MercadoLibre, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; unaudited interim results. Amounts below are U.S. dollars unless stated otherwise. MercadoLibre operates Latin American e-commerce, payments, advertising, classifieds, online-store and shipping services. Approximately 99.6% of revenue and operating expenses came from foreign operations.
Financial performance and liquidity
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net revenue | $131.8 million | $112.2 million | $247.2 million | $214.9 million |
| Gross profit / margin | $95.5 million / 72.4% | $81.1 million / 72.3% | $179.3 million / 72.5% | $155.2 million / 72.2% |
| Operating income (loss) / margin | $(5.9) million / (4.5)% | $35.4 million / 31.6% | $28.1 million / 11.4% | $64.0 million / 29.8% |
| Net income (loss) | $(25.6) million | $30.0 million | $4.7 million | $47.5 million |
| GAAP diluted EPS | $(0.58) | $0.67 | $0.11 | $1.07 |
- Revenue grew 17.5% in Q2 and 15.0% for the first half. Marketplace revenue increased 17.5% in Q2 and 16.9% for the first half; non-marketplace revenue grew 17.7% and 10.7%, respectively.
- Marketplace GMV was $1.8 billion in Q2, up from $1.7 billion; MercadoPago total payment volume was $785.5 million, versus $577.9 million. Items sold rose to 23.6 million from 20.1 million.
- Operating results included a $49.5 million impairment charge on two Caracas office properties. Q2 also included a $16.0 million consolidated foreign-currency loss. Management’s non-GAAP adjusted net income was $31.8 million in Q2 and $59.5 million for the first half; these figures exclude specified Venezuela devaluation and impairment effects.
- Cash provided by operations was $87.9 million for the first half, compared with $59.2 million. Investing activities used $77.0 million; issuer-defined free cash flow was $39.2 million, versus $17.9 million.
- At June 30, cash and cash equivalents were $385.5 million, short-term investments $105.2 million and long-term investments $52.1 million. Total liabilities were $549.4 million. Loans and other financial liabilities totaled $280.6 million, including the new notes.
Material changes and financing
- On June 30, MercadoLibre issued $330 million of unsecured 2.25% convertible senior notes due July 1, 2019. Net proceeds were approximately $321.7 million after transaction costs. The notes have an initial conversion price of about $126.02 per share; none of the conversion conditions had been met by quarter-end.
- The company spent $19.7 million on capped-call transactions intended to reduce potential dilution between the notes’ $126.02 conversion price and an approximately $155.81 cap price.
- Q2 operating expenses included higher product and technology and sales and marketing costs, as well as the impairment. First-half foreign-exchange results included the Venezuelan loss, partly offset by a $4.6 million Argentine foreign-exchange gain.
- In April, the company acquired online real-estate classifieds businesses in Chile and Mexico for a fair-value purchase price of $38.1 million, including contingent consideration. The acquired businesses contributed $3.4 million in revenue from acquisition through June 30.
Outlook, risks and contingencies
- No numerical revenue or earnings guidance is provided. Management expected continued technology-related capital investment, believed existing cash, operating cash generation and credit-card-receivable funding would be sufficient for operations and planned investment, and expected to continue comparable quarterly dividends, subject to board discretion.
- Venezuela moved to the SICAD 2 exchange rate for remeasurement effective May 16 after the company could not access SICAD 1. The June 30 rate was 49.98 bolivars per U.S. dollar. Management cited lower expected dollar-equivalent cash flows, recorded the impairment, and said it planned to continue supporting the Venezuelan business; further devaluation or tighter currency controls could materially affect results and access to funds.
- Argentina’s currency controls limit conversion and repatriation. The filing also discusses Argentina’s sovereign-debt dispute and the July 2014 failure to reach an agreement with holdout creditors. The Argentine software-development tax benefit was due to expire in September 2014; approval of the company’s application under the replacement law remained pending.
- Legal matters included numerous consumer and ordinary-court claims, with $3.8 million reserved for probable losses and up to $5.5 million of reasonably possible claims unreserved. Certain Brazilian marketplace-liability and consumer-protection proceedings remain unresolved; management assessed some risks as reasonably possible.
- The filing identifies risks from economic and political conditions, foreign exchange, regulation, litigation, cybersecurity, service interruptions, competition and reliance on third parties. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the period.
Investor verification points
- Review the underlying filing’s reconciliation and definitions for adjusted net income and free cash flow; both are non-GAAP measures.
- Assess the assumptions behind the Venezuelan SICAD 2 rate, impairment valuation and potential further currency restrictions or devaluations.
- Examine the notes’ conversion, repurchase and cash-settlement terms, future interest expense, and the company’s capacity to repay or refinance the $330 million principal.
- Track the Argentine tax-holiday application and expiry, currency restrictions, and implications of the sovereign-debt dispute.
- Monitor the identified litigation, especially Brazilian claims concerning seller fraud, prohibited listings and marketplace liability, and compare possible exposures with recorded reserves.