MercadoLibre, Inc. — Q3 2016 Form 10-Q
Business context and reporting period. MercadoLibre operates an e-commerce platform across Latin America, including its marketplace, payments, shipping, advertising, classifieds and online-store services. This unaudited filing covers the three and nine months ended September 30, 2016; comparisons are with the same 2015 periods. Unless stated otherwise, amounts below are U.S. dollars.
Financial and operating performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net revenue | $230.8 million | $168.6 million | $588.1 million | $471.1 million |
| Gross profit | $145.6 million | $111.8 million | $374.1 million | $319.2 million |
| Income from operations | $53.7 million | $45.3 million | $116.4 million | $105.5 million |
| Net income | $38.9 million | $45.6 million | $85.0 million | $66.8 million |
| Diluted EPS | $0.88 | $1.03 | $1.93 | $1.51 |
| Operating cash flow | $102.8 million | $14.4 million | $147.7 million | $111.3 million |
- Q3 revenue rose 36.9%; nine-month revenue rose 24.9%. Marketplace revenue was $134.4 million in Q3 and $341.7 million for nine months; non-marketplace revenue was $96.5 million and $246.4 million, respectively.
- Q3 gross margin was 63.1%, down from 66.3%; operating margin was 23.3%, down from 26.8%. For nine months, gross margin was 63.6% versus 67.8%, and operating margin was 19.8% versus 22.4%.
- Q3 net income declined despite higher revenue and operating income, principally alongside income and asset tax expense of $13.4 million versus $2.0 million and a foreign-currency loss of $4.8 million versus a $2.6 million gain. Nine-month net income increased 27.2%.
- Key Q3 operating indicators increased year over year: successful items sold 40.0%, total payment volume 52.7%, and GMV 10.8%. For nine months, the respective increases were 41.3%, 46.3% and 13.2%.
Balance sheet, liquidity and cash flow
- At September 30, 2016, cash and cash equivalents were $188.0 million, short-term investments $283.7 million, and long-term investments $155.2 million. Together these totaled approximately $626.8 million.
- Total assets were $1.256 billion and total liabilities $861.1 million. Current assets were $759.1 million against current liabilities of $496.3 million.
- Loans payable and other financial liabilities totaled $305.5 million, including $299.5 million non-current. The company also had $313.8 million of funds payable to customers, a material operating liability.
- Nine-month investing cash outflow was $91.9 million, including $55.5 million of property and equipment purchases and $7.3 million for acquisitions. Financing cash outflow was $20.4 million, mainly dividends of $17.8 million. Reported free cash flow, a company-defined non-GAAP measure, was $78.7 million.
Material changes and unusual items
- Revenue growth was led by Brazil: nine-month revenue there increased 44.4% to $311.4 million and represented 53.0% of consolidated revenue. Argentine revenue rose 8.4% to $185.9 million; Venezuelan revenue fell 7.3% to $26.5 million.
- Management attributed lower gross margins to greater penetration of payments and shipping, higher collection fees and sales taxes, and increased customer-support costs. Q3 cost of net revenues rose 50.0%, faster than revenue growth.
- The company recorded a $13.7 million impairment in Q2 2016 on Venezuelan real estate under construction, following currency devaluation and reduced expected U.S.-dollar cash flows. It had recorded a $16.2 million Venezuelan impairment in Q1 2015.
- Argentine software-development tax-holiday benefits included $16.0 million of income-tax benefit and $4.2 million of labor-cost benefit for the nine-month period. The holiday is subject to ongoing eligibility requirements and expires December 31, 2019.
- In August 2016, the company agreed to acquire a Buenos Aires office building for approximately $31.4 million plus VAT, with installments and delivery scheduled from 2017 to 2018. It also acquired software/logistics businesses in Argentina and Brazil for approximately $3.1 million and $5.5 million, respectively.
Outlook, risks and contingencies
- MercadoLibre stated it does not provide traditional earnings guidance. Management expressed confidence in long-term growth opportunities but cautioned that macroeconomic weakness, local-currency devaluations, Venezuelan currency restrictions, price controls and high interest rates could reduce U.S.-dollar revenue.
- Management expects continued investment in technology, marketing and personnel and said sustaining operating-margin growth may become more difficult. Higher payments and shipping penetration may continue to pressure gross margins.
- Venezuela remained highly inflationary for accounting purposes, with the SIMADI rate at about 659 bolivars per U.S. dollar at quarter-end. The filing highlights risks from further devaluation, foreign-exchange restrictions and potential government intervention. Venezuelan operations had $39.7 million of net assets before intercompany eliminations and generated $26.5 million of nine-month revenue.
- The $330 million 2.25% convertible notes due 2019 became convertible at holders’ option for the October–December 2016 quarter after the stock-price threshold was met. No holder had requested conversion as of the filing date; the company intended to settle in shares. The notes’ carrying amount was $300.1 million.
- Legal reserves were $5.6 million for matters assessed as probable losses; additional reasonably possible legal actions were estimated at up to $4.5 million. The company also described pending Brazilian tax disputes, including a $4.2 million São Paulo claim for which a lower court had ruled in its favor, subject to further proceedings.
- The board approved a $0.15-per-share quarterly dividend in November 2016, payable January 16, 2017. The company said it expected to continue comparable quarterly dividends, subject to board discretion.
Important facts for investors to verify
- Whether the rapid growth in payment volume and shipped items can be maintained without further gross- and operating-margin erosion.
- The effects of currency movements, especially in Venezuela and Argentina, on reported revenue, earnings, asset values and cash accessibility.
- Potential dilution or settlement consequences if holders convert the 2019 notes, and the company’s actual settlement approach.
- The durability and eligibility conditions of Argentine tax-holiday benefits and their effect on reported tax expense.
- Execution, cash commitments and expected returns from office-property investments and acquisitions; review subsequent developments in the identified litigation and tax matters.