MercadoLibre, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Unaudited results are compared with the corresponding 2020 periods. Amounts below are U.S. dollars; financial statement figures are in millions unless noted.
Business context and results
MercadoLibre operates a Latin American commerce and fintech ecosystem, including its marketplace, Mercado Pago payments and credit, shipping, advertising, classifieds and storefront services. Management attributed continued revenue growth to higher commerce activity and expansion of fintech services.
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net revenues | $1,702.8 | $878.4 | $3,081.2 | $1,530.5 |
| Gross profit | $753.9 | $427.2 | $1,345.3 | $740.0 |
| Income from operations | $166.2 | $99.4 | $257.0 | $69.7 |
| Net income | $68.2 | $55.9 | $34.2 | $34.8 |
| Basic and diluted EPS | $1.37 | $1.11 | $0.69 | $0.66 |
| Gross margin | 44.3% | 48.6% | 43.7% | 48.4% |
| Operating margin | 9.8% | 11.3% | 8.3% | 4.6% |
Q2 revenue rose 93.9% year over year; commerce revenue increased 96.4% and fintech revenue 88.9%. For the first half, revenue increased 101.3%, with commerce up 113.3% and fintech up 81.0%. The company reported 75.9 million quarterly unique active users, versus 51.5 million, and total payment volume of $17.5 billion, versus $11.2 billion.
Cash flow, balance sheet and debt
- First-half cash flows: Operating cash flow was negative $1.0 million, compared with positive $564.7 million in 2020; investing cash flow was negative $256.6 million and financing cash flow negative $755.4 million. The operating cash flow decline was primarily attributed to a smaller increase in funds payable to customers and amounts due to merchants. Capital expenditures were $262.8 million, versus $101.9 million.
- Liquidity: At June 30, cash and cash equivalents were $1.070 billion, restricted cash $361.2 million and short-term investments $898.4 million. Management identified $1.260 billion of cash and cash equivalents plus short-term investments as its main liquidity source, excluding $707.9 million of investments required as a Central Bank of Brazil guarantee.
- Debt and equity: Loans payable and other financial liabilities totaled $2.368 billion, up from $1.409 billion at year-end 2020. Total liabilities were $6.062 billion and equity $81.0 million, compared with $4.875 billion and $1.652 billion, respectively, at year-end. The equity decline chiefly reflects the accounting treatment of the January repurchase of convertible-note equity components and share repurchases.
- Credit portfolio: Net loans receivable were $570.5 million, versus $401.7 million at year-end. The allowance for uncollectible loans rose to $239.3 million from $77.8 million; reported past-due loans totaled $239.3 million.
Material changes and unusual items
- Gross margin declined year over year in both Q2 and the first half, mainly because product sales and shipping operating costs increased as a share of revenue. Management also cited lower collection fees as a partial offset.
- Q2 operating margin fell to 9.8% from 11.3%, with higher marketing expense and cost of revenue. First-half operating margin improved to 8.3% from 4.6%, supported by revenue growth and marketing efficiencies.
- First-half interest expense and other financial losses included $49.2 million related to the January repurchase of $440 million principal amount of 2028 convertible notes. The company paid $1.865 billion, including premium and accrued interest, and issued $400 million of 2026 sustainability notes and $700 million of 2031 notes.
- First-half foreign currency losses were $27.2 million, including a $31.0 million loss associated with share repurchases in Argentina amid currency controls. The company also recorded $7.2 million of impairment on digital assets.
- Income tax expense was $70.7 million in Q2 and $114.3 million for the first half. The reported first-half effective tax rate was 77.0%, affected in part by nondeductible debt-extinguishment and share-repurchase foreign exchange losses, and withholding tax on Argentine dividends.
Outlook, risks and contingencies
MercadoLibre stated that it does not provide traditional earnings guidance, citing uncertainty in forecasting near-term results and its long-term investment focus. Management anticipated continued investment in technology, logistics capacity and personnel. It said existing cash, investments and operating resources were expected to fund operations, capital expenditures and obligations, while noting uncertainty around pandemic effects and cash generation.
- Key risks include COVID-19 impacts, Latin American macroeconomic volatility, currency depreciation and restrictions, regulation, competition, credit losses, fraud and cybersecurity, operational interruptions, and reliance on third-party providers.
- Management accrued $10.2 million for legal and other contingencies assessed as probable; it disclosed up to $66.6 million of reasonably possible legal claims for which no loss was accrued. A Brazilian tax dispute includes $94.4 million deposited with the court; an appeal was pending.
- The buyer protection program had estimated maximum potential exposure of $2.648 billion, with a recorded allowance of $5.3 million. Management cautioned that the stated maximum is not considered representative of actual exposure.
- Argentine foreign-exchange controls may limit access to foreign currency. The company uses the official exchange rate for its Argentine subsidiaries, and noted that an informal market rate can differ significantly.
Important facts for investors to verify
- Whether revenue growth can be sustained while gross margin remains under pressure from product mix and shipping costs.
- Credit portfolio performance, including rising loan-loss allowances and past-due balances.
- Cash generation and working-capital movements, given near-zero first-half operating cash flow.
- Debt levels, refinancing and liquidity available after excluding restricted or guaranteed balances.
- Exposure to currency controls, exchange-rate movements, tax matters and legal contingencies.
- Reported earnings’ sensitivity to the debt repurchase, foreign-exchange losses, tax charges and other unusual items.