MercadoLibre, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; comparisons are with the same periods in 2011. Unaudited financial statements are in U.S. dollars. MercadoLibre operates Latin American online commerce, payments, advertising and online-store platforms.
Financial performance
| Metric | Q2 2012 | Q2 2011 | H1 2012 | H1 2011 |
|---|---|---|---|---|
| Net revenue | $88.8m | $69.4m | $172.6m | $130.8m |
| Gross profit | $65.0m | $52.4m | $127.6m | $99.6m |
| Operating income | $31.9m | $21.6m | $56.8m | $40.8m |
| Net income | $25.4m | $14.8m | $45.0m | $28.9m |
| Net income attributable to MercadoLibre | $25.4m | $14.8m | $45.0m | $28.9m |
| Diluted EPS | $0.57 | $0.34 | $1.02 | $0.65 |
- Revenue increased 28.1% in Q2 and 31.9% in H1. Management attributed growth to higher marketplace volume and items sold, off-platform payments and financing, and classified and advertising sales. Revenue growth measured in local currencies was 47.1% in Q2 and 45.4% in H1.
- Gross margin was approximately 73.1% in Q2 and 73.9% in H1, down from 75.6% and 76.1%, respectively. Cost of revenue grew faster than sales, notably from payment collection fees, customer-support investment and revenue taxes.
- Operating margin improved to approximately 35.9% in Q2 and 32.9% in H1, from 31.1% and 31.2%. Net margin rose to approximately 28.6% in Q2 and 26.1% in H1, from 21.4% and 22.1%.
- Operating expenses rose 7.1% in Q2 and 20.5% in H1. Sales and marketing increased 7.5% in Q2 and 18.6% in H1; management cited higher compensation and MercadoPago chargebacks. H1 general and administrative expense included $0.9m related to Venezuelan tax-payment checks not collected because of a clearing-bank administrative error; the subsidiary paid the taxes again and filed a claim.
Cash flow, liquidity and balance sheet
- H1 operating cash flow was $58.5m, versus $33.7m in H1 2011. Investing used $28.3m, compared with $43.3m; financing used $8.3m, mainly dividends. Cash increased $20.2m to $87.6m.
- At June 30, cash and cash equivalents were $87.6m, short-term investments $83.0m and long-term investments $49.6m. Management cited $170.6m of cash and short-term investments plus $49.6m of long-term investments as liquidity. Current assets were $233.5m and current liabilities $132.0m.
- Total loans and other financial liabilities were approximately $0.24m, principally Argentine car leases. Total liabilities were $146.7m, including $77.7m of funds payable to customers. Dividends payable were $4.8m.
- Capital expenditures were $10.4m in H1, versus $13.4m in H1 2011. The company reported equity of $247.8m and total assets of $398.6m at June 30.
Material changes, outlook and risks
- Marketplace GMV rose 21.7% in Q2 and 29.6% in H1; items sold increased 35.6% and 36.8%. MercadoPago total payment volume grew 39.1% in Q2 and 44.5% in H1. Confirmed registered users reached 73.2m, versus 58.4m a year earlier.
- Brazil remained the largest revenue market, but its share declined to about 50% from 57% in H1 2011. Argentina and Venezuela each grew about 69% in reported dollars in H1. Foreign exchange movements affect reported results; approximately 99% of revenue and operating costs are generated outside the United States.
- Management said available liquidity and operating cash generation should fund operations, capital expenditures and obligations. It anticipated continued technology-related capital investment and expected to continue comparable quarterly dividends, subject to board discretion. A $0.109-per-share dividend was declared July 31, 2012, payable October 15, 2012. No formal revenue or earnings guidance was provided.
- Venezuela is accounted for as highly inflationary, using the U.S. dollar as functional currency and a 5.30 bolívares-per-dollar remeasurement rate. Venezuelan subsidiaries represented about 11.5% of consolidated net assets and 11.3% of consolidated cash and investments were held locally in local currency. Currency-conversion restrictions, inflation and political and economic conditions remain risks.
- Other exposures include currency and interest-rate movements. Management estimated that a 100-basis-point rate increase could reduce the fair value of available-for-sale securities by about $1.6m. No interest-rate derivatives or currency hedges were in place during 2012.
- Legal reserves were $2.2m; additional reasonably possible legal matters totaled up to $3.1m, excluding individually described claims. Brazilian litigation includes hundreds of ordinary-court cases and more than 2,500 consumer-court cases. A São Paulo tax claim of about $11.4m was assessed as remote and unreserved; a separate claim of about $5.8m was being contested with a court deposit of approximately $4.7m. Management reported no material change in risk factors from its 2011 Form 10-K.
- The 2012 long-term retention plan is expected to cost approximately $7.3m, with $0.8m accrued in H1. The Argentine software-development tax benefit reduced H1 tax expense by $4.1m, or approximately $0.09 per share; the existing benefit was stated to run through 2014, with a potential extension under a new law still awaiting regulations.
Important facts for investors to verify
- Whether revenue and transaction growth can continue while payment-processing costs and customer-support investment pressure gross margin.
- The sustainability and cash-conversion quality of earnings, including the contribution from increased funds payable to customers and working-capital movements.
- Exposure to Venezuelan currency controls, inflation and local-currency cash, and the reported growth rates after currency effects.
- Developments in Brazilian consumer and intellectual-property litigation, São Paulo tax disputes, and the Venezuelan tax-payment recovery claim.
- The future cost of retention plans, dividend commitments, capital investment and the Argentine tax benefit.