MercadoLibre, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. Although the request identifies 2017 Q4, this is an annual 10-K; quarterly figures are noted where relevant. Amounts are U.S. dollars unless stated otherwise.
Business context
MercadoLibre operates an integrated Latin American commerce and payments ecosystem, including its marketplace, MercadoPago, MercadoEnvios, classifieds, advertising, webstores and merchant credit. Brazil generated 59.5% of FY2017 revenue and Argentina 25.7%. The company deconsolidated its Venezuelan subsidiaries effective December 1, 2017.
Key financial metrics
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net revenue | $1,398.1 million | $844.4 million |
| Gross profit / margin | $719.6 million / 51.5% | $536.9 million / 63.6% |
| Operating income / margin | $56.3 million / 4.0% | $181.1 million / 21.4% |
| Net income | $13.8 million | $136.4 million |
| Basic and diluted EPS | $0.31 | $3.09 |
| Operating cash flow | $269.0 million | $190.3 million |
| Capital expenditures | $83.5 million | $84.7 million |
- Revenue grew 65.6% as reported; management’s foreign-exchange-neutral measure showed 82.0% growth. Marketplace revenue was $839.1 million; non-marketplace revenue was $559.0 million.
- Marketplace GMV was $11.75 billion, up 46.0%; MercadoPago total payment volume was $13.73 billion, up 77.1%. Successful items sold increased 49.1% to 270.1 million; registered users reached 211.9 million, up 21.7%.
- Cash and cash equivalents were $388.3 million; short- and long-term investments were $209.4 million and $34.7 million, respectively. Combined cash and investments totaled approximately $632.4 million. Current assets were $1,286.9 million versus current liabilities of $968.0 million.
- Total loans payable and other financial liabilities were $368.4 million, including $312.0 million carrying value for convertible notes. The notes have $330 million principal, bear 2.25% interest and mature July 2019. The filing reports $405.9 million of total long-term debt obligations and related scheduled payments in its contractual-obligations table.
- FY2017 Q4 revenue was $437.0 million and net loss was $67.7 million, principally reflecting the Venezuela deconsolidation charge.
Material changes versus FY2016
- Revenue rose substantially, supported by transaction growth, greater payments and shipping adoption, higher take rates, and Brazil’s strong performance.
- Gross margin fell 12.1 percentage points. Management cited $181.6 million of free-shipping costs, higher payment-processing fees, taxes, customer-support costs and hosting expense. Free shipping was mainly offered in Brazil and Mexico.
- Operating income declined to $56.3 million as cost of revenue and sales and marketing rose; sales and marketing expense more than doubled to $325.4 million. Results included an $85.8 million loss from Venezuela deconsolidation.
- Operating cash flow increased to $269.0 million. Cash and equivalents increased to $388.3 million from $234.1 million; investing cash outflow narrowed to $22.6 million, while financing cash outflow was $50.9 million, including $67.3 million for capped calls and $26.5 million of dividends.
Outlook, risks and unusual items
- Management does not provide traditional earnings guidance, citing difficulty forecasting near-term results. It expects continued investment in product development, marketing, personnel, payments, credit and shipping; it warned margins may face further pressure.
- Venezuela’s restrictive exchange controls, selective default, lack of access to U.S. dollars and deteriorating conditions led to deconsolidation and an $85.8 million impairment. The company said it intended to continue operating there, but will not consolidate those operations going forward.
- Currency exposure is material: Brazil and Argentina represented 59.5% and 25.7% of FY2017 revenue. Reported 2017 revenue benefited from currency translation by $138.3 million, while the filing says aggregate cost of revenue and operating expenses increased by $53.2 million from currency effects.
- Key risks include competition, consumer and payment fraud, cybersecurity and service interruptions, regulatory uncertainty for payments and e-commerce, credit losses from MercadoCredito, shipping costs, and political, economic and currency volatility across Latin America.
- MercadoPago’s Brazilian payment-institution authorization remained pending; the Brazilian Central Bank extended the relevant compliance deadline to September 2018. Mexico’s competition authority began an industry-wide e-commerce inquiry; the company said it had not been named or implicated.
- Legal proceedings included $5.9 million of reserves for probable losses and $6.4 million of reasonably possible claims for which no loss was accrued. The buyer-protection program’s estimated maximum potential exposure was $925.7 million; the recorded allowance was $1.1 million. These are different measures, and the maximum is not management’s estimate of expected losses.
- The company paid $0.60 per share in 2017 but suspended dividends beginning in Q1 2018 to redirect capital toward business investments. The 2017 U.S. tax reform and Argentine tax reform affected deferred tax balances and tax expense.
- The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective at year-end.
Important facts for investors to verify
- How much of revenue growth and marketplace activity is sustainable after separating organic performance from exchange-rate effects and changes in take rates.
- Whether payment and shipping growth can offset the associated costs, especially free shipping, and stabilize gross and operating margins.
- The ongoing credit quality, loss provisions and funding requirements of MercadoCredito as its loan portfolio expands.
- Potential outcomes and cash implications of Brazilian payment regulation, tax disputes, consumer claims and the buyer-protection program.
- The company’s operating and accounting exposure to Venezuela after deconsolidation, and the assumptions behind the $85.8 million charge.
- Liquidity and settlement capacity given rising customer funds payable, credit-card receivables and the 2019 convertible-note maturity; also confirm the contractual-obligations disclosures against the debt note.
- The impact of the dividend suspension and planned reinvestment on future capital allocation and returns to shareholders.