MercadoLibre, Inc. — Q2 2018 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and six months ended June 30, 2018. MercadoLibre operates an online commerce ecosystem across Latin America, including its marketplace, MercadoPago payments, MercadoEnvios shipping, advertising, online stores and merchant and consumer lending. Figures below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Financial results and key metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net revenue | $335.4 | $283.9 | $656.4 | $553.6 |
| Gross profit | $159.7 | $171.6 | $322.5 | $340.4 |
| Operating income (loss) | $(28.2) | $30.0 | $(57.7) | $93.3 |
| Net income (loss) | $(11.3) | $5.3 | $(24.2) | $53.8 |
| Operating cash flow | Not provided separately | Not provided separately | $107.2 | $226.3 |
- Revenue increased 18.1% in Q2 and 18.6% in the first half year over year. On the company’s foreign-exchange-neutral basis, growth was 43.7% and 37.1%, respectively.
- Gross margin fell to 47.6% in Q2 from 60.4%; first-half gross margin was 49.1% versus 61.5%. Operating margin changed from positive 10.6% to negative 8.4% in Q2, and from positive 16.9% to negative 8.8% for the first half.
- First-half net cash from investing activities was $28.9 million, versus $41.1 million used in 2017; financing activities provided $79.5 million, versus $8.4 million used. The reported increase in cash, cash equivalents and restricted cash was $135.8 million, including a $79.7 million unfavorable exchange-rate effect.
- At June 30, cash and cash equivalents were $489.2 million, restricted cash $34.9 million, and short-term investments $69.4 million. The company cited $593.4 million of these combined resources, plus $11.4 million of long-term investments, as liquidity.
- Total assets were $1.519 billion and total liabilities $1.365 billion. Current assets were $1.125 billion and current liabilities $975.1 million. Loans payable and other financial liabilities totaled $480.0 million ($146.7 million current and $333.4 million non-current). Stockholders’ equity was $154.7 million, down from $325.8 million at year-end 2017.
- The $330 million 2.25% convertible senior notes are due July 2019; their carrying amount was $317.8 million at June 30. They became convertible at holders’ option for Q3 2018 after the conversion threshold was met. The company said it intended to settle conversions in shares.
Material changes versus the prior comparable period
- Marketplace-related shipping subsidies rose to $209.2 million for the first half from $36.9 million a year earlier, and to $96.7 million in Q2 from $32.6 million. Under ASC 606, subsidies reduce revenue; the standard was applied retrospectively to the comparative periods.
- Non-marketplace revenue, including payment fees, rose 83.8% in the first half and 72.5% in Q2. Payment fees were $288.7 million for the first half and $143.9 million for Q2, compared with $140.2 million and $75.0 million, respectively, in 2017.
- Costs rose faster than revenue: first-half cost of revenue increased 56.6%, sales and marketing 87.4%, and product and technology development 18.5%. Management cited shipping subsidies, payment collection costs, sales taxes, buyer protection, credit-related bad debts and marketing investment.
- Operational indicators grew: first-half successful items sold increased 44.3%, total payment volume 50.3%, and successful items shipped 73.5%. Gross merchandise volume increased 24.1%. These metrics include Venezuelan activity in the 2017 comparison, while 2018 results exclude Venezuela.
- Currency translation and other comprehensive loss weighed on equity: first-half currency translation adjustment was a loss of $102.5 million. Accumulated other comprehensive loss increased to $386.1 million from $282.9 million at year-end.
Outlook, commentary, risks and unusual items
- Management does not provide traditional earnings guidance, citing uncertainty in forecasting near-term results and a long-term investment focus. It expects revenue growth to continue, but cautions that weak regional economies, currency devaluations, high interest rates, Venezuelan deconsolidation and continued shipping subsidies could constrain reported U.S.-dollar growth and margins.
- Argentina was designated highly inflationary under U.S. GAAP from July 1, 2018. The company planned to change the Argentine operations’ functional currency from pesos to U.S. dollars. Argentine subsidiaries had $286.7 million of peso-denominated monetary assets and $259.0 million of peso-denominated monetary liabilities at quarter-end; subsequent currency movements may produce gains or losses.
- Venezuelan subsidiaries were deconsolidated effective December 1, 2017 because restrictions and economic deterioration impaired the company’s control and ability to exchange currency and repatriate funds. Their results are excluded from 2018 consolidated results.
- The company suspended dividends beginning in Q1 2018 to redirect capital toward business investment. First-half capital expenditures were $46.8 million, versus $34.6 million in 2017.
- Management reported $5.7 million of reserves for probable legal contingencies and up to $7.3 million of reasonably possible legal exposures for which no loss was accrued. The company’s maximum estimated buyer-protection-program exposure was $648.1 million, with a related recorded allowance of $4.2 million; management said the maximum is not representative of expected losses.
- Risks include regional political and macroeconomic volatility, Argentine inflation and peso depreciation, foreign-exchange exposure, dependence on local shipping carriers, delivery disruptions, competition, regulation, litigation, fraud, cybersecurity and systems interruptions. A May 2018 truckers’ strike in Brazil disrupted commerce and deliveries.
- Management stated disclosure controls were effective and reported no material changes in internal control over financial reporting during the first half.
Important facts for investors to verify
- Whether revenue growth and payment-volume momentum can offset the sharply higher shipping subsidies and associated pressure on gross and operating margins.
- How the July 2018 hyperinflationary accounting transition and further Argentine peso movements affect earnings, equity and comparability.
- The liquidity, conversion or settlement outcome and repayment plan for the $330 million notes due July 2019, alongside the company’s other borrowing and credit-business funding needs.
- Credit performance and loss allowances for MercadoCredito, credit-card receivables and the buyer protection program as these activities expand.
- The status and potential financial impact of legal and tax matters, including the São Paulo tax disputes and any appeal in the City of São Paulo tax case.