MercadoLibre, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012; unaudited. Comparisons are with the corresponding 2011 periods. Amounts are U.S. dollars unless stated otherwise.
Business context
MercadoLibre operates Latin American e-commerce marketplaces and related payments, advertising, and online-store services. Its marketplace operated in 13 countries and MercadoPago in six. Nearly all revenue and operating costs arose outside the United States. Brazil remained the largest reporting segment, while Argentina and Venezuela drove much of reported revenue growth.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net revenue | $97.3m | $81.6m | $269.8m | $212.5m |
| Gross profit | $71.6m | $61.6m | $199.2m | $161.1m |
| Operating income | $33.7m | $30.0m | $90.5m | $70.8m |
| Net income | $26.1m | $26.3m | $71.1m | $55.2m |
| Net income attributable to MercadoLibre | $26.0m | $26.3m | $71.1m | $55.2m |
| Diluted EPS | $0.59 | $0.60 | $1.62 | $1.25 |
- Revenue grew 19.2% in Q3 and 27.0% in the first nine months. Management reported local-currency growth of 37.0% and 42.2%, respectively, indicating that currency translation reduced reported-dollar growth.
- Gross margin was approximately 73.6% in Q3 versus 75.4% a year earlier, and 73.8% for the nine months versus 75.8%. Operating margin was about 34.7% versus 36.7% in Q3, and 33.5% versus 33.3% for the nine months.
- Q3 net income was slightly lower year over year despite revenue growth. Management attributed the main year-over-year drag in other income to a foreign-exchange swing: a $0.2m loss versus a $3.3m gain in Q3 2011. Nine-month foreign-currency results were a $0.5m loss versus a $2.1m gain.
- Marketplace activity increased: Q3 items sold rose 22.4% to 17.6m, while GMV increased 6.5% to $1.44bn. Nine-month items sold increased 31.2% to 48.4m and GMV increased 20.4% to $4.06bn. MercadoPago total payment volume was $480.1m in Q3, up 30.3%, and $1.26bn for the nine months, up 38.7%.
- Operating expenses increased, including product and technology development (+34.7% in Q3), sales and marketing (+11.3%), and general and administrative (+25.7%). Management cited investment in engineering and customer support, higher payment chargebacks, compensation, and legal costs.
Cash, liquidity, and capital resources
- At September 30, cash and cash equivalents were $98.2m; short-term investments were $79.4m and long-term investments $59.4m. Management described $177.6m of cash and short-term investments plus $59.4m of long-term investments as available liquidity.
- Nine-month operating cash flow was $83.7m, up from $62.3m. Investing activities used $37.3m, and financing activities used $13.1m, primarily for dividends. Cash increased $30.8m to $98.2m.
- Capital expenditures were $13.0m for the nine months, down from $22.7m in 2011. The company said it expected continued technology-related capital investment and believed cash and operating cash generation would be sufficient for operations, capital spending, and obligations.
- Outstanding debt was approximately $0.2m, mainly Argentine car leases. Current liabilities also included $83.6m of customer funds payable and $4.8m of dividends payable; these should not be confused with conventional borrowing.
- Foreign subsidiaries held $189.9m, or 80.1%, of consolidated cash and investments. Cash and investments held locally in Venezuela represented approximately 14.3% of consolidated cash and investments.
Changes, outlook, and risks
- Revenue mix shifted: Brazil represented 47.5% of Q3 revenue, down from 56.4% a year earlier; Argentina rose to 24.8% from 19.4%, and Venezuela to 14.6% from 11.1%. Q3 Brazil revenue was nearly flat in reported dollars, while Argentina and Venezuela grew strongly.
- Higher payment adoption contributed to increased collection fees and cost of revenue. Cost of revenue grew 28.1% in Q3 and 37.7% for the nine months, faster than reported revenue in both periods.
- No specific revenue or earnings guidance was provided. The company said it currently expected to continue comparable quarterly cash dividends, subject to board discretion. A $0.109-per-share dividend declared October 30 was scheduled for payment January 15, 2013.
- Management highlighted foreign-exchange exposure, particularly to the Brazilian real, and interest-rate sensitivity. A 100-basis-point rate increase was estimated to reduce the fair value of available-for-sale securities by about $2.0m. The company had not entered into foreign-currency hedging agreements during 2012 and did not use interest-rate derivatives.
- Venezuela was accounted for as highly inflationary, with the U.S. dollar as its functional currency and a 5.30 bolívar-per-dollar remeasurement rate. Currency controls restrict access to U.S. dollars; management said it did not expect current restrictions to significantly harm its Venezuelan business plans.
- Legal reserves were $2.5m for probable losses; management separately disclosed reasonably possible legal matters aggregating up to $4.7m. Other named claims include São Paulo tax assessments of approximately $11.4m and a previously contested tax claim of approximately $5.8m; management assessed the risks on those claims as remote and recorded no reserve. Brazilian consumer and ordinary courts had 2,894 and 499 pending cases, respectively.
- Management identified risks involving regulation, litigation and online-intermediary liability, fraud and security, service interruptions, competition, customer retention, third-party providers, and political and economic conditions in Latin America. It reported no material change to the risk factors in the 2011 Form 10-K. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether marketplace and payment growth can sustain revenue gains while cost of revenue, chargebacks, and customer-support spending rise.
- How much of reported growth reflects underlying local-currency performance versus exchange-rate effects, especially in Brazil, Argentina, and Venezuela.
- The liquidity and availability of customer-related funds and locally held Venezuelan cash, alongside the company’s low reported conventional debt.
- Developments in Brazilian litigation and tax disputes, including the distinction between accrued, reasonably possible, and management-assessed remote claims.
- The continuation of dividends and planned technology investment; the filing provides no specific earnings or revenue guidance.