MercadoLibre, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; financial statements are unaudited and stated in U.S. dollars. MercadoLibre operates Latin American e-commerce marketplaces, payments services, online classifieds, advertising, and online stores. Comparisons below are with Q1 2011 unless noted.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net revenue | $83.7 million | $61.5 million | +36.2% |
| Gross profit / gross margin | $62.6 million / 74.8% | $47.1 million / 76.7% | Margin down about 1.9 percentage points |
| Operating income / operating margin | $24.9 million / 29.8% | $19.3 million / 31.4% | Income +29.2%; margin down about 1.6 points |
| Net income | $19.6 million | $14.1 million | +39.7% |
| Diluted EPS | $0.45 | $0.32 | Up $0.13 |
| Operating cash flow | $19.0 million | $15.2 million | +25.2% |
Margins are calculated from reported amounts and rounded. Revenue growth reflected higher marketplace activity, payments, classifieds, and advertising. Gross merchandise volume rose 38.6%, items sold rose 38.1%, and MercadoPago total payment volume rose 50.9%. Local-currency revenue growth was 43.6%, versus reported growth of 36.2%.
Costs grew faster than revenue in several areas: cost of revenue rose 47.2%, product and technology expense 59.4%, sales and marketing 32.7%, and general and administrative expense 34.3%. Management attributed higher payment collection fees, customer support and fraud-prevention spending, engineering investment, MercadoPago chargebacks, retention compensation, legal fees, and a $0.9 million Venezuelan tax-payment processing issue to the increases. Operating expenses as a whole rose 35.5%.
Liquidity, balance sheet, and cash flows
- At March 31, cash and cash equivalents were $75.9 million; short-term investments were $82.7 million and long-term investments were $43.1 million. Together, cash and investments totaled about $201.7 million, up from $186.2 million at year-end 2011.
- Current assets were $217.2 million and current liabilities $120.2 million. Total liabilities were $134.9 million; reported loans and other financial liabilities totaled approximately $0.2 million, mainly Argentine car leases.
- Operating cash flow was $19.0 million; investing cash outflow was $6.8 million and financing cash outflow was $3.5 million, principally the January dividend. Cash increased $8.5 million to $75.9 million.
- Capital expenditures were $3.7 million, compared with $3.0 million a year earlier. The filing says the company expects continued technology-related capital investment and believes existing liquidity and operating cash generation will fund operations, capital expenditures, and obligations.
- Contractual obligations totaled $13.6 million: $0.2 million of capital leases, $4.1 million of operating leases, and $9.3 million of purchase obligations.
Material changes and management commentary
- Revenue increased in every reported geography. Growth was strongest in Argentina (+71.2%) and Venezuela (+66.0%); Brazil, the largest segment, grew 21.4% and represented 50.4% of revenue, down from 56.5% a year earlier.
- Marketplace GMV was $1.32 billion, items sold totaled 15.0 million, and MercadoPago processed $370.1 million across 4.9 million transactions. Confirmed registered users reached 69.5 million, compared with 55.6 million.
- Interest income and other financial gains rose to $3.1 million from $1.9 million. Foreign-currency loss increased to $1.0 million from $0.5 million. The blended tax rate declined to 27.0% from 29.9%; the company cited geographic income mix and Brazilian tax differences. Argentina’s software-development tax benefit was $2.0 million for the quarter.
- The board approved a $4.8 million quarterly dividend ($0.109 per share) in February, paid April 16, 2012. Management said it currently expects to continue comparable quarterly dividends, subject to board discretion.
- No formal quantitative revenue, earnings, or other operating guidance is provided. Management cautions that Q1 results are not necessarily indicative of full-year results.
Risks, contingencies, and unusual items
- Foreign exchange and Venezuela: Approximately 99.5% of revenue and operating costs arose in foreign operations. Venezuelan operations are treated as highly inflationary, with the U.S. dollar as functional currency and transactions remeasured at the restricted SITME rate of 5.30 bolívares per U.S. dollar. Venezuelan net assets were about 10.0% of consolidated net assets; cash and investments held locally in Venezuela were about 8.6% of consolidated cash and investments. The filing describes restrictions on obtaining foreign currency but says management does not expect a significant adverse effect on its Venezuelan business plans. A 10% currency movement could materially affect reported revenue, earnings, and equity, according to the company’s sensitivity analysis.
- Legal matters: The company had $2.1 million reserved for probable legal losses and identified up to $2.7 million of reasonably possible claims without accrual. Brazilian proceedings include hundreds of ordinary-court cases and more than 2,077 consumer-court cases, commonly involving alleged fraud or customer damages. A São Paulo tax claim of about $5.8 million was described as a remote loss risk; the company had deposited about $5.2 million in court. Management notes that online-intermediary liability and intellectual-property claims may create costs or require changes to business practices.
- Other exposures: The company had no material off-balance-sheet arrangements. A 100-basis-point interest-rate change was estimated to change available-for-sale investment fair value by about $1.4 million. Variable-payment retention-plan obligations were valued at about $13.0 million, with $5.6 million accrued.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. It reported no material changes to the risk factors in the 2011 Form 10-K.
Important facts for investors to verify
- Whether rapid revenue and transaction growth can continue while payment-processing and operating costs rise, and whether margins stabilize.
- How much reported growth reflects underlying local-currency performance versus exchange-rate translation, particularly in Venezuela and Brazil.
- The availability and liquidity of investments, including the maturity profile and concentration of funds outside the United States.
- Developments in Brazilian consumer and legal proceedings, the São Paulo tax dispute, and other reasonably possible contingencies.
- Whether dividend payments and planned technology investment remain consistent with cash generation and working-capital needs.