MercadoLibre, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013; filed November 7, 2013. Financial statements are unaudited and presented in U.S. dollars. MercadoLibre operates Latin American e-commerce marketplace and payments businesses, alongside advertising, classifieds, storefront, and shipping services.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net revenue | $123.1m | $97.3m | $338.0m | $269.8m |
| Gross profit | $88.9m | $71.6m | $244.1m | $199.2m |
| Income from operations | $37.4m | $33.7m | $101.4m | $90.5m |
| Net income | $29.1m | $26.1m | $76.7m | $71.1m |
| Net income attributable to MercadoLibre shareholders | $29.3m | $26.0m | $76.7m | $71.1m |
| Diluted EPS | $0.66 | $0.59 | $1.73 | $1.62 |
- Q3 revenue grew 26.5% year over year; nine-month revenue grew 25.2%. At constant local-currency exchange rates, growth was 45.2% and 40.1%, respectively.
- Q3 gross margin was approximately 72.2% versus 73.6%; operating margin was 30.4% versus 34.7%; net margin was 23.7% versus 26.8%. Nine-month gross and operating margins were approximately 72.2% and 30.0%, versus 73.8% and 33.5% in 2012.
- Marketplace revenue was $86.8m in Q3, up 29.0%; non-marketplace revenue was $36.3m, up 21.0%. Nine-month amounts rose 24.7% and 26.4%, respectively.
- Q3 gross merchandise volume was $1.88bn and items sold were 22.0m; total payment volume was $641.6m across 8.4m payment transactions. Confirmed registered users reached 95.0m.
Cash flow, liquidity and capital
- Nine-month operating cash flow was $122.8m, compared with $83.7m in 2012. Investing cash flow was negative $78.4m and financing cash flow negative $4.9m; exchange-rate effects reduced cash by $12.9m. Cash increased $26.6m to $128.1m.
- The company’s stated free cash flow measure was $43.5m, calculated from operating cash flow after acquired-business payments, fixed-asset advances, and property and equipment purchases.
- At September 30, cash and cash equivalents were $128.1m, short-term investments $91.3m, and long-term investments $69.8m. Current assets were $317.7m against current liabilities of $220.2m (current ratio approximately 1.44).
- Total liabilities were $241.1m. Current loans payable and other financial liabilities were $18.9m; the filing describes a $13.5m Venezuelan bank loan at 13%, maturing in 12 months, and $6.2m due on Buenos Aires office financing. It also reports approximately $40,000 of car-lease debt.
- Capital spending increased substantially: the filing reports $49.9m of property and equipment purchases and a $26.2m fixed-asset advance, as well as $3.2m for an acquired software company. Major property acquisitions were in Buenos Aires and Caracas.
- The board declared a fourth-quarter 2013 dividend of $0.143 per share, payable January 15, 2014. Management said it expects comparable quarterly dividends to continue, subject to board discretion, and believes available cash and operating cash generation will fund operations and planned investment.
Material changes and management commentary
- Revenue increased in all reported geographic segments. Q3 growth was strongest in Venezuela (61.8%), Argentina (37.4%), Mexico (20.9%), Brazil (13.1%), and other countries (8.6%). Brazil remained the largest segment, but its share of consolidated revenue declined year over year.
- Operating expenses rose faster than revenue: nine-month product and technology development increased 43.8%, sales and marketing 27.5%, and general and administrative expense 29.3%. Management cited engineering hires, technology infrastructure, increased advertising, and higher long-term retention plan compensation.
- The Venezuelan bolívar was devalued in February 2013; the company recorded a $6.4m foreign-exchange loss. It used the official rate of 6.30 bolívares per U.S. dollar and reported it could not access the SICAD auction mechanism. Venezuela accounted for 16.5% of consolidated net assets and local-currency cash and investments there represented approximately 12.4% of consolidated cash and investments.
- The 2013 long-term retention plan is payable over six years beginning in 2014, subject to performance and continued employment; compensation cost was expected to total approximately $10.5m, with $3.7m accrued through September.
- Management anticipates continued investment in information technology and states that existing liquidity and operating cash generation should be sufficient for operations, capital expenditures, and obligations. The filing provides no specific revenue or earnings guidance.
Risks, contingencies and unusual items
- Foreign exchange and country exposure: Further Venezuelan devaluation or tighter currency controls could materially affect reported results and access to funds. Argentine currency restrictions also limit conversion of local cash. The company’s revenues and operating costs are overwhelmingly generated outside the United States.
- Regulation: Brazilian Law No. 12.865 makes MercadoPago subject to new payment-processing regulation and a government authorization requirement; failure to obtain authorization could restrict or interrupt the business. Proposed Venezuelan vehicle-price limits could affect listings and the company’s Venezuelan business if enacted.
- Legal matters: The company had $3.5m in reserves for probable legal losses and disclosed up to $4.2m of additional reasonably possible losses without accrual. More than 3,900 Brazilian ordinary and consumer-court cases were pending. A São Paulo tax assessment of approximately $18.1m was being contested; management assessed loss risk as remote and had not accrued a reserve. A subsequent administrative appeal was denied in October 2013, and the company planned to contest the matter judicially.
- Other notable items: The Argentine software-development tax benefit provides a 60% income-tax relief through 2014 under the then-current law; a new law could extend benefits, subject to requirements still being evaluated. A hypothetical Venezuelan exchange-rate sensitivity is presented in the filing and is explicitly not management guidance.
Most important facts for investors to verify
- Whether reported growth and segment performance persist after separating local-currency growth from U.S.-dollar translation effects.
- Venezuela’s exchange-rate access, cash mobility, currency exposure, and any further devaluation or regulatory changes.
- Implementation of Brazil’s payment-services rules and MercadoPago’s authorization status, plus the outcome of proposed Venezuelan vehicle-price restrictions.
- Whether expense growth, especially retention-plan compensation, marketing, and technology investment, moderates enough to support margins.
- Final outcomes and potential exposure from the São Paulo tax dispute and other litigation, and the terms and completion status of the Caracas and Buenos Aires property transactions.
- That cash-flow and free-cash-flow comparisons account for working-capital movements and unusually high property-related spending.