MercadoLibre, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited. Amounts are U.S. dollars unless stated otherwise. MercadoLibre operates an e-commerce marketplace and related payments, advertising, and online-store services across Latin America.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net revenue | $102.7 million | $83.7 million | +22.7% |
| Gross profit / margin | $74.1 million / 72.1% | $62.6 million / 74.8% | Margin down 2.7 percentage points |
| Operating income / margin | $28.6 million / 27.8% | $24.9 million / 29.8% | Income up; margin down |
| Net income attributable to shareholders | $17.5 million; $0.40 diluted EPS | $19.6 million; $0.45 diluted EPS | Down approximately 11% |
| Operating cash flow | $30.1 million | $19.0 million | Up 58.5% |
| Free cash flow (company-defined non-GAAP) | $24.0 million | $15.3 million | Up approximately 57% |
- Cash and cash equivalents were $122.2 million and short-term investments $75.5 million at quarter-end; long-term investments were $95.0 million. Cash plus short-term investments totaled $197.7 million.
- Current assets were $288.6 million versus current liabilities of $182.7 million, a current ratio of approximately 1.58. Total liabilities were $199.2 million.
- Reported loans and other financial liabilities totaled approximately $0.2 million; $6.3 million of dividends payable was also recorded. Customer funds payable were $110.3 million.
- Quarter-end cash increased $20.7 million to $122.2 million. Investing activities provided $3.8 million, chiefly reflecting net investment maturities and purchases; financing used $4.8 million, primarily for dividends. Foreign-exchange effects reduced cash by $8.4 million.
Changes versus the prior-year quarter
- Revenue growth reflected marketplace GMV growth of 18.3%, items sold up 20.5%, MercadoPago total payment volume up 43.8%, and growth in financing and off-platform payment revenue. Revenue grew 36.3% when calculated using prior-year exchange rates.
- All geographic segments grew in reported dollars: Brazil +13.3%, Argentina +41.4%, Venezuela +34.6%, Mexico +18.3%, and other countries +14.0%. Brazil represented 46.5% of revenue and Argentina 24.9%.
- Costs grew faster than revenue: cost of revenue increased 35.7%; operating expenses increased 20.7%. Higher payment collection costs, customer-support investment, fraud prevention, chargebacks, compensation, and marketing contributed to expense growth.
- Net income declined despite higher operating income, primarily because foreign-currency losses increased to $6.2 million from $1.0 million. The 2013 loss included approximately $6.4 million from Venezuela’s currency devaluation.
- Marketplace registered users rose to 85.7 million from 69.5 million; GMV was $1.56 billion versus $1.32 billion, and payment volume was $532.1 million versus $370.1 million.
Outlook, risks, and notable items
- Management gave no specific revenue or earnings guidance. It said it expected to continue comparable quarterly cash dividends, subject to board discretion, and anticipated continued technology-related capital investment.
- Venezuela devalued its official exchange rate from 4.3 to 6.3 bolívares per U.S. dollar in February 2013; the prior SITME system was eliminated. At filing, the company could not access the new SICAD auction mechanism. Venezuelan operations accounted for 14.7% of quarterly revenue, about 13.1% of consolidated net assets, and local-currency cash and investments equal to about 14.6% of consolidated cash and investments. Management warned that further devaluation or tighter controls could adversely affect operations and access to U.S. dollars.
- Argentina’s currency controls may delay or restrict conversion and remittance of funds. Management did not expect current restrictions to materially harm its plans, but the exposure remains relevant.
- Management presented non-GAAP adjusted net income of $23.4 million and adjusted EPS of $0.53, excluding the Venezuela devaluation loss and related tax effect. These measures are not substitutes for GAAP results.
- The company acquired an Argentine software development business in March for approximately $3.45 million; its purchase-price allocation was preliminary. In April it agreed to buy Buenos Aires office space for $18.0 million plus VAT, payable partly in installments.
- Legal reserves were $3.5 million for probable losses; additional reasonably possible matters were estimated at up to $4.2 million. The filing also describes 557 Brazilian ordinary-court cases and more than 3,563 consumer-court cases. A São Paulo tax claim of approximately $11.4 million was contested and management assessed loss as remote, with no reserve recorded.
- Other disclosed risks include competition, regulation, platform security and interruptions, fraud, intellectual-property claims, litigation, and regional economic and political conditions. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Key facts for investors to verify
- Whether marketplace and MercadoPago growth continues to translate into revenue while gross and operating margins remain under pressure.
- Venezuela’s future exchange-rate rules, access to foreign currency, and potential additional remeasurement losses.
- The quality and liquidity of cash and investments, including the portion held in foreign subsidiaries and in Venezuela.
- Cash conversion and working-capital trends, particularly payment receivables and customer funds payable.
- Progress and final accounting for the software acquisition, and funding and completion of the $18.0 million office purchase.
- Developments in Brazilian litigation and the contested São Paulo tax assessment, as well as the assumptions behind the company’s adjusted non-GAAP results.