MercadoLibre, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023; comparisons are to the corresponding 2022 periods unless noted. Unaudited consolidated results are reported in U.S. dollars. MercadoLibre operates e-commerce, payments, logistics, advertising and consumer/merchant lending businesses across Latin America.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net revenue | $3.760bn | $2.690bn | $10.212bn | $7.535bn |
| Gross profit | $1.995bn | $1.348bn | $5.251bn | $3.705bn |
| Operating income | $685m | $296m | $1.583bn | $685m |
| Net income | $359m | $129m | $822m | $317m |
| Adjusted EBITDA (non-GAAP) | $820m | $393m | $1.972bn | $966m |
- Q3 revenue grew 39.8% reported and 69.1% on the company’s FX-neutral measure. Nine-month growth was 35.5% reported and 61.8% FX-neutral.
- Q3 gross margin was 53.1%, versus 50.1%; operating margin was 18.2%, versus 11.0%. For the nine-month periods, gross margin was 51.4% versus 49.2%, and operating margin was 15.5% versus 9.1%.
- Commerce revenue was $2.128bn in Q3, up 45.3%; Fintech revenue was $1.632bn, up 33.2%. Mexico recorded the fastest Q3 reported revenue growth among the largest segments, at 66.0%.
- Q3 foreign currency losses were $239m; nine-month losses were $508m. The company attributes much of the increase to Argentine currency conditions and purchases of its own shares in Argentina. Q3 income tax expense was $172m, versus $69m.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $3.212bn, compared with $1.398bn. Investing cash outflow was $2.536bn and financing cash outflow was $340m. Cash, cash equivalents and restricted cash totaled $3.256bn at period end.
- Cash and cash equivalents were $2.171bn and short-term investments $3.320bn. Management identified $3.722bn as its main source of liquidity, excluding $1.769bn of investments principally held for a Central Bank of Brazil guarantee.
- Loans payable and other financial liabilities totaled $4.454bn; operating lease liabilities totaled $786m. Company-defined net debt, a non-GAAP measure, was $1.466bn, down from $2.139bn at December 31, 2022.
- Net loans receivable were $2.378bn, up from $1.736bn at year-end 2022. Management reported its non-performing loans ratio improved to 30.8% from 37.0% a year earlier. The allowance for loan losses was $1.024bn at September 30.
Material changes, outlook and notable items
- Growth reflected higher marketplace activity and payments: Q3 gross merchandise volume increased 32% and total payment volume increased 47%, as reported by management. Q3 items shipped rose 27% year over year.
- Management cited improved doubtful-account provisions and cost-of-revenue margins as contributors to higher operating margins, while noting increased investment in technology, marketing, staffing and logistics. It expects continued capital spending on technology and logistics; nine-month capital expenditures were $329m.
- The company does not provide traditional earnings guidance, citing uncertainty in forecasting near-term results and a focus on long-term strategy. It states existing liquidity and operating cash generation are expected to fund foreseeable operating needs, capital spending and obligations.
- Argentina remains a significant source of currency and inflation exposure: reported inflation was 103.2% for the first nine months, and the peso depreciated 97.5% against the U.S. dollar using the official rate. Exchange controls and the gap between official and alternative rates affect operations and reporting.
- Argentina’s central bank announced that, from December 1, 2023, DEBIN funding would be suspended and replaced with a pull-transfer method requiring customer consent outside Mercado Pago. Management was assessing the potential effect on account funding.
- The company announced it would redeem its 2.00% convertible notes due 2028 on November 14, 2023. $351m principal had converted by September 30; the filing reports $379m converted by its issuance date, leaving $60m outstanding. These subsequent conversions are not reflected in the September 30 balance sheet.
- Legal proceedings: $72m was accrued for matters assessed as probable losses. Additional reasonably possible losses were estimated at up to $480m and were not accrued. The buyer-protection program’s estimated maximum exposure was $4.364bn, with a $5m provision; management cautions this maximum is not representative of expected losses.
- Controls and procedures were assessed as effective, with no material changes to internal control over financial reporting reported during the period.
Important facts for investors to verify
- Whether credit growth, delinquency trends, charge-offs and loan-loss provisions remain consistent with the reported improvement in non-performing loans.
- How revenue, margins and cash generation trend when assessed alongside FX-neutral growth and the material currency and inflation effects, especially in Argentina.
- The availability and use of liquidity, including regulatory restrictions on cash and investments, funding needs for lending, and the mix of fixed- and variable-rate debt.
- The operational and financial impact of the Argentine DEBIN funding change and evolving fintech capital requirements in Brazil and other markets.
- Final outcomes and potential payments from legal and tax disputes, and the completion and accounting impact of the 2028 notes’ conversion and redemption.