MercadoLibre, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparative period is Q1 2015. Unaudited U.S. GAAP consolidated financial statements. Amounts below are U.S. dollars unless otherwise stated.
Business context and results
MercadoLibre operates Latin American e-commerce marketplaces and related payments, shipping, advertising, classifieds, and web-store services. Results are substantially generated outside the United States.
| Metric | Q1 2016 | Q1 2015 | Change / context |
|---|---|---|---|
| Net revenue | $157.6m | $148.1m | Up 6.4% reported; up 75.0% on the company’s foreign-exchange-neutral basis |
| Gross profit / margin | $102.2m / 64.8% | $103.4m / 69.8% | Gross profit down 1.2%; margin contracted |
| Operating income / margin | $30.5m / 19.3% | $25.6m / 17.3% | Up 19.1%; prior period included $16.2m impairment |
| Net income | $30.2m | $1.7m | Basic and diluted EPS were $0.68 versus $0.04 |
| Operating cash flow | $(11.8)m | $38.2m | Down $50.0m year over year |
| Free cash flow | $(29.1)m | $29.9m | Company-defined non-GAAP measure |
| Cash and cash equivalents | $144.9m | $166.9m at Dec. 31, 2015 | Quarter-end balance |
| Short- and long-term investments | $383.5m | $389.7m at Dec. 31, 2015 | Combined with cash, approximately $528.3m |
| Total assets / equity | $1,083.5m / $353.1m | $1,003.6m / $339.5m at Dec. 31, 2015 | Quarter-end balances |
Material changes and operating trends
- Marketplace revenue declined 0.7% to $94.1m, while non-marketplace revenue grew 19.1% to $63.5m. Payments, shipping, advertising, and other ancillary services contributed to non-marketplace growth.
- Brazil revenue rose 13.2% to $77.5m; Argentina rose 1.6% to $48.2m; Mexico rose 17.8% to $11.1m. Venezuela fell 13.3% to $12.1m, primarily reflecting currency devaluation.
- Cost of revenue increased 24.0% to $55.4m, faster than reported revenue. Management cited higher payment-processing fees, sales taxes, customer-support, hosting, and mobile point-of-sale costs.
- Product and technology expense increased 27.2% to $21.9m, and sales and marketing increased 24.7% to $32.7m. General and administrative expense declined 5.9% to $17.1m.
- Marketplace gross merchandise volume was $1.78bn, up from $1.65bn; successful items sold rose to 38.3m from 27.5m. MercadoPago payment volume increased to $1.38bn from $1.04bn, and payment transactions to 27.5m from 14.8m.
Cash, debt, and liquidity
- Management attributed the operating cash outflow mainly to working-capital needs, including increased credit-card receivables and lower discounts of receivables, as well as changes in accounts payable and accrued expenses.
- Current assets were $605.0m and current liabilities $386.3m at quarter-end. Current liabilities included $230.0m of funds payable to customers.
- Loans payable and other financial liabilities totaled approximately $299.0m, including the $330m principal amount of 2.25% convertible senior notes due 2019. The notes’ net carrying amount was $294.9m. No note-conversion conditions had been met by March 31, 2016.
- Capital expenditures, including acquired businesses, were $17.3m, versus $8.3m a year earlier. The company acquired Argentine software developer Monits S.A. for a fair-value purchase price of $3.1m.
Outlook, commentary, risks, and unusual items
- The company does not provide traditional earnings guidance, citing uncertainty in forecasting near-term results and a focus on long-term initiatives. Management stated that existing cash, receivables-sale capacity, and operating cash generation were expected to fund operations, capital expenditures, and obligations.
- Management expects to continue comparable quarterly dividends, subject to board discretion. A $0.15-per-share dividend was approved in February 2016; another $0.15-per-share dividend was approved May 4, 2016.
- Foreign-exchange effects materially complicate comparisons. Q1 2016 included a $5.1m foreign-currency gain, while Q1 2015 included an $8.6m loss, including a $20.4m Venezuelan remeasurement loss. Q1 2015 also included a $16.2m Venezuelan asset impairment. These prior-year items contributed to the large year-over-year increase in net income.
- An Argentine software-development tax holiday produced a $4.3m income-tax benefit and a $1.0m labor-cost benefit in Q1 2016. Continued eligibility depends on meeting requirements; the program is scheduled to expire in 2019.
- Venezuela remains a significant risk: the company used SIMADI at 273 bolivars per U.S. dollar at March 31, while reporting a rate of 397 at May 4. Exchange controls, further devaluation, inflation, regulation, and limits on repatriating funds could adversely affect results and asset values.
- Other disclosed risks include currency movements in Argentina and Brazil, fraud and chargebacks, evolving rules governing online marketplaces and payments, competition, service interruptions, and litigation. Legal reserves were $4.7m for probable matters; management identified up to $4.0m of reasonably possible claims for which no loss was accrued.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether revenue growth, payments volume, and marketplace activity persist, and how much reported growth is attributable to local-currency inflation or exchange-rate translation.
- Whether rising payment, support, buyer-protection, and technology costs continue to pressure gross margin and cash generation.
- The liquidity and working-capital implications of MercadoPago receivables growth, including the role and availability of receivables discounting.
- Developments in Venezuela’s exchange-rate regime and the impact of any further devaluation on reported revenue, earnings, and net assets.
- Performance and eligibility conditions for the Argentine tax holiday, and any resulting changes to tax expense or payroll costs.
- Convertible-note terms, future dividend decisions, and the outcome or financial exposure of pending legal and consumer-protection claims.