MercadoLibre, Inc. — Q3 2011 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2011, compared with the same periods in 2010. MercadoLibre operates Latin American e-commerce marketplaces, payments, advertising and online-store services; Brazil was its largest market. The company reports in U.S. dollars, while substantially all revenue and operating costs arise in foreign operations.
Financial performance and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net revenue | $81.6m | $56.0m | $212.5m | $154.4m |
| Gross profit | $61.6m | $44.5m | $161.1m | $121.6m |
| Operating income | $30.0m | $19.3m | $70.8m | $53.6m |
| Net income | $26.3m | $18.8m | $55.2m | $40.1m |
| Diluted EPS | $0.60 | $0.43 | $1.25 | $0.91 |
- Growth and margins: Revenue rose 45.9% in Q3 and 37.6% for nine months. Gross margin was about 75.4% in Q3 and 75.8% year to date; operating margin was about 36.7% and 33.3%, respectively. Net margin was about 32.2% in Q3 and 26.0% year to date.
- Marketplace activity: Q3 gross merchandise volume (GMV) was $1.35bn, up 51.8%; items sold were 14.4m, up 38.1%. Payment volume was $368.5m, up from $189.9m. The nine-month figures were GMV of $3.37bn, items sold of 36.9m and payment volume of $909.5m.
- Cash flow: For the first nine months, operating cash flow was $62.3m, investing cash outflow $51.7m and financing cash outflow $7.1m. Cash increased $2.3m to $59.1m.
- Liquidity and debt: Cash and short-term investments totaled $126.7m; long-term investments were $41.0m. Total cash and investments were therefore approximately $167.7m. Reported loans and other financial liabilities totaled about $0.3m; customer funds payable are operating balances, not described as borrowings. Current liabilities were $104.3m.
- Other balance-sheet items: Total assets were $325.3m and total equity $207.9m at September 30. Accounts receivable and funds receivable from customers were $15.4m and $13.2m; funds payable to customers were $58.9m.
Material changes versus prior period
- Revenue growth reflected higher GMV and sales, partly offset by a lower take rate: 6.05% versus 6.30% in Q3, and 6.30% versus 6.39% for the nine-month period. Management also reported local-currency revenue growth of 41.3% in Q3 and 29.9% year to date.
- Cost of revenue grew faster than revenue: 75.2% in Q3 and 56.7% year to date, versus revenue growth of 45.9% and 37.6%. Management cited higher payment collection fees, revenue taxes and customer-support spending.
- Operating expenses increased, including product and technology development (+40.3% in Q3), sales and marketing (+36.0%) and general and administrative expense (+3.0%). For the nine months, those expenses increased 45.3%, 30.7% and 29.5%, respectively.
- Q3 net income benefited from higher operating income and other income, including $3.3m of foreign-currency gains. Nine-month other income improved versus 2010 in part because MercadoPago installment receivables were being pre-sold, reducing financing expense; 2010 included $7.3m of related financial expenses in the first half.
- Income and asset tax expense rose to $8.8m in Q3 from $1.0m, and to $22.4m for nine months from $9.7m. The prior-year Q3 included a $4.6m tax valuation allowance reversal, affecting comparability.
- Q3 direct business measures grew, while the company’s take rate declined. Brazil represented 56.4% of Q3 revenue; Venezuela’s share increased to 11.1%, while Mexico’s declined to 6.9%.
Outlook, commentary, risks and unusual items
- Management provided no specific revenue, earnings or margin guidance. It said existing cash, operating cash generation and proceeds from selling credit-card receivables should be sufficient for operations, capital expenditures and obligations. It expected continued technology-related capital investment and said it expected to continue comparable quarterly dividends, subject to board discretion.
- In September, the company acquired 60% of Autopark LLC, which operates Mexican auto and real-estate classified sites, for approximately $5.5m. The purchase-price allocation was preliminary; the company recorded $6.7m of goodwill. The seller retains 40%, with specified call and put options affecting potential future consideration.
- A $1.6m loss from voided or overdrawn checks processed by a Brazilian payments processor was a one-time contributor to nine-month sales and marketing expense and tax expense. The company also purchased a Caracas office property for about $6.6m.
- Venezuela is treated as highly inflationary, uses the U.S. dollar as its functional currency and is subject to restrictions on obtaining foreign currency. Venezuelan net assets were about 8.0% of consolidated net assets; local-currency cash and investments held there were about 5.2% of consolidated cash and investments. Management said restrictions were not expected to significantly harm its Venezuela investment plans.
- Legal exposure includes Brazilian consumer and ordinary court cases; total reserves for probable proceedings were $1.7m, with an additional aggregate amount of up to $2.7m described as reasonably possible. A São Paulo tax dispute of about $5.1m was contested and funded by a court deposit; management assessed loss as remote. A separate federal tax claim of about $2.8m was also assessed as remote. The Rio de Janeiro fraud claim was settled without financial or legal liability, subject to changes to website terms.
- Disclosed risks include foreign-exchange and interest-rate movements, economic and regulatory conditions in Latin America, Venezuela currency controls, payment fraud and chargebacks, service interruptions, competition, and litigation or intellectual-property claims. The filing also highlighted uncertainty from the U.S. credit-rating downgrade and European sovereign-debt concerns. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether GMV and payment-volume growth can continue while the take rate declines and payment-processing costs rise.
- The cash-flow and credit-risk effects of MercadoPago receivables, customer funds balances and payment-processor chargebacks.
- The effective tax burden and sustainability of tax benefits, including the Argentine software-development incentive and Brazilian tax-loss utilization.
- Exposure to foreign exchange and capital controls, particularly in Brazil, Argentina and Venezuela, and the location and accessibility of cash and investments.
- Final purchase accounting and future obligations arising from the Autopark acquisition options, and the realized performance of the acquired platforms.
- Developments in Brazilian legal and tax proceedings, including the reserved customer-service claim and unreserved claims management considers possible or remote.
- Dividend declarations and cash requirements: the third quarterly dividend was recorded as payable at September 30 and paid in October 2011.