MercadoLibre, Inc. — 2015 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2015. The filing also reports fourth-quarter results. Unless otherwise stated, financial amounts are in U.S. dollars.
Business context
MercadoLibre operates an e-commerce platform across Latin America, combining its marketplace and classifieds businesses with MercadoPago payments, MercadoEnvios shipping, advertising and online stores. It also began offering e-commerce enterprise software in Brazil in 2015. The company reports five geographic segments: Brazil, Argentina, Mexico, Venezuela and other countries.
Financial and operating performance
| Metric | 2015 | 2014 |
|---|---|---|
| Net revenue | $651.8 million | $556.5 million |
| Gross profit / gross margin | $436.8 million / 67.0% | $397.6 million / 71.4% |
| Operating income / operating margin | $139.2 million / 21.4% | $120.5 million / 21.6% |
| Net income | $105.8 million | $72.7 million |
| Operating cash flow | $221.4 million | $196.8 million |
| Free cash flow (company-defined, non-GAAP) | $117.1 million | $121.0 million |
- Revenue increased 17.1%. Marketplace revenue rose 4.5% to $393.0 million; non-marketplace revenue increased 43.5% to $258.8 million.
- Marketplace GMV was $7.15 billion, up from $7.08 billion; successful items sold increased 26.8% to 128.4 million. MercadoPago payment volume rose 47.1% to $5.18 billion, and confirmed registered users grew 19.6% to 144.6 million.
- Fourth-quarter revenue was $180.7 million, gross profit $117.6 million and net income $39.0 million. The fourth quarter was the largest revenue quarter of 2015.
- At year-end, cash and cash equivalents were $166.9 million, short-term investments $202.1 million and long-term investments $187.6 million. Current assets were $557.5 million versus current liabilities of $325.0 million.
- Long-term debt and other financial liabilities were $294.3 million, primarily the carrying value of $330 million face-value convertible notes due 2019. The notes bear 2.25% interest; a separate Venezuelan mortgage carried a 24% fixed rate.
Material changes versus prior year
- Net income rose 45.6%, while operating income increased 15.5%. The 2015 result included a $24.6 million Argentine software-development tax benefit, including $3.6 million attributable to fourth-quarter 2014. The company also recorded a $16.2 million Venezuelan asset impairment, compared with $49.5 million in 2014.
- Gross margin declined 4.4 percentage points. Management attributed pressure principally to greater MercadoPago and shipping penetration, which increased transaction and collection costs; cost of revenue rose 35.2%.
- Marketplace GMV was nearly flat in reported dollars despite higher item sales. Currency depreciation and changing country mix affected reported results. Argentina revenue grew 62.6%, while Brazil grew 6.2% and Venezuela fell 30.2%.
- Operating cash flow improved, but free cash flow declined modestly. Cash and cash equivalents fell by $56.3 million, including a $66.4 million adverse effect from exchange-rate changes.
- Non-marketplace activities expanded, with revenue growth in financing, off-platform payments, shipping and classifieds. MercadoPago processed 72.5% of GMV, compared with 49.7% in 2014.
Outlook, commentary and risks
- The company does not provide traditional earnings guidance, citing uncertainty in forecasting near-term results. Management emphasizes long-term growth and continued investment in product development, marketing, payments, credit, shipping and new services, while cautioning that operating margins may remain under pressure.
- Foreign-exchange exposure is significant: 2015 revenue was concentrated in Brazil (44.6%) and Argentina (37.6%). The filing estimates currency movements reduced 2015 revenue by about $347.7 million, with a corresponding $335.3 million decrease in aggregate costs and operating expenses.
- Venezuela remained a material uncertainty. Its economy was treated as highly inflationary; the company adopted the SIMADI rate for remeasurement, recognized a $20.4 million first-quarter foreign-exchange loss and impaired Venezuelan real estate by $16.2 million. Venezuela contributed 6.2% of revenue. Price controls, currency restrictions, economic instability and possible further devaluation could affect operations and asset values.
- Argentina removed prior foreign-exchange controls in December 2015, but the peso depreciated sharply during the month. Brazil payment operations require central-bank authorization; the company had applied but had not received authorization by the filing date. Payment, consumer-protection, tax and marketplace-liability rules remain important regulatory risks.
- Legal exposure includes a $4.4 million reserve for probable proceeding-related losses and up to $3.2 million of additional reasonably possible losses disclosed in the notes. The filing also reports numerous consumer claims, particularly in Brazil and Argentina. A Brazilian settlement provides for joint liability in certain transactions paid through MercadoPago.
- Other risks include competition, fraud and cybersecurity, service interruptions, reliance on third-party payment and shipping providers, seasonal variation, and the possibility that higher payment or shipping costs could reduce transaction volume or margins.
- The company paid quarterly dividends in 2015 and said it expected to continue comparable payments, subject to board discretion. It reported effective disclosure controls and internal control over financial reporting; the auditor issued an unqualified opinion on the financial statements and controls.
Important facts for investors to verify
- How much of revenue and earnings growth came from underlying transaction growth, pricing and mix versus foreign-exchange movements and the Argentine tax benefit.
- Whether MercadoPago and MercadoEnvios growth can sustain margins as their transaction costs and adoption increase.
- The status and consequences of Brazilian payment-institution authorization, and any changes in payment, tax or consumer-liability rules across operating markets.
- Venezuela’s applicable exchange rate, ability to obtain and transfer U.S. dollars, exposure to price controls, and recoverability of Venezuelan assets.
- Cash availability and investment liquidity, the repayment or conversion terms of the 2019 notes, and the actual outcomes of material litigation and contingencies.