MercadoLibre, Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also reports unaudited fourth-quarter results. Amounts are U.S. dollars unless noted.
Business context
MercadoLibre operates an e-commerce marketplace and related payments, advertising, and online-store services across Latin America. Its largest revenue markets were Brazil (48.1%), Argentina (23.7%), and Venezuela (14.6%). MercadoPago processed $1.787 billion of payments during 2012, equal to 31.3% of gross merchandise volume.
Financial and operating performance
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Revenue | $373.6 million | $298.9 million | +25.0% |
| Gross profit / margin | $275.5 million / 73.7% | $226.9 million / 75.9% | Margin down 2.2 percentage points |
| Operating income / margin | $129.7 million / 34.7% | $99.8 million / 33.4% | +29.9% |
| Net income attributable to shareholders | $101.2 million | $76.8 million | +31.9% |
| Diluted EPS | $2.30 | $1.73 | +33.0% |
| Operating cash flow | $139.9 million | $89.4 million | +56.4% |
| Free cash flow (non-GAAP) | $121.8 million | $64.8 million | +88.0% |
Fourth-quarter 2012 revenue was $103.8 million, versus $86.5 million in Q4 2011; net income was $30.2 million, versus $21.6 million. The fourth quarter is typically the company’s strongest season.
- Operating activity expanded: gross merchandise volume (GMV) rose 18.3%, successful items sold increased 27.6% to 67.4 million, and MercadoPago payment volume grew 36.2%.
- Revenue grew 38.9% measured in local currencies, compared with 25.0% in reported U.S. dollars. Management cited currency translation as an important factor in reported growth.
- Gross margin declined as payment processing became a larger part of marketplace transactions and increased collection costs. Operating margin improved as operating expenses grew more slowly than revenue.
- Cash and cash equivalents were $101.5 million; short-term investments were $93.7 million and long-term investments $86.0 million. Total assets were $478.7 million and total liabilities $184.9 million at year-end.
- Reported debt was approximately $0.1 million, primarily car leases. Customer funds payable, a significant payment-platform liability, were $101.5 million and should not be confused with conventional borrowings.
- Capital expenditures were $18.1 million. The company paid $18.0 million in dividends during 2012 and declared $19.2 million in dividends for the year. A further $0.143-per-share quarterly dividend was declared in February 2013.
Changes, outlook, risks, and unusual items
- Revenue growth slowed from 37.9% in 2011 to 25.0% in 2012. Management cautioned that recent growth rates are not sustainable and will decrease; it does not provide traditional near-term earnings guidance.
- Management expects continued investment in technology, product development, and infrastructure, and believes available liquidity and operating cash generation will be sufficient for operations, capital spending, acquisitions, and obligations.
- In February 2013, Venezuela devalued its official exchange rate from 4.3 to 6.3 bolivars per U.S. dollar and eliminated the SITME currency system. The filing says the change did not affect 2012 statements; applying the new rate at year-end would have produced an estimated $5.7 million translation loss. Venezuela accounted for 14.6% of 2012 revenue.
- Currency controls in Argentina and Venezuela, inflation, economic and political volatility, and foreign-exchange movements pose material risks. The company generated 93.6% of revenue in Brazil, Argentina, Venezuela, and Mexico.
- Legal exposure includes 530 Brazilian ordinary-court cases and more than 3,114 Brazilian consumer-court cases. The company reserved $2.8 million for probable proceedings and disclosed up to $4.0 million of additional reasonably possible legal losses. Significant claims include Brazilian consumer/fraud litigation and tax disputes; management contests these matters.
- Management disclosed reliance on third-party hosting, no formal disaster-recovery plan, and no business-interruption insurance. Service outages, payment fraud, chargebacks, regulatory changes, or litigation could harm operations and results.
- The company accepted an offer to acquire an Argentine software development company for approximately $3.3 million, subject to closing conditions, with an expected closing date of April 1, 2013.
Investor verification priorities
- Confirm how 2013 Venezuelan exchange-rate changes and currency access restrictions affect revenue translation, cash availability, and repatriation.
- Track MercadoPago growth against processing costs, chargebacks, credit-card funding mix, and the resulting gross-margin trend.
- Review marketplace growth, local-currency versus U.S.-dollar revenue growth, and whether reported growth continues to decelerate.
- Monitor the outcomes and potential financial effects of Brazilian consumer, fraud, intellectual-property, and tax proceedings, including the stated reserves and reasonably possible exposure.
- Assess liquidity quality and payment-platform obligations alongside investment maturities, capital spending, dividends, and the proposed acquisition.