MercadoLibre, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; comparative period is Q1 2010. Interim financial statements are unaudited and prepared under U.S. GAAP. MercadoLibre operates Latin American e-commerce marketplaces, payments and related services.
Financial performance and liquidity
| Metric | Q1 2011 | Q1 2010 / comparison |
|---|---|---|
| Net revenue | $61.5 million | $45.9 million; up 33.8% reported and 25.5% in local currencies |
| Gross profit / margin | $47.1 million / 76.7% | $36.0 million / 78.5% |
| Operating income / margin | $19.3 million / 31.4% | $15.5 million / 33.8% |
| Net income / diluted EPS | $14.1 million / $0.32 | $9.6 million / $0.22 |
| Operating cash flow | $15.2 million | $11.5 million |
| Capital expenditures | $3.0 million | $1.4 million |
| Cash and cash equivalents | $51.0 million | $56.8 million at December 31, 2010 |
| Short-term / long-term investments | $3.2 million / $101.8 million | $5.3 million / $78.8 million at December 31, 2010 |
| Total liabilities | $103.6 million | $98.0 million at December 31, 2010 |
| Loans and other financial liabilities | $0.3 million total | Primarily an Argentine car lease; $0.2 million reported in MD&A |
Gross and operating margins declined as cost of revenue and operating expenses grew faster than sales. Cash from operations increased, while investing activities used $21.2 million, mainly reflecting investment purchases net of maturities and $3.0 million of capital spending. Cash and equivalents decreased $5.9 million during the quarter. Current assets of $94.2 million were approximately equal to current liabilities of $93.9 million; customer funds payable are a substantial part of current liabilities.
Material changes and business developments
- Revenue growth reflected higher marketplace activity and payment usage: gross merchandise volume rose 30.4%, items sold 30.7%, and reported take rate increased to 6.4% from 6.3%. Total payment volume increased to $245.2 million from $123.8 million.
- Brazil remained the largest market, contributing 56.5% of revenue. Venezuela revenue rose 94.8% in U.S. dollars, with exchange-rate effects contributing to reported growth; management cited 25.5% local-currency revenue growth overall.
- Cost of revenue rose 44.9%; as a share of revenue it increased to 23.3% from 21.5%. Management cited higher payment collection fees, revenue taxes, customer-support investment and hosting costs.
- Product and technology development expense increased 59.9%; general and administrative expense increased 52.3%. Sales and marketing expense rose 19.1%, but declined as a share of revenue to 21.5% from 24.2%.
- Interest expense and other financial charges fell to $0.6 million from $3.0 million, largely because the company began pre-selling installment-related receivables, reducing associated financing expense and credit exposure. Foreign-currency results shifted from a $0.4 million gain to a $0.5 million loss.
- MercadoPago began processing off-platform transactions in Mexico in February 2011; an improved marketplace payments platform launched there on April 15, after quarter-end. The company also made MercadoPago obligatory on most marketplace listings in Mexico.
Outlook, risks and contingencies
- Management expects continued capital investment to maintain its platform and believes cash, operating cash generation and receivables sales will fund operations, capital expenditures and obligations. It stated an expectation to continue similar quarterly cash dividends, subject to board discretion. The first $3.5 million dividend was paid April 15, 2011.
- Foreign-exchange exposure is significant; the company reported no currency hedging. Brazil accounts for most revenue, while Venezuelan operations are treated as highly inflationary, use the U.S. dollar as functional currency, and face restrictions on access to foreign currency. Management said those restrictions were not expected to materially impair its Venezuela business plans.
- Legal reserves were $1.8 million. The filing also identifies up to $3.9 million of reasonably possible legal losses for which no amount was accrued. A São Paulo tax claim was approximately $15.3 million including interest and surcharges; management assessed loss as remote and recorded no reserve.
- A Brazilian customer-service injunction requires telephone support, with a reported potential fine of approximately $65,000 per day; the company appealed and obtained an extension, with the fine stated to begin July 11, 2011 if unresolved. The reported estimated claim risk was approximately $307,000 and considered reasonably possible.
- Other risks include litigation and intellectual-property claims, fraud and payment risks, regulatory changes, system interruptions, competition, and political and economic conditions in Latin America. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether revenue and payment-volume growth can continue, particularly given Brazil’s concentration and currency effects on reported results.
- Whether increased payments adoption and customer-protection spending can be managed without further gross-margin erosion.
- The liquidity, maturity and credit quality of the sizable investment portfolio, including the distinction between available-for-sale securities and held-to-maturity time deposits.
- Developments in the São Paulo tax appeal, Brazilian litigation, and the customer-service injunction and related fine exposure.
- The sustainability of quarterly dividends alongside planned capital investment and the company’s reliance on receivables sales to support payment operations.