MercadoLibre, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011; unaudited. Comparisons are with the corresponding 2010 periods. Financial figures are U.S. dollars unless noted.
Business context
MercadoLibre operates Latin American e-commerce marketplaces and related services, including MercadoPago payments, advertising and online stores. Brazil was its largest market, providing about 58% of Q2 revenue. The company reported 58.4 million confirmed registered users at period-end, compared with 47.4 million a year earlier.
Key financial results
| Metric | Q2 2011 | Q2 2010 | H1 2011 | H1 2010 |
|---|---|---|---|---|
| Net revenue | $69.4m | $52.5m | $130.8m | $98.4m |
| Gross profit | $52.4m | $41.1m | $99.6m | $77.1m |
| Operating income | $21.6m | $18.8m | $40.8m | $34.3m |
| Net income | $14.8m | $11.7m | $28.9m | $21.3m |
| Diluted EPS | $0.34 | $0.26 | $0.65 | $0.48 |
- Revenue rose 32.1% in Q2 and 32.9% in H1. Management attributed growth principally to increased marketplace volume, more items sold and favorable currency translation; revenue growth in local currencies was 21.6% in Q2 and 23.5% in H1.
- Gross margin was approximately 75.6% in Q2 and 76.1% in H1, down from 78.3% and 78.4%, respectively. Operating margin was approximately 31.1% in Q2 and 31.2% in H1; net margin was approximately 21.4% and 22.1%.
- Q2 gross merchandise volume increased 33.8% to $1.07bn; items sold rose 26.3% to 11.6m. MercadoPago payment volume approximately doubled to $295.8m, with 3.1m payment transactions. Q2 take rate eased to 6.5% from 6.6%; H1 take rate improved to 6.5% from 6.4%.
- H1 operating cash flow was $33.7m, versus $26.1m. Investing used $43.3m and financing used $3.5m; cash and cash equivalents declined $12.6m to $44.3m.
Balance sheet, liquidity and debt
- At June 30, cash and cash equivalents were $44.3m, short-term investments $72.4m and long-term investments $50.2m, totaling $166.8m in cash and investments. Current assets were $159.2m and current liabilities $100.8m.
- Total liabilities were $110.9m, including $58.2m payable to customers. Reported loans and other financial liabilities totaled about $0.23m, mainly an Argentine car lease. Dividends payable were $3.5m.
- H1 capital expenditures were $13.4m, versus $3.9m a year earlier. This included approximately $6.6m for an office property in Caracas and increased technology and office investment.
- Management said existing liquidity, operating cash generation and proceeds from selling credit-card receivables should be sufficient for operations, capital spending and obligations. It reported no material off-balance-sheet arrangements.
Material changes, outlook and risks
- Operating expenses grew: H1 product and technology development rose 48.2%, sales and marketing 27.8%, and general and administrative 47.1%. Management cited engineering investment, retention-plan compensation, legal and tax services, and customer support and trust-and-safety spending.
- Q2 sales and marketing included a one-time $1.6m loss tied to voided or overdrawn checks processed by a Brazilian payments processor. Increased collection fees and customer-support costs also pressured gross margin.
- Financial expenses fell substantially after the company began pre-selling installment-related receivables to financial institutions in 2010. Foreign-currency losses were $0.7m in Q2 and $1.2m in H1 2011.
- The board declared a quarterly dividend of approximately $3.5m, or $0.08 per share, paid July 15, 2011. Management said it currently expects comparable quarterly dividends, subject to board discretion. No specific earnings or revenue guidance was provided.
- Management expects continued IT-related capital investment. The 2011 long-term retention plan had estimated total compensation cost of about $6.1m, with $0.8m accrued in H1.
- Key exposures include currency movements and Venezuela’s highly inflationary environment and restricted access to foreign currency. Venezuelan operations represented about 7% of consolidated net assets; local-currency cash and investments in Venezuela were about 2.9% of consolidated cash and investments.
- Brazilian litigation includes hundreds of ordinary-court cases and more than 1,719 consumer-court cases. Legal reserves were $2.1m; additional reasonably possible legal actions were estimated at up to $4.4m. A separate São Paulo tax claim of about $5.8m was assessed by management as remote and unreserved. The filing also describes disputes over intermediary liability, customer service and intellectual property.
- Management identified risks including competition, regulation, service interruptions, security and fraud, reliance on third parties, legal claims, and economic and political conditions in Latin America. It reported disclosure controls effective and no material change in internal controls during the quarter.
Important facts for investors to verify
- Whether transaction growth and payment-volume expansion can continue while take rate and gross margin remain under pressure.
- The durability of cash generation and liquidity, including the role of receivable sales and the composition, maturity and location of investments.
- Currency exposure, especially Brazil and Venezuela, and any changes to Venezuelan exchange restrictions or ability to move funds.
- Developments in Brazilian consumer, fraud, customer-service and intellectual-property litigation, along with the unreserved São Paulo tax claim.
- The recurrence or resolution of the Brazilian payment-processor loss, and the expense and share-price sensitivity of long-term retention plans.
- Whether quarterly dividends continue and whether planned technology and other capital expenditures deliver expected returns.