MercadoLibre, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparative period is Q1 2013. Unaudited results are presented in U.S. dollars. MercadoLibre operates e-commerce marketplaces and related payments, advertising, storefront and shipping services across Latin America. About 99% of revenue and operating expenses were generated in foreign operations.
Financial performance and liquidity
- Revenue: $115.4 million, up 12.3% from $102.7 million. Marketplace revenue rose 16.3% to $83.4 million; non-marketplace revenue increased 3.2% to $32.0 million.
- Profit and margins: Gross profit was $83.8 million (72.7% gross margin), versus $74.1 million (72.1%). Operating income was $34.0 million (29.5% margin), versus $28.6 million (27.8%). Net income was $30.3 million, versus $17.5 million; diluted EPS was $0.69, versus $0.40.
- Cash flow: Operating cash flow was $27.6 million, down from $30.1 million. Capital expenditures were $7.1 million; reported free cash flow, a non-GAAP measure, was $20.5 million versus $24.0 million. Cash and cash equivalents decreased $9.1 million to $131.1 million, including a $15.7 million adverse effect from exchange-rate changes.
- Liquidity and debt: Cash, short-term investments and long-term investments totaled approximately $263.5 million. Current assets were $337.2 million and current liabilities $226.8 million. Loans and other financial liabilities totaled $9.5 million, including $7.0 million of Venezuelan and $2.5 million of Argentine borrowing. Funds payable to customers were $132.4 million and are a significant operating liability.
- Other metrics: Gross merchandise volume was $1.80 billion, up from $1.56 billion; items sold were 21.7 million versus 18.1 million; payment volume was $664.0 million versus $532.1 million. Registered users reached 103.7 million versus 85.7 million.
Changes versus Q1 2013
- Revenue growth was broad-based, with the largest reported increases in Venezuela (27.7%), other countries (20.0%), Brazil (9.8%) and Argentina (8.9%). Management reported consolidated local-currency revenue growth of 49.9%, reflecting substantial currency effects on reported U.S.-dollar results.
- Marketplace drove most revenue growth. Cost of revenue rose 10.1%, slower than revenue, and declined to 27.3% of revenue from 27.9%.
- Product and technology expense increased 30.6% to $12.3 million; general and administrative expense rose 10.5% to $15.2 million. Sales and marketing expense was nearly flat at $22.4 million.
- Other income/expense improved to $5.1 million of income from $3.2 million of expense, mainly because foreign currency results shifted from a $6.2 million loss to a $3.1 million gain. The 2013 loss included Venezuela’s exchange-rate devaluation.
- Comprehensive income attributable to shareholders fell to $13.7 million from $16.3 million, largely reflecting a $16.6 million currency translation loss in Q1 2014.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management expects continued investment in technology and capital expenditures, and anticipates comparable quarterly dividends, subject to board discretion. A $7.3 million quarterly dividend was declared for payment in July 2014.
- Currency and country exposure: Venezuela accounted for 16.8% of revenue and 21.1% of consolidated net assets. The company used the SICAD 1 rate of 10.7 bolívares per U.S. dollar to remeasure Venezuelan monetary positions at quarter-end; SICAD 2 was 49.81. Management warns that further devaluation, restricted access to foreign currency, price or profit controls, and political or economic deterioration could materially harm results. The filing also describes restrictions on converting Argentine pesos and a 23% peso devaluation in January 2014.
- The filing’s discussion of access to SICAD 1 is not fully consistent: one passage says the company expects access, while risk disclosures say it had been unable to access the auction process. Investors should verify the company’s actual access and the exchange rate used in subsequent reporting.
- Argentina’s existing software-development tax benefit expires in September 2014; management expects no benefit in the final quarter of 2014 and estimates an approximately 22% average Argentine tax rate for 2014. Qualification under a replacement law was still under review.
- Brazilian proceedings included 636 ordinary-court cases and 3,191 consumer-court cases. The company had $3.5 million in reserves for probable legal losses and disclosed up to $4.1 million of reasonably possible losses. Certain São Paulo tax disputes are contested; related court deposits include approximately $18.1 million for one claim. A Brazilian prosecutor’s injunction concerning unlawful listings was temporarily stayed pending appeal.
- On April 8, 2014, after quarter-end, the company acquired real-estate classified businesses in Chile and Mexico for $33.6 million in cash, with up to $5 million of additional contingent consideration.
- The 2014 long-term retention plan is payable over six years beginning in 2015; expected compensation cost was approximately $12.8 million. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether reported growth and margins persist after separating local-currency growth from foreign-exchange translation and remeasurement effects.
- Venezuelan access to foreign currency, the appropriate accounting exchange rate, the local-currency share of cash and investments, and the effects of possible further devaluation or regulation.
- Cash generation and working-capital demands from MercadoPago receivables, including the trend in receivables and funds payable to customers.
- Progress on Argentina’s replacement software tax benefit and the impact of the current tax holiday’s expiration.
- Developments in material litigation and tax claims, and the purchase accounting and performance terms for the post-quarter Chile and Mexico acquisition.