MercadoLibre, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Financial statements are unaudited and presented in U.S. dollars; figures below are in millions unless stated otherwise. MercadoLibre operates an e-commerce marketplace and related payments, shipping, advertising, classifieds, storefront, and credit services, primarily in Latin America.
Financial results and position
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Net revenue | $321.0 | $269.7; up 19.0% reported, 30.1% FX-neutral |
| Gross profit / margin | $162.8 / 50.7% | $168.9 / 62.6% |
| Operating income (loss) / margin | $(29.4) / (9.2%) | $63.3 / 23.5% |
| Net income (loss) / diluted EPS | $(12.9) / $(0.29) | $48.5 / $1.10 |
| Operating cash flow | $(37.0) | $104.8 |
| Cash and cash equivalents | $350.4 | $388.3 at Dec. 31, 2017 |
| Short-term investments | $159.4 | $209.4 at Dec. 31, 2017 |
| Total assets / equity | $1,719.7 / $252.9 | $1,673.2 / $325.8 at Dec. 31, 2017 |
Cash, short-term investments, and long-term investments totaled approximately $543.3 million at quarter-end. Current assets were $1,285.6 million and current liabilities $1,085.9 million. Loans payable and other financial liabilities totaled $449.4 million, including the 2.25% convertible senior notes due July 2019. The notes’ carrying amount was $316.8 million. Capital expenditures were $23.0 million, versus $12.8 million a year earlier.
Material changes and operating trends
- Growth in payment and marketplace activity was strong: gross merchandise volume rose 34.0%, successful items sold 50.6%, total payment volume 60.5%, and successful items shipped 92.4% year over year. Payment fees were $144.8 million, compared with $65.2 million.
- Reported revenue growth was partly offset by shipping subsidies and the absence of Venezuelan revenue. Under ASC 606, shipping subsidies are deducted from revenue: $112.5 million in Q1 2018 versus $4.3 million in Q1 2017. Venezuela, which contributed $14.4 million of Q1 2017 revenue, was deconsolidated effective December 1, 2017.
- Gross margin contracted to 50.7% as shipping subsidies, higher payment-processing and sales-tax costs, and expanded shipping and payments activity weighed on results. Cost of net revenue increased 56.9%.
- Operating expenses rose to $192.2 million from $105.5 million. Sales and marketing increased 135.8% to $110.7 million, reflecting higher marketing, buyer-protection, bad-debt, compensation, and chargeback costs. Product and technology expense rose 26.8% to $38.4 million; general and administrative expense rose 52.1% to $43.1 million.
- Operating cash flow declined by $141.8 million year over year, primarily reflecting lower net income and changes in credit-card receivables, prepaid expenses, and other assets. Investing cash flow was $(24.1) million; financing cash flow was $24.0 million, including $80.9 million of loan proceeds and the $45.7 million cost of new capped-call transactions.
- Revenue by geography: Brazil $184.2 million, Argentina $101.9 million, Mexico $17.1 million, and other countries $17.8 million. Reported revenue rose in these regions; Venezuela was no longer consolidated.
Outlook, commentary, risks, and unusual items
- Management does not provide traditional earnings guidance, citing uncertainty in forecasting near-term results and a focus on long-term investment. It expects continued revenue growth but warns that weak regional conditions, local-currency depreciation, Venezuelan deconsolidation, high interest rates, and continued free-shipping initiatives could pressure U.S.-dollar revenue and margins. Management expects continued investment in product development, marketing, personnel, and technology.
- The board suspended dividends beginning in Q1 2018, stating that investment opportunities are expected to provide greater shareholder returns. The company paid $6.6 million in dividends during the quarter, related to the prior dividend program.
- The $330 million convertible notes became convertible at holders’ option from April 1 through June 30, 2018, after the conversion threshold was met. The company said it intended to settle conversions in shares; no additional conversion requests had been received through the filing date. It paid $45.7 million for additional capped calls intended to reduce potential dilution.
- Foreign-exchange exposure is material: 57.4% of revenue came from Brazil and 31.8% from Argentina. The company reported a $5.6 million foreign-currency gain. It did not enter into currency hedges during the quarter.
- Legal contingencies included $6.2 million of recorded reserves and up to $8.1 million of reasonably possible claims for which no loss was accrued. A São Paulo tax case was resolved in the company’s favor on appeal in April 2018. Management also identifies potential intellectual-property, regulatory, fraud, security, competition, and third-party-provider risks.
- The company recorded a $12.4 million income-tax benefit despite a pre-tax loss. Argentina’s software-development tax holiday contributed a $7.3 million tax benefit and is scheduled to expire December 31, 2019. The filing says the estimated U.S. transition tax is expected to be offset by foreign tax credits, but the calculation had not been finalized.
- The filing states disclosure controls were effective and reports no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of revenue growth and future profitability depends on payment-fee growth versus marketplace activity, and how free-shipping subsidies evolve.
- Whether the sharp increase in marketing, buyer-protection, credit-loss, and operating costs produces durable customer and transaction growth.
- Cash generation and credit exposure as MercadoCredito loans receivable rose to $122.3 million from $73.4 million at year-end, and credit-card receivables stood at $530.2 million.
- Convertible-note conversion, potential dilution, and the company’s ability to fund obligations as the July 2019 maturity approaches.
- Effects of currency depreciation, regional economic and regulatory conditions, and Venezuela’s deconsolidation on reported results.
- Shipping-subsidy presentation under ASC 606 and the different Venezuelan consolidation scope when assessing year-over-year comparisons.