MercadoLibre, Inc. — Q3 2010 Form 10-Q
Reporting period: Three and nine months ended September 30, 2010; filed November 5, 2010. Unaudited interim financial statements, in U.S. dollars. MercadoLibre operates Latin American online commerce marketplaces, payments services, and classified listings.
Financial performance
Amounts are in millions of U.S. dollars except per-share data and percentages.
| Metric | Q3 2010 | Q3 2009 | First 9 months 2010 | First 9 months 2009 |
|---|---|---|---|---|
| Revenue | $56.0 | $50.6 | $154.4 | $123.8 |
| Gross profit | $44.5 | $40.2 | $121.6 | $98.2 |
| Operating income | $19.3 | $19.0 | $53.6 | $38.2 |
| Net income | $18.8 | $9.9 | $40.1 | $21.9 |
| Diluted EPS | $0.43 | $0.22 | $0.91 | $0.50 |
- Q3 revenue rose 10.6% year over year; nine-month revenue rose 24.7%. Net income increased about 91% in Q3 and 83% for the nine-month period.
- Approximate Q3 gross, operating, and net margins were 79.5%, 34.5%, and 33.6%, respectively, versus 79.5%, 37.5%, and 19.5% a year earlier. Nine-month margins were approximately 78.8%, 34.7%, and 26.0%, versus 79.3%, 30.8%, and 17.7%.
- Q3 gross merchandise volume was $888.1 million, up 12.3%; items sold were 10.4 million versus 8.0 million. Total payment volume was $189.9 million versus $114.0 million. Registered users reached 50.2 million, up from 40.2 million.
- Brazil led nine-month revenue at $88.2 million (+38.6%), followed by Argentina at $28.6 million (+50.4%). Venezuela revenue fell 40.5% in U.S. dollars, mainly reflecting exchange-rate remeasurement; management reported local-currency growth of 63.0% for the nine-month period.
Cash flow, balance sheet, and liquidity
- Nine-month operating cash flow was $42.0 million, up from $27.0 million. Investing activities used $44.8 million, chiefly reflecting $85.3 million of investment purchases, partly offset by $51.1 million of investment maturities and sales. Financing activities used $2.9 million; cash declined $5.4 million to $44.5 million.
- Capital expenditures were $10.6 million versus $3.9 million, including technology investments and work on the Argentine office building.
- At September 30, cash and cash equivalents were $44.5 million; short-term investments were $6.6 million and long-term investments $65.9 million. Cash plus investments totaled approximately $116.9 million, compared with $91.0 million at year-end 2009.
- Current assets were $85.4 million and current liabilities $73.9 million, a current ratio of approximately 1.16. Total liabilities were $84.6 million and shareholders’ equity $156.2 million.
- Loans and other financial liabilities totaled approximately $0.3 million at quarter-end. The DeRemate acquisition notes were fully repaid in March 2010. Customer funds payable are operational liabilities, not borrowing.
Material changes and management commentary
- Beginning in Q3, the company stopped charging buyers a separate MercadoPago fee for marketplace transactions in Brazil and Argentina, aiming to encourage payment adoption. Reporting segments changed from marketplace/payments to geography. MercadoPago continues to earn fees on off-platform payments and installment financing.
- From Q3, the company began pre-selling installment-related financing receivables to financial institutions, seeking to reduce credit risk and make related costs more predictable. Management said there were no financial expenses associated with those receivables in Q3 2010, unlike $3.9 million in Q3 2009.
- Revenue growth reflected marketplace activity and regional growth, but Q3 take rate eased to 6.3% from 6.4%. Management cited local-currency revenue growth of 23.2% in Q3 and 34.0% for nine months; foreign-exchange movements, especially Venezuela’s, affected reported U.S.-dollar results.
- Management expects continued capital investment to maintain the platform and stated existing cash, operating cash generation, and receivables sales should fund operations, capital expenditures, and obligations. No quantitative earnings or revenue guidance was provided.
Risks, contingencies, and unusual items
- Venezuela became highly inflationary for accounting purposes effective January 1, 2010, with the U.S. dollar as functional currency. After the parallel currency market was closed, the company began using Venezuela’s regulated SITME rate on June 9, 2010; access was subject to transaction limits. The company reported a $13.7 million net investment in Venezuelan subsidiaries.
- Brazilian litigation remained significant: 341 cases in ordinary courts and more than 1,550 consumer-court cases were pending at September 30, largely involving alleged fraud or purchase/payment-related damages. Legal reserves were $1.25 million; the company said no loss was considered probable for more than 1,291 additional actions with claimed amounts up to $3.78 million.
- A Brazilian court injunction restricting Citizen-branded watch listings was suspended on October 22, 2010. Other intellectual-property and intermediary-liability claims could result in costs, business changes, or damages. The company said it believed its defenses were meritorious.
- A $4.6 million reversal of a Brazilian tax valuation allowance reduced Q3 tax expense. The Argentine software-development tax benefit was $3.2 million for nine months, or $0.07 per share as reported in the filing.
- Management identified foreign-exchange, interest-rate, credit, legal/regulatory, cybersecurity, competition, service interruption, and regional political/economic risks. It reported no material change to previously disclosed risk factors, no material off-balance-sheet arrangements, and effective disclosure controls.
Important facts for investors to verify
- How much payment adoption and transaction growth offset the removal of buyer payment fees, and how the change affects take rate and margins.
- Whether receivables pre-sales continue on acceptable terms and sustain the reduction in financing expense and credit exposure.
- Reported results and cash repatriation exposure under Venezuela’s SITME restrictions and highly inflationary accounting.
- Trends in bad-debt charges, customer-support costs, and the volume and outcomes of Brazilian legal actions.
- Capital spending, remaining Argentine office commitments, and the composition and liquidity of the investment portfolio.