MercadoLibre, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Unless noted, financial amounts are USD millions. MercadoLibre operates an e-commerce marketplace and related payments, shipping, advertising, classifieds and web-store services across Latin America.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net revenue | $168.6 | $147.9 | $471.1 | $395.2 |
| Gross profit / margin | $111.8 / 66.3% | $104.5 / 70.7% | $319.2 / 67.8% | $283.9 / 71.8% |
| Operating income / margin | $45.3 / 26.9% | $47.1 / 31.9% | $105.5 / 22.4% | $75.2 / 19.0% |
| Net income | $45.6 | $33.8 | $66.8 | $38.5 |
| Basic and diluted EPS | $1.03 | $0.76 | $1.51 | $0.87 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $111.3 | $138.4 |
| Free cash flow (company-defined) | $6.3 | $42.1 | $32.9 | $81.3 |
Q3 revenue grew 14.0% year over year, but operating income fell 4.0% as cost of revenue and operating expenses rose. For the first nine months, revenue increased 19.2% and operating income 40.2%. Revenue growth was concentrated in non-marketplace services: nine-month marketplace revenue rose 5.4% to $286.5, while non-marketplace revenue grew 49.7% to $184.5. Q3 growth was 1.7% for marketplace and 37.4% for non-marketplace.
Cost of revenue increased faster than sales: it reached 33.7% of Q3 revenue versus 29.3% a year earlier, and 32.2% for the nine months versus 28.2%. Management attributed much of the increase to payment-processing costs from MercadoPago’s greater penetration and higher sales taxes. Product and technology expense rose 43.5% for the nine months; management said it plans to continue investing in engineering and platform development.
Liquidity, debt and cash flow
- At September 30, cash and cash equivalents were $173.0; short-term investments $168.0; and long-term investments $185.7. Cash plus short-term investments totaled $341.0; including long-term investments, cash and investments totaled about $526.8.
- Current assets were $625.2 and current liabilities $367.3. Funds payable to customers were $219.8; credit-card receivables were $187.6.
- Total liabilities were $705.4 and equity $363.5. Loans payable and other financial liabilities totaled $297.0, including the convertible notes and other borrowings.
- The $330.0 principal amount of 2.25% convertible senior notes is due July 2019; the notes’ net carrying amount was $289.8. Interest expense related to the notes was $12.9 for the nine months. No conversion conditions had been met at September 30.
- Nine-month operating cash flow was $111.3, down from $138.4, primarily reflecting increased MercadoPago working capital and receivables. Investing cash outflow was $94.9, including $45.0 for acquisitions and $36.8 in property-and-equipment purchases and advances. Financing cash outflow was $18.7, including dividends and share repurchases. Cash declined $50.1, including a $47.8 adverse exchange-rate effect.
- Capital expenditures, as defined in the filing to include acquired businesses, were $83.4 for the nine months, versus $57.1 in 2014. Company-defined free cash flow was $32.9 versus $81.3.
Material changes and unusual items
- Argentina revenue rose 67.8% for the nine months, while Brazil revenue increased 11.2%. Venezuela revenue fell 36.9% in reported dollars, largely reflecting currency remeasurement; Mexico revenue increased 7.3%. Brazil and Argentina together contributed 82.2% of nine-month revenue.
- Marketplace gross merchandise volume was $5.14 billion for the nine months, down from $5.28 billion, while items sold rose to 91.7 million from 72.3 million. MercadoPago total payment volume increased to $3.63 billion from $2.42 billion, and payment transactions rose to 54.9 million from 32.0 million. Reported GMV excludes certain categories, as described in the filing.
- Argentina’s software-development tax-holiday eligibility was approved retroactive to September 18, 2014. The company recorded a one-time income-tax gain of about $16 million and a labor-cost gain of about $4.2 million; it also reserved $1.4 million for audit fees. This materially lowered the reported tax burden, particularly in Q3.
- The company recorded a $16.2 million impairment of Venezuelan real estate in Q1 2015, versus a $49.5 million impairment in Q2 2014. Venezuela’s SIMADI exchange rate was 199.42 bolivars per U.S. dollar at quarter-end; the company recorded a $20.4 million Venezuela remeasurement loss in Q1, with no significant foreign-exchange losses in Q2 or Q3.
- Brazilian real depreciation affected reported results and equity. The filing reports a $46.1 million currency-translation loss in other comprehensive income for the nine months and a $45.7 million total net change in accumulated other comprehensive loss.
- Two acquisitions were completed in April: Mexican real-estate classifieds operator Metros Cúbicos for $29.9 million and Brazilian e-commerce software developer KPL Soluções for $22.7 million, including contingent consideration for KPL.
Outlook, risks and contingencies
The filing gives no numerical revenue or earnings guidance. Management said existing cash, operating cash generation and the sale of credit-card receivables were expected to be sufficient to fund operations, capital spending and obligations. It anticipated continued investment in technology and stated it currently expected comparable quarterly cash dividends, subject to board discretion. Management said it remained committed to supporting its Venezuelan business over the long term.
- Currency controls and potential further devaluations in Venezuela and Argentina may restrict conversion or repatriation of funds and affect reported revenue, earnings and asset values. Brazil’s currency exposure is also significant.
- Venezuelan government price and profit controls, regulatory changes, inflation and access to foreign currency create operating uncertainty. Management was assessing a new Venezuelan decree on price determination.
- Payment operations expose the company to working-capital, credit, fraud, chargeback and collection risks; credit-card receivables increased substantially year over year.
- At September 30, legal reserves for probable losses were $1.6 million; additional reasonably possible proceedings were estimated at up to $3.4 million. The filing also describes numerous consumer and commercial claims and tax disputes. A Nike-related Argentine intellectual-property case was described as having a probable loss risk; the filing does not state a clear quantified reserve for that specific matter.
- The company reported effective disclosure controls and procedures and no material change in internal control over financial reporting during the period.
Investor verification priorities
- Reconcile the $16 million Argentine tax benefit and $4.2 million labor-cost gain to reported earnings, and assess ongoing eligibility requirements through 2019.
- Assess underlying growth and margins excluding currency effects and the tax-holiday benefit, especially in Brazil and Argentina.
- Track MercadoPago receivables, payment-processing costs, funding needs and cash conversion as payment volume expands.
- Review Venezuela’s exchange-rate exposure, price-control developments, real-estate acquisitions and impairment assumptions.
- Confirm the full debt and interest profile, acquisition contingent payments, legal exposures and the sustainability of dividends alongside planned capital spending.