MercadoLibre, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Unaudited financial statements are prepared under U.S. GAAP; amounts below are U.S. dollars unless noted. MercadoLibre operates an integrated Latin American commerce and fintech platform, including marketplace, payments, logistics, advertising, storefronts and consumer and merchant lending.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change / context |
|---|---|---|---|
| Net revenue | $1,378.4 million | $652.1 million | Up 111.4% |
| Commerce revenue | $910.6 million | $380.7 million | Up 139.2% |
| Fintech revenue | $467.8 million | $271.4 million | Up 72.4% |
| Gross profit / margin | $591.4 million / 42.9% | $312.8 million / 48.0% | Margin declined 5.1 percentage points |
| Operating income (loss) / margin | $90.8 million / 6.6% | $(29.7) million / (4.6)% | Returned to operating profitability |
| Net income (loss) | $(34.0) million | $(21.1) million | Loss widened; Q1 2021 includes debt-extinguishment and repurchase-premium costs |
| Operating cash flow | $(263.0) million | $(85.7) million | Higher cash use, partly attributed to reductions in payables and customer/merchant funds payable |
| Investing cash flow | $(97.9) million | $(150.1) million | Included $148.7 million of net loan-receivable growth and $112.7 million of property and equipment purchases |
| Financing cash flow | $(859.7) million | $154.6 million | Primarily reflects the 2028 Notes repurchase, partly offset by new borrowing |
- Revenue growth reflected higher commerce activity and fintech services. Gross merchandise volume rose 77.4%, total payment volume rose 81.8%, and unique active users increased to 69.8 million from 43.2 million.
- Cost of revenue rose 132.0%, faster than revenue. Management cited increased shipping and product costs, sales taxes, collection fees and customer support costs; the resulting gross-margin decline was partly offset by lower collection fees as a share of revenue.
- Operating expenses increased 46.1% to $500.5 million, but declined as a share of revenue. Sales and marketing included a $59.1 million increase in bad-debt expense.
Financial position, debt and liquidity
- At March 31, 2021, cash and cash equivalents were $862.7 million, restricted cash was $325.6 million, short-term investments were $980.1 million, and total assets were $5.20 billion. Cash, cash equivalents and short-term investments totaled $1.84 billion, but portions were pledged or otherwise restricted.
- Management identified $1.21 billion of cash and cash equivalents and short-term investments as its main liquidity source, excluding $562.8 million held for a Brazilian Central Bank requirement and $71.3 million pledged for a Brazilian credit line.
- Loans payable and other financial liabilities totaled $2.17 billion, compared with $1.41 billion at December 31, 2020. In January, the company issued $400 million of 2.375% Sustainability Notes due 2026 and $700 million of 3.125% Notes due 2031.
- The company repurchased $440 million principal amount of its 2.00% convertible notes due 2028 for total consideration of $1.865 billion, including accrued interest and premium. The transaction included $49.2 million of debt-extinguishment loss and premium expense, and a $1.484 billion reduction to equity for reacquisition of the notes’ equity component. Total reported equity fell from $1.65 billion at year-end to negative $30.4 million.
- Working-capital assets included $883.7 million of credit-card receivables and other payment receivables and $435.4 million of net loans receivable. The allowance for uncollectible loans increased to $140.4 million from $77.8 million at year-end.
Outlook, risks and unusual items
- Outlook: The company does not provide traditional earnings guidance, citing uncertainty in forecasting near-term results and a focus on long-term initiatives. Management said uncertainty around COVID-19 and regional economic conditions limits certainty about 2021 business development and cash generation.
- COVID-19 and currencies: Lockdowns, weaker regional economies and local-currency devaluations could disrupt operations or reduce U.S.-dollar-reported revenue. Substantially all revenue, cost of revenue and operating expenses arise outside the United States. Argentina’s exchange controls and gap between official and informal exchange rates add currency and cash-access risks.
- Credit and margin risks: Expansion of lending, higher bad-debt charges, shipping investment, product sales and sales taxes may pressure margins and cash flow. The company also cites competition, regulation, cybersecurity, service disruptions and third-party dependencies as risks.
- Legal contingencies: The filing records $8.7 million for matters assessed as probable. It identifies up to $55.7 million of reasonably possible legal actions for which no loss was accrued. A Brazilian tax dispute includes $65.6 million deposited with the court; management assessed the loss risk as reasonably possible, not probable.
- Bitcoin: The company purchased $7.8 million of bitcoin during Q1. It accounts for digital assets as indefinite-lived intangible assets; impairment may be recognized for declines below carrying value, while increases are not recorded until sale. The filing highlights price volatility, regulatory, custody and loss risks.
- Share repurchases: The company repurchased shares under a program authorized for up to $350 million, which expires August 31, 2021. It reported an $18.3 million foreign-currency loss related to the cost of accessing U.S. dollars for purchases in Argentina.
- Other notable disclosures: Capital expenditures were $112.7 million, versus $53.5 million a year earlier. Management expects continued investment in technology and logistics. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- Reconcile the $1.865 billion cash outlay for $440 million principal of 2028 Notes, its accounting treatment, remaining note balance and implications for equity and future interest costs.
- Assess liquidity available for operations after accounting for restricted cash, guarantee investments, customer funds and financing needs for Mercado Pago and Mercado Credito.
- Monitor credit performance, including the rise in loan-loss allowance and bad-debt expense, and whether loan growth produces adequate returns.
- Track gross margin, shipping and product costs, sales taxes, and the sustainability of operating profitability as the company invests for growth.
- Evaluate exposure to Latin American currency movements, Argentina’s exchange controls, COVID-19-related uncertainty, and the disclosed legal and bitcoin risks.