Business context and reporting period
MercadoLibre, Inc. operates a Latin American e-commerce ecosystem spanning its marketplace, payments, shipping, advertising, classifieds, online stores and merchant lending. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods. Amounts below are U.S. dollars unless noted.
Financial results and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net revenue | $316.5m | $199.6m | $590.5m | $357.3m |
| Gross profit / margin | $171.6m / 54.2% | $126.3m / 63.3% | $340.4m / 57.7% | $228.5m / 64.0% |
| Operating income / margin | $30.0m / 9.5% | $32.2m / 16.1% | $93.3m / 15.8% | $62.7m / 17.5% |
| Net income / diluted EPS | $5.3m / $0.12 | $15.9m / $0.36 | $53.8m / $1.22 | $46.1m / $1.04 |
- Q2 revenue grew 58.5%; six-month revenue grew 65.3%. Q2 net income fell despite strong sales growth, while first-half net income rose 16.8%.
- Operating cash flow was $226.3m for the first half, compared with $44.9m in 2016. Free cash flow, a company-defined non-GAAP measure, was $191.7m versus approximately breakeven. Management attributed much of the operating cash flow improvement to changes in credit-card receivables and accounts payable/accruals.
- Capital expenditures were $34.6m in the first half, down from $44.9m. Investing cash outflow was $41.1m and financing cash outflow was $8.4m.
- At June 30, cash and cash equivalents were $382.8m, short-term investments $206.2m, and long-term investments $186.3m. Current assets were $958.2m and current liabilities $676.0m.
- Loans payable and other financial liabilities totaled $324.9m, including the convertible notes’ $306.4m carrying amount. The $425.6m of funds payable to customers is a separate customer-related liability, not company borrowing.
Material changes versus prior period
- Revenue growth came from both streams: Q2 marketplace revenue was $196.7m, up 73.7%, and non-marketplace revenue was $119.8m, up 38.7%. Non-marketplace includes payment, shipping, advertising and other fees.
- Brazil contributed 56.9% of Q2 revenue and Argentina 27.8%. Q2 revenue increased in every reported geography; Brazil revenue rose 75.0% and Argentina 30.0%.
- Profitability contracted as costs grew faster than revenue. Q2 cost of revenue increased 97.7%, sales and marketing 117.5%, and general and administrative expense 51.1%. The company cited payment collection fees, free shipping, sales taxes, customer support and increased marketing.
- Payment volume rose 79.2% and shipped items 61.4% in the first half; successful items sold increased 39.9%. Higher payments and shipping penetration supported growth but pressured gross margins.
Outlook, commentary, risks and unusual items
- Management does not provide traditional earnings guidance, citing uncertainty and a long-term investment focus. It expects growth to continue but warns that macroeconomic weakness, local-currency devaluations, Venezuelan currency effects, price controls and high regional interest rates could reduce U.S.-dollar revenue. It expects continued investment in technology, marketing and personnel and cautions that operating margins could decline further.
- Venezuela was the principal unusual Q2 item: adoption of the DICOM rate of 2,640 bolivars per U.S. dollar led to an approximately $22m foreign-exchange loss and a $2.8m impairment of real estate under construction. The company had previously recorded a $13.7m impairment in Q2 2016. It says it cannot assure access to U.S. dollars or rule out further devaluations or tighter controls.
- The Argentine software-development tax holiday generated an $11.3m income-tax benefit in the first half and $6.2m in Q2; the benefit is subject to ongoing eligibility requirements and is scheduled to expire in 2019.
- The $330m, 2.25% convertible notes mature July 2019. They became convertible at holders’ option for July–September 2017 after the conversion threshold was met; the company intended to settle in shares, and reported no additional conversion requests through the filing date. The notes’ estimated fair value was $715.2m at quarter-end, versus $458.8m at year-end 2016.
- Legal contingencies included $5.7m accrued for matters assessed as probable and up to $5.5m of reasonably possible losses not accrued. A post-quarter Brazilian tax assessment of about $3.7m was assessed as reasonably possible, not probable. The buyer-protection program’s estimated maximum exposure was $564.2m, against a recorded allowance of $1.0m; management cautions that maximum exposure is not its estimate of actual losses.
- The board set a 2017 quarterly dividend of $0.15 per share, or $0.60 annually, subject to future board decisions. Management reported effective disclosure controls and no material changes in internal control during the period.
Important facts for investors to verify
- Whether payment and shipping growth can sustain revenue expansion without further gross- and operating-margin deterioration.
- The extent to which Q2 earnings and cash flow are affected by Venezuela, foreign exchange, and working-capital movements; also review the company’s non-GAAP adjustments alongside GAAP results.
- MercadoLibre’s ability to access foreign currency in Venezuela, the assumptions behind the DICOM measurement and property impairment, and potential additional losses or controls.
- Convertible-note dilution or settlement outcomes, refinancing or repayment capacity ahead of the 2019 maturity, and the sustainability of the dividend.
- Developments in the Brazilian tax assessment, other legal matters, buyer-protection claims, and the costs and eligibility conditions of the Argentine tax holiday.