MercadoLibre, Inc. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. This is an annual filing; fourth-quarter figures below are unaudited quarterly data. The company operates an online commerce ecosystem across Latin America, including its marketplace, MercadoPago payments, advertising and hosted online stores.
Financial performance and key metrics
| Metric | FY 2011 | FY 2010 | Change |
|---|---|---|---|
| Revenue | $298.9 million | $216.7 million | +37.9% |
| Gross profit / margin | $226.9 million / 75.9% | $170.2 million / 78.5% | Margin down 2.6 percentage points |
| Operating income / margin | $99.8 million / 33.4% | $74.6 million / 34.4% | Income +33.8%; margin down 1.0 point |
| Net income | $76.8 million | $56.0 million | +37.1% |
| Diluted EPS | $1.73 | $1.27 | +36.2% |
| Operating cash flow | $89.4 million | $67.9 million | +31.7% |
- Fourth quarter: Revenue was $86.5 million versus $62.3 million in Q4 2010; gross profit was $65.7 million versus $48.5 million; net income was $21.6 million versus $15.9 million. Diluted EPS was $0.47 versus $0.36. Q4 gross margin was about 76.0%, compared with about 77.9% a year earlier.
- Marketplace and payments: Gross merchandise volume (GMV) was $4.82 billion, up 41.5%; successful items sold were 52.8 million, up 34.6%. MercadoPago payment volume was $1.31 billion, up 88.1%, and represented 27.2% of GMV (excluding specified classified categories).
- Revenue mix: Brazil generated 55.5% of revenue, Argentina 19.0%, Venezuela 11.6%, Mexico 7.5% and other countries 6.4%. Brazil revenue rose 35.1%; Argentina 42.2%; Venezuela 66.8%; Mexico 17.5%.
- Liquidity and debt: Year-end cash and cash equivalents were $67.4 million; short- and long-term investments were $74.9 million and $43.9 million, respectively. Current assets were $200.2 million and current liabilities $118.3 million. Loans and other financial liabilities totaled approximately $0.3 million; the company also reported $3.5 million in dividends payable. Funds payable to customers were $69.2 million and reflect payment-platform obligations, not conventional borrowings.
- Cash uses and investment: Investing cash outflow was $66.9 million, including net investment purchases, capital spending and the Autopark acquisition. Financing cash outflow was $10.6 million, primarily dividends. Reported capital expenditures were $24.7 million.
Material changes versus prior periods
- Revenue growth was driven mainly by higher GMV and items sold, while take rate declined to 6.20% from 6.36%, partly because GMV grew faster than some revenue sources.
- Gross margin declined as payment processing became a larger share of transactions and carries higher costs. Cost of revenue rose 54.8%, faster than revenue growth of 37.9%.
- Operating expenses rose 33.0% to $127.1 million, but fell as a share of revenue to 42.5% from 44.1%. Product and technology development spending increased 47.3% to $23.3 million.
- MercadoPago payment volume expanded rapidly. The company also changed its marketplace payment and fee arrangements in certain countries, including making MercadoPago obligatory for eligible Mexican paid listings.
- Operating cash flow increased, but growth in credit-card receivables and other payment-related working capital partly offset the increase. The allowance for doubtful accounts rose to $16.0 million from $11.6 million.
Outlook, commentary, risks and unusual items
- Management does not provide traditional earnings guidance. It emphasizes long-term growth and expects continued investment in technology, marketing, people and infrastructure; it cautions that historical growth rates are not sustainable and may decline.
- Management expects comparable quarterly dividends to continue, subject to board discretion. FY 2011 dividends totaled $14.1 million, or $0.32 per share; a further $4.8 million dividend was declared in February 2012.
- Foreign-exchange and country risks are significant: most revenue is earned in local currencies, and Brazil alone accounted for 55.5% of revenue. Venezuela is treated as highly inflationary for accounting, uses the U.S. dollar as its functional currency, and faces exchange controls and restricted access to foreign currency. Argentina also imposed additional currency-purchase and transfer restrictions during 2011 and early 2012.
- Payments-related risks include fraud, chargebacks, reliance on banks and processors, possible licensing or financial-regulation requirements, and sensitivity to credit-card funding and interest rates. Management reported a one-time $1.6 million loss in Q2 2011 from voided or overdrawn checks processed by a Brazilian payments processor.
- Legal and regulatory exposure includes hundreds of ordinary Brazilian lawsuits and more than 1,983 consumer-court cases, mostly involving alleged fraud, purchases or billing. A Brazilian state-prosecutor claim asserting marketplace liability for seller fraud remains on appeal; management assessed the loss risk as reasonably possible. The company recorded $1.8 million of reserves for proceedings it considered probable. A separate São Paulo tax claim of about $5.8 million is being contested; the company deposited about $5.2 million in court and management assessed loss risk as remote.
- In September 2011, MercadoLibre acquired 60% of Autopark/AP Clasificados for about $5.5 million. The balance sheet includes a $4.0 million redeemable noncontrolling interest, and the agreement contains call/put options relating to the remaining 40%.
- The company reported effective internal control over financial reporting, and the independent auditor issued an unqualified opinion on the financial statements and controls.
Investor facts to verify
- Confirm the Q4 and full-year results against the audited statements, particularly the reported growth in earnings relative to the margin decline.
- Assess whether MercadoPago growth can continue without further pressure on gross margin, chargebacks, bad debt and working capital.
- Track currency conversion and repatriation restrictions in Venezuela and Argentina, and the resulting effect on reported U.S.-dollar revenue and cash access.
- Review the status and potential financial impact of the Brazilian seller-fraud liability appeal, consumer litigation and tax disputes.
- Check the terms, future purchase price and funding implications of the Autopark 40% call/put options, as well as the sustainability of dividends.