MercadoLibre, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone Q4 report. Unless otherwise stated, figures are in U.S. dollars.
Business context
MercadoLibre operates an integrated Latin American commerce and financial technology ecosystem, including its marketplace, MercadoPago payments, MercadoEnvios shipping, classifieds, advertising, webstores, merchant and consumer credit, and investment products. Brazil, Argentina, and Mexico generated 94.0% of 2018 revenue. Venezuela was deconsolidated effective December 1, 2017.
Financial and operating performance
| Metric | 2018 | 2017 |
|---|---|---|
| Net revenue | $1,439.7 million | $1,216.5 million |
| Gross profit / margin | $697.0 million / 48.4% | $719.6 million / 59.2% |
| Operating income (loss) / margin | ($69.5) million / (4.8%) | $56.3 million / 4.6% |
| Net income (loss) | ($36.6) million | $13.8 million |
| Operating cash flow | $230.9 million | $269.0 million |
| Capital expenditures | $102.0 million | $83.5 million |
- Reported revenue rose 18.3%; management’s foreign-exchange-neutral measure showed growth of 49.7%. Non-Marketplace revenue increased 53.9% to $737.3 million, while Enhanced Marketplace revenue declined 4.8% to $702.4 million.
- Gross margin contracted as shipping subsidies, payment and shipping activity, processing and support costs, and MPOS device sales increased. Shipping subsidies deducted from revenue were $424.8 million in 2018 versus $181.6 million in 2017.
- Sales and marketing expense rose 48.3% to $482.4 million, including increased marketing, buyer-protection costs, and credit-related bad debt. Total operating expenses increased to $766.5 million.
- Gross merchandise volume increased 6.4% to $12.5 billion; total payment volume increased 34.4% to $18.5 billion; successful items sold rose to 334.7 million from 270.1 million. Confirmed registered users reached 267.4 million.
- Q4 revenue was $428.0 million and net loss was $2.3 million, compared with $358.1 million revenue and a $67.7 million net loss in Q4 2017. The prior-year quarter included the Venezuela deconsolidation charge.
Liquidity, debt, and balance sheet
- At year-end, cash and cash equivalents were $440.3 million, restricted cash $24.4 million, short-term investments $461.5 million, and long-term investments $276.1 million. Of short-term investments, $284.3 million was held as a mandatory Central Bank of Brazil guarantee. Management reported $617.6 million of cash, cash equivalents, and short-term investments excluding that guarantee, plus $276.1 million of long-term investments.
- Current assets were $1.51 billion and current liabilities $1.17 billion. Current liabilities included $641.0 million payable to MercadoPago customers, a significant operating funding obligation.
- Total assets were $2.24 billion, total liabilities $1.90 billion, and equity $336.7 million. Loans payable and other financial liabilities totaled $735.2 million, including $602.2 million non-current and $132.9 million current.
- The company issued $880 million of 2.00% convertible notes due 2028 and used proceeds in part to retire $263.7 million principal of 2.25% notes due 2019. The 2028 notes’ initial conversion price was $443.40 per share. Contractual long-term debt obligations, including principal and interest, totaled $1.25 billion.
- Cash flow from investing activities was negative $672.5 million, largely reflecting investment purchases and maturities, lending, and capital spending. Financing activities provided $608.9 million, mainly from the 2028 notes. Cash, cash equivalents, and restricted cash ended at $464.7 million.
Material changes, outlook, and risks
- Management does not provide traditional earnings guidance, citing uncertainty in forecasting near-term results. It stated that it expects revenue growth to continue, while noting that shipping subsidies, expansion of payments and shipping, and continued investment may weigh on revenue presentation and margins.
- Management attributed reported growth and profitability pressure to increased shipping subsidies, foreign-exchange movements, rising payment and logistics costs, and higher investment in marketing, customer protection, technology, and credit. Argentine and Brazilian currencies depreciated substantially in 2018; the Argentine peso declined 100.3% against the U.S. dollar by the company’s cited measure. Argentina was treated as highly inflationary and its functional currency changed to the U.S. dollar effective July 1, 2018.
- MercadoPago received Central Bank of Brazil authorization in November 2018 and became subject to its supervision and reserve requirements. The filing states the required reserve percentage rose from 80% at year-end 2018 to 100% beginning January 1, 2019. Mexico’s FinTech law and Chilean payment-card rules could require further authorizations and compliance changes.
- MercadoCredito loans expose the company to borrower defaults, model risk, and funding and interest-rate risk. Net loans receivable were $95.8 million, with an allowance of $6.6 million. The company also relies on third-party carriers, payment processors, banks, and technology providers.
- Currency, inflation, political and regulatory changes, competition, cybersecurity, consumer complaints, fraud, and service interruptions are material risks. The filing notes that substantially all core systems were hosted at a third-party data center and that the company had no formal disaster-recovery plan or alternative hosting provider.
- Accrued legal and other proceeding-related contingencies were $5.8 million; additional reasonably possible legal actions were estimated at up to $6.9 million and were not accrued. The Buyer Protection Program’s estimated maximum potential exposure was $988.7 million, against a recorded provision of $4.1 million; management said the maximum was not representative of expected losses.
- The board suspended dividends beginning in Q1 2018 to redirect capital to business investment. The 2018 financial statements received an unqualified audit opinion, and the auditor also opined that internal control over financial reporting was effective.
Important facts for investors to verify
- How much of revenue growth and margin change reflects underlying transaction economics versus currency translation and the accounting presentation of shipping subsidies.
- Whether higher MercadoPago, MercadoEnvios, and MercadoCredito volumes can produce improved unit economics as subsidies, processing costs, credit losses, and buyer-protection expenses evolve.
- Availability of liquidity after excluding restricted Central Bank funds, and the funding and cash-settlement requirements of convertible notes, customer balances, and credit operations.
- Credit quality, delinquency trends, allowance adequacy, and securitization exposure as MercadoCredito expands.
- Progress on regulatory licensing and compliance in Brazil, Mexico, Chile, and other markets, and any effect on product availability or costs.
- Exposure to further currency depreciation, inflation, and operating disruption in key markets, particularly Argentina and Brazil.