notes due 2019 in 2014. None of the specified conversion conditions had been met by March 31, 2015. Capped-call transactions are intended to reduce potential dilution within stated price limits.
- Management recorded $2.7 million of reserves for probable legal losses and disclosed up to $4.5 million of reasonably possible legal exposure for certain actions. The Brazilian State of São Paulo fraud case was settled, but court approval remained pending; the settlement provides for joint liability in certain transactions using MercadoPago.
- Subsequent to quarter-end, the company acquired a Brazilian e-commerce management company for $15.8 million, with up to $9.5 million additional contingent consideration, and a Mexican real-estate classifieds business for $27.0 million plus a $3.0 million escrow.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of reported revenue growth reflects underlying activity versus local-currency inflation, exchange rates and fee changes, particularly in Argentina, Brazil and Venezuela.
- The ongoing impact of SIMADI conversion and Venezuelan economic, regulatory and currency developments on revenue, cash access, asset values and future impairment risk.
- The durability of payment-volume growth and related working-capital needs, including credit-card receivables, customer funds payable and collection costs.
- The notes’ carrying value, interest expense, maturity and potential dilution, alongside the company’s dividend and acquisition cash commitments.
- Developments in the pending Brazilian settlement and other litigation, tax matters, and the Argentine tax-holiday application.