Business context and reporting period
MercadoLibre, Inc. filed its Form 10-K for the fiscal year ended December 31, 2019. The filing covers the company’s Latin American e-commerce and financial-technology ecosystem, including its marketplace, Mercado Pago payments and lending, Mercado Envios logistics, advertising, classifieds and webstore services. The company operated marketplace services in 18 countries; Brazil, Argentina and Mexico generated 95.5% of 2019 net revenue.
The filing provides unaudited fourth-quarter results as well as audited full-year results. Amounts below are U.S. dollars unless noted.
Financial and operating metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Net revenue | $2,296.3 million | $1,439.7 million |
| Gross profit / margin | $1,102.1 million / 48.0% | $697.0 million / 48.4% |
| Operating loss / margin | $153.2 million / (6.7%) | $69.5 million / (4.8%) |
| Net loss | $172.0 million | $36.6 million |
| Basic and diluted loss per share | $3.71 | $0.82 |
| Operating cash flow | $451.1 million | $230.9 million |
| Capital expenditures | $141.4 million | $102.0 million |
Fourth-quarter 2019 revenue was $674.3 million, gross profit was $308.3 million and net loss was $54.0 million. Fourth-quarter 2018 revenue was $428.0 million and net loss was $2.3 million. The third-quarter 2019 net loss was $146.1 million.
- Growth and activity: Revenue increased 59.5% year over year; management reported 92.0% growth on an FX-neutral basis. Gross merchandise volume was $13,997.4 million, up from $12,504.9 million. Total payment volume rose to $28,389.9 million from $18,455.9 million; payment transactions increased to 838.0 million from 389.3 million.
- Revenue mix: Enhanced Marketplace revenue was $1,199.2 million, up 70.7%; Non-Marketplace revenue was $1,097.1 million, up 48.8%, including $949.9 million of payment fees. Brazil revenue increased 68.7%, Mexico 152.2% and Argentina 21.2% in reported dollars.
- Costs and margins: Cost of revenue increased 60.8%. Sales and marketing expense rose 72.9% to $834.0 million, increasing to 36.3% of revenue from 33.5%. Management cited marketing and branding investment, credit-related bad debt, buyer protection and card chargebacks. Gross margin was broadly stable, while the operating loss widened.
- Balance sheet and liquidity: At year-end, total assets were $4,781.7 million, total liabilities $2,699.7 million and equity $1,983.1 million. Cash and cash equivalents were $1,384.7 million; restricted cash was $66.7 million; short-term investments were $1,597.2 million and long-term investments $264.0 million. Management described $2,459.2 million of cash, cash equivalents and short-term investments as its main liquidity source, excluding specified guarantee investments, and also considered long-term investments part of liquidity.
- Debt and funding: Loans payable and other financial liabilities totaled $817.5 million, including $631.4 million non-current; the 2028 convertible notes had $880 million principal outstanding. The notes carry a 2.00% coupon and mature in 2028. Year-end contractual obligations totaled $1,794.4 million, including debt principal and interest, leases and purchase commitments.
- Cash flows: Operating activities provided $451.1 million; investing activities used $1,447.8 million; financing activities provided $2,021.0 million. Financing cash flow included net common-stock proceeds of $1,867.2 million and preferred-stock proceeds of $98.7 million. The company ended the year with $1,451.4 million of cash, cash equivalents and restricted cash.
- Other activity: Registered users reached 320.6 million, from 267.4 million; successful items sold rose to 378.9 million from 334.7 million; unique buyers increased to 44.2 million from 37.4 million. The company suspended common-stock dividends beginning in the first quarter of 2018.
Material changes versus the prior comparable period
- Revenue accelerated, led by Brazil and Mexico and by expansion in payments and off-platform activity. FX-neutral revenue growth exceeded reported growth, while significant Argentine-peso depreciation reduced reported-dollar growth.
- Operating losses widened as operating expenses increased 63.8%, faster than revenue. Sales and marketing was the largest contributor; product and technology expense rose 53.0% to $223.8 million.
- Net loss increased to $172.0 million from $36.6 million. The 2019 tax expense was $64.8 million, compared with a $28.9 million tax benefit in 2018; the change principally reflected valuation allowances on deferred tax assets in Mexico and Colombia. The valuation allowance increased to $138.9 million from $15.7 million.
- Operating cash flow nearly doubled, but investment cash outflow increased substantially, largely reflecting investment purchases, loan originations and property and equipment purchases. Financing inflows and the 2019 equity offerings materially increased liquidity.
- Mercado Pago’s installment payments represented 51.8% of total payment volume, down from 66.5% in 2018. Credit-card-funded payments represented 71.3%, compared with 72.8%.
Outlook, commentary, risks and unusual items
Management does not provide traditional earnings guidance, citing uncertainty in forecasting near-term results and its focus on long-term initiatives. It expects continued investment in product development, marketing, personnel and logistics. It cautions that these investments may pressure operating margins; shipping subsidies and faster growth in payments and shipping than marketplace sales may also weigh on gross margins.
- Credit exposure: Mercado Credito expanded merchant and consumer lending. Net loans receivable were $188.5 million at year-end, with an allowance for uncollectible loans of approximately $20.4 million. The loan allowance provision increased significantly during 2019. Credit losses, funding costs and model accuracy are key risks.
- Foreign exchange and macroeconomics: Argentina, Brazil and Mexico accounted for most revenue. Argentina was treated as highly inflationary, with the U.S. dollar as the functional currency from July 2018; the peso depreciated approximately 41.7% against the U.S. dollar on an average basis in 2019. Exchange controls, inflation, interest rates and regional economic volatility may affect results and cash movement.
- Regulation and taxes: Argentina’s Central Bank issued new payment-provider rules in January 2020, requiring registration and, if applied at year-end 2019, an estimated $126.9 million in freely available bank deposits. Argentina also suspended implementation of a new knowledge-economy tax regime pending further rules. Mercado Pago licensing and data-protection requirements in several countries remain relevant risks.
- Post-year-end legal matter: On February 4, 2020, an Argentine prosecutor filed a complaint alleging that sales of government securities by a fund holding Mercado Pago customer balances involved non-public information. The complaint named the CEO and others; the filing said it provided no specific evidence or supporting theory, an inquiry had begun and no formal charges had been presented.
- Other risks and unusual items: The company deconsolidated Venezuela in December 2017 and excludes its results thereafter. A $98.8 million tax valuation-allowance charge was recorded in the third quarter of 2019. The 2028 notes became convertible during January–March 2020 after the fourth-quarter 2019 conversion threshold was met; the company stated its intention to settle in shares, but retains the option to use cash.
- Controls and audit: The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Goodwill valuation for Mexico was identified as a critical audit matter; management recorded no impairment.
Most important facts for investors to verify
- Whether revenue growth, payment volumes and marketplace activity can continue while operating expenses and credit-loss provisions are controlled.
- Loan portfolio performance, delinquency and charge-off trends, funding sources, and the adequacy of credit-loss allowances.
- How much reported growth and profitability are affected by foreign exchange, inflation, shipping subsidies and changes in revenue presentation.
- The availability and practical usability of reported liquidity, including restricted or regulatory-required funds, and the company’s debt and contractual payment schedule.
- Developments in Argentine payment regulation, tax incentives, exchange controls and the securities-fund complaint, including any formal charges or material financial impact.
- Potential dilution or cash use associated with conversion of the 2028 notes and the terms and redemption rights of the preferred stock.