MercadoLibre, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are with Q1 2019 unless stated otherwise. Amounts are in U.S. dollars. MercadoLibre operates an integrated Latin American commerce and fintech ecosystem, including its marketplace, Mercado Pago, shipping, advertising, classifieds, stores and lending services.
Financial and operating performance
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Net revenue | $652.1 million | $473.8 million; up 37.6% reported and 70.5% on an FX-neutral basis |
| Commerce / Fintech revenue | $380.7 million / $271.4 million | Up 32.7% / 45.2%, respectively |
| Gross profit and margin | $312.8 million; 48.0% | $237.0 million; 50.0% |
| Operating income (loss) and margin | $(29.7) million; (4.6)% | $10.1 million; 2.1% |
| Net income (loss) and diluted EPS | $(21.1) million; $(0.44) | $11.9 million; $0.13 |
| Operating cash flow | $(85.7) million | $138.4 million |
| Investing / financing cash flow | $(150.1) million / $154.6 million | $(1,260.1) million / $1,974.7 million |
| Cash, cash equivalents and restricted cash | $1.265 billion at March 31 | $1.451 billion at December 31, 2019 |
| Total assets / total liabilities | $4.458 billion / $2.493 billion | $4.782 billion / $2.700 billion at December 31, 2019 |
| Loans payable and other financial liabilities | $932.8 million | $817.5 million at December 31, 2019 |
Revenue increased across all reported geographies: Brazil 31.4%, Argentina 41.7%, Mexico 73.7% and other countries 17.2%. Management attributed growth to commerce and fintech activity, including off-platform payments, credit, and lower shipping subsidies netted against revenue. Gross margin fell mainly as shipping and carrier costs rose. Operating expenses grew 51.0%, led by sales and marketing, contributing to the shift to an operating loss.
Selected operating measures: unique active users were 43.2 million versus 33.0 million; gross merchandise volume was $3.414 billion versus $3.088 billion; total payment volume was $8.095 billion versus $5.639 billion; and payment transactions were 290.7 million versus 143.9 million.
Material changes and liquidity
- Operating cash flow declined by $224.0 million year over year, with working-capital movements including lower funds payable to customers and higher credit-card receivables, payables and other liabilities cited as drivers.
- Management reported $2.276 billion of cash and cash equivalents and short-term investments available as a principal liquidity source, excluding $326.7 million of Brazilian regulatory-guarantee investments and $26.5 million pledged for Argentine secured credit lines; it also held $270.0 million of long-term investments. Some cash and investments are restricted or held to meet regulatory and guarantee requirements.
- Current assets were $3.510 billion and current liabilities $1.577 billion. Current assets include substantial investments and financial receivables; customer funds payable were $718.5 million.
- The company continued to fund Mercado Pago and Mercado Credito through bank and credit lines and securitization. The $880 million 2.00% convertible senior notes mature in 2028; the notes were not convertible for Q2 2020 under the quarter’s conversion test.
- Capital expenditures were $53.5 million, versus $33.0 million, principally for technology and facilities. The company acquired Uruguay-based software developer Kiserty for stated consideration of $10.9 million.
Outlook, commentary, risks and unusual items
- Management does not provide traditional earnings guidance and said uncertainty around COVID-19 and regional economic conditions prevented reliable forecasts for the remainder of 2020. It said funding sources remained available and new geographic-level credit facilities had been obtained.
- COVID-19 lockdowns and currency depreciation weakened the regional macroeconomic environment and negatively affected Q1 operations, consumer mix and revenue. Non-essential categories weakened; logistics faced backlogs and cancellations in some networks, while managed fulfillment operations continued. Lower physical-store traffic slowed MPOS and QR payment growth late in March.
- Management reported that April gross merchandise volume rebounded to year-over-year growth above the Q1 average in Brazil, Argentina and Mexico. Argentina April payment-volume growth exceeded its Q1 average; Brazil payment-volume growth improved from its mid-March trough but had not returned to pre-pandemic levels. These are management observations, not formal guidance.
- Foreign-currency translation reduced comprehensive income by $94.6 million in Q1; total comprehensive loss was $111.2 million. Local-currency depreciation may reduce reported U.S.-dollar revenue and affect assets, earnings and liquidity.
- The company adopted the expected-credit-loss standard (ASC 326) on January 1, 2020, reducing opening retained earnings by $4.6 million after tax. The loan-loss allowance rose to $30.4 million from $20.4 million at year-end; management also cited the adoption as a contributor to higher bad-debt expense.
- A $14.2 million valuation allowance was recorded on certain Mexican deferred tax assets. Argentina suspended the knowledge-based economy tax regime pending new regulations, affecting the Argentine tax outlook.
- Legal contingencies included $8.2 million accrued for matters assessed as probable and up to $18.4 million of reasonably possible claims for which no loss was accrued. Estimated maximum buyer-protection exposure was $1.130 billion, with a $3.0 million recorded allowance; the maximum exposure is not management’s estimate of likely losses.
- Other risks include credit losses, payment and financial-services regulation, litigation and intellectual-property claims, logistics disruption, competition, cybersecurity, and the uncertain duration and economic effects of COVID-19. Disclosure controls were assessed as effective; the company continued monitoring remote-work effects on internal controls.
Important facts for investors to verify
- Whether revenue and payment growth persisted after Q1, and how much reported growth reflects local-currency inflation, FX movements, or changes in revenue classification.
- Whether the operating loss and margin pressure continued as shipping costs, marketing investment and credit-loss provisions evolved.
- Cash-flow conversion, the availability of liquidity after regulatory restrictions and customer-fund obligations, and the terms and maturities of new credit facilities.
- COVID-19 effects on marketplace demand, logistics, payment volumes, borrower defaults and local currencies, including whether the reported April rebound continued.
- Changes in credit allowances, Mexican deferred-tax-asset recoverability, Argentine tax rules, and the outcome of legal and buyer-protection claims.