MercadoLibre, Inc. — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; filed February 28, 2014. The filing is an annual report, not a standalone Q4 filing. Unless noted, figures are U.S. dollars.
Business context
MercadoLibre operates an e-commerce ecosystem across Latin America, including its marketplace, payments (MercadoPago), classifieds, advertising, online stores and, newly in 2013, shipping (MercadoEnvios) in Brazil and Argentina. Brazil, Argentina and Venezuela together generated 87.4% of 2013 revenue. Management emphasizes long-term growth and does not provide traditional earnings guidance.
Financial and operating performance
| Metric | FY 2013 | FY 2012 | Change |
|---|---|---|---|
| Net revenue | $472.6 million | $373.6 million | +26.5% |
| Gross profit / margin | $342.5 million / 72.5% | $275.5 million / 73.7% | Margin down 1.2 percentage points |
| Operating income / margin | $153.5 million / 32.5% | $129.7 million / 34.7% | Margin down 2.2 points |
| Net income attributable to shareholders | $117.5 million | $101.2 million | +16.0% |
| Diluted EPS | $2.66 | $2.30 | +15.7% |
| Operating cash flow | $142.5 million | $139.9 million | +$2.6 million |
| Free cash flow (non-GAAP) | $24.8 million | $121.8 million | Down sharply after higher capital spending |
Marketplace revenue was $331.3 million (+26.4%); non-marketplace revenue was $141.3 million (+26.7%). Marketplace gross merchandise volume (GMV) rose 28.1% to $7.3 billion; successful items sold increased 23.2% to 83.0 million. MercadoPago payment volume grew 39.8% to $2.50 billion, about 34.2% of GMV. Confirmed registered users reached 99.5 million, up from 81.5 million.
Q4 2013 revenue was $134.6 million versus $103.8 million in Q4 2012; net income was $40.8 million versus $30.2 million. Q4 was the strongest quarter, consistent with the company’s stated holiday seasonality.
Liquidity, debt and investment
At year-end, cash and cash equivalents were $140.3 million, short-term investments $76.6 million and long-term investments $45.7 million, totaling $262.6 million. Operating cash flow was positive, but investment in property and equipment was $113.8 million; total reported capital expenditures were $117.6 million. The company reported $15.9 million of loans and other financial liabilities, mainly new unsecured borrowing for office purchases and equipment. Total liabilities were $244.9 million, including $129.0 million of funds payable to customers; that customer balance is integral to its payments operations and is not conventional funded debt.
Cash dividends declared for 2013 totaled $25.2 million ($0.572 per share). The board declared a further quarterly dividend of $0.166 per share in February 2014, subject to board discretion in future periods.
Changes, outlook and material risks
- Revenue growth remained strong, but profitability ratios softened: higher payment-processing costs as MercadoPago penetration increased contributed to the gross-margin decline; increased technology investment and compensation also weighed on operating margin. Product and technology development expense rose 42.8% to $40.9 million.
- Foreign exchange was a significant headwind. Management estimated currency movements reduced 2013 revenue by about $60.9 million, partly offset by lower translated costs. Venezuela’s February 2013 exchange-rate change generated a $6.4 million loss.
- Venezuela represented 17.9% of consolidated revenue and 18.8% of net assets at year-end. The filing says accounting from January 2014 would use the SICAD auction rate (then reported at about BsF 11.8 per U.S. dollar, versus the year-end accounting rate of BsF 6.3); management estimated a $1.5–$2.5 million Q1 2014 remeasurement loss. Revenue and costs would also be translated at a fluctuating auction rate. Further currency restrictions, devaluation, price controls and new “fair price” rules could materially affect results.
- Brazil’s 2013 payments legislation introduced new regulatory and authorization requirements. The company said it would need to seek Central Bank authorizations by August 2014 and make operational changes; failure to obtain authorization could restrict or interrupt MercadoPago services.
- Argentina’s software-development tax benefit was scheduled to expire in 2014. The company intended to apply under a replacement program, but eligibility and the resulting tax rate were uncertain. The filing warns that failure to qualify could raise the Argentine rate toward the 35% statutory rate.
- Legal and regulatory exposure includes Brazilian consumer/fraud claims, intellectual-property disputes and tax proceedings. At year-end, the company had $3.3 million reserved for probable proceeding losses and disclosed additional reasonably possible legal exposures of approximately $4.0 million. It reported 624 Brazilian ordinary-court cases and 3,149 consumer-court cases. It also had approximately $22.3 million in non-current legal deposits, principally tied to São Paulo tax disputes.
- Other risks include intense competition, payment fraud and chargebacks, cyberattacks, dependence on third-party payment processors and carriers, uncertain online-platform liability, and potential systems interruptions. Management reports no formal disaster recovery plan, no business-interruption insurance and limited backup-site capacity.
Management expects to continue investing in technology, product development and brand awareness, and believes existing cash, operating cash generation and receivables-financing arrangements should fund operations and planned investment. It cautions that currency movements and macroeconomic conditions could reduce reported U.S.-dollar growth. No specific earnings or revenue forecast is provided.
Investor verification priorities
- Track Venezuela’s applicable exchange rates, access to SICAD and the actual 2014 impact on reported revenue, assets and earnings.
- Confirm Brazil’s MercadoPago authorization status, required compliance spending and any effect on payment volume or service availability.
- Reconcile capital spending and the sharp decline in free cash flow, including whether office-property purchases were exceptional or signal continued elevated investment.
- Monitor payment economics: collection fees, funding mix, installment exposure, chargebacks and whether MercadoPago growth translates into sustainable margins.
- Review Argentina’s software-tax benefit qualification and the effective tax-rate consequences if relief changes or lapses.
- Follow material Brazilian litigation and tax disputes, including the status and recoverability of court deposits and any changes to reserves.
- Compare reported U.S.-dollar growth with local-currency growth and reassess the concentration of revenue, cash and net assets in Brazil, Argentina and Venezuela.
The filing’s audited financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting as of December 31, 2013.