MercadoLibre, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Amounts are in U.S. dollars; financial-statement figures are in millions unless stated otherwise. MercadoLibre operates an integrated Latin American commerce and fintech ecosystem, including its marketplace, payments, logistics, advertising, credit and investment services.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net revenue | $878.4 | $545.2 | $1,530.5 | $1,019.0 |
| Gross profit | $427.2 | $272.4 | $740.0 | $509.4 |
| Operating income (loss) | $99.4 | ($12.5) | $69.7 | ($2.3) |
| Net income | $55.9 | $16.2 | $34.8 | $28.1 |
| Basic and diluted EPS | $1.11 | $0.31 | $0.66 | $0.45 |
| Gross margin | 48.6% | 50.0% | 48.4% | 50.0% |
| Operating margin | 11.3% | (2.3%) | 4.6% | (0.2%) |
- Revenue growth: Q2 revenue rose 61.1%; first-half revenue rose 50.2%. Commerce revenue increased 79.5% in Q2, while fintech revenue increased 34.1%. First-half increases were 57.6% and 39.2%, respectively.
- Cash flow: First-half cash from operations was $564.7, versus $165.9 in 2019. Investing activities used $548.0, versus $1,414.9; financing activities provided $319.5, versus $1,916.2. The 2020 period included $94.8 of property-and-equipment purchases and significant investment purchases and maturities.
- Cash and investments: At June 30, cash and cash equivalents were $1,169.6, restricted cash $493.8, and short-term investments $2,124.9. Management cited $2,763.8 of cash, cash equivalents and short-term investments as its main liquidity source, excluding $530.7 held as a Brazilian Central Bank mandatory guarantee. Some other cash is restricted or subject to regulatory requirements.
- Debt and obligations: Loans payable and other financial liabilities totaled $1,202.6, including $591.7 current and $610.9 non-current. The 2.00% convertible notes due 2028 had a net carrying amount of $589.0; their $880.0 principal amount remains outstanding. Funds payable to customers were $1,324.6. Total liabilities were $3,545.6.
Changes versus the comparable period
- Q2 operating results improved from an operating loss to $99.4 of operating income; net income increased to $55.9 from $16.2. First-half net income rose more modestly, to $34.8 from $28.1.
- Gross margin fell 1.4 percentage points in both Q2 and the first half, primarily due to higher shipping costs as a share of revenue. Lower collection fees and, for the first half, lower sales taxes partly offset the pressure.
- Management attributed stronger operating margins to marketing efficiencies as pandemic-related consumer behavior increased organic demand. Q2 sales and marketing expense was nearly flat year over year despite sharply higher revenue.
- Growth was broad-based, led by Argentina and Mexico in reported dollar terms. Currency devaluation partially offset local-currency growth. First-half FX-neutral revenue growth was 98.8%, versus reported growth of 50.2%; Q2 FX-neutral growth was 123.4%, versus reported growth of 61.1%.
- Active users reached 51.5 million in Q2, compared with 35.5 million; gross merchandise volume was $5,044.8, compared with $3,397.7; and total payment volume was $11,214.3, compared with $6,517.4.
Outlook, risks and unusual items
- Outlook: The company does not provide traditional earnings guidance. Management said uncertainty over COVID-19, government measures, economic conditions and currency movements made it impossible to predict business development and cash generation for the remainder of 2020. It cautioned that local-currency depreciation could reduce reported U.S.-dollar revenue.
- Credit and counterparty exposure: The company recorded a $26.7 allowance for overdue receivables from an unaffiliated Argentine payment-collection entity and is seeking to collect the balance. It also adopted the current expected credit loss standard in January 2020, reducing opening retained earnings by $4.6 million net of tax. Management said it would continue monitoring pandemic-related effects on credit losses.
- Material control weakness: The receivable issue revealed deficiencies in the timely operation of certain controls. Management concluded disclosure controls were ineffective at June 30 and that internal control over financial reporting was not effective as of December 31, 2019. The company reported no material prior-period financial-statement errors and said no restatement was needed. Remediation steps were underway, with completion expected before year-end 2020, subject to testing.
- Currency, regulatory and tax risks: The company has significant exposure to Latin American currencies and reported a $100.7 first-half currency translation loss in other comprehensive income. Argentine payment-service rules required segregation of user funds; $217.2 was held in a designated bank account. Argentina’s knowledge-based economy tax regime was suspended pending revised rules, contributing to higher tax expense; Mexico deferred-tax valuation allowances also affected tax expense.
- Legal and other contingencies: Accrued liabilities for legal and other contingencies were $7.5; additional reasonably possible legal claims were estimated at up to $18.9 and were not accrued. A Brazilian tax dispute appeal was dismissed in June; the company filed again and planned further appeals, while maintaining its position that success was more likely than not. A criminal complaint in Argentina naming the CEO was recommended for dismissal by the prosecutor, and the judge accepted that recommendation.
- Other notable items: The company paid $104.1 for additional capped-call transactions intended to reduce potential dilution from the 2028 notes. It acquired Uruguayan software company Kiserty for consideration of up to $10.9. It also had $270.5 of cloud-services purchase commitments, with payment periods extending into 2024 and 2023.
Most important facts for investors to verify
- Whether the $26.7 receivable from the Argentine collection agent is recoverable, and whether the control remediation is completed and independently tested.
- How much reported growth and profitability persist after pandemic-driven demand effects, shipping costs, and foreign-exchange movements are considered.
- Liquidity available for general use after accounting for restricted cash, customer funds and regulatory guarantees, alongside the increase in current borrowings.
- Credit-loss trends in Mercado Credito and payment receivables, including the impact of COVID-19 and the new expected-loss methodology.
- Developments in Argentina’s payment-service and tax regulations, and outcomes of the Brazilian tax dispute and other legal contingencies.