MercadoLibre, Inc. — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010; unaudited. Comparisons are with the corresponding 2009 periods. MercadoLibre operates Latin American online marketplaces and the MercadoPago payments platform.
Financial performance
| Metric | Q2 2010 | Q2 2009 | H1 2010 | H1 2009 |
|---|---|---|---|---|
| Net revenue | $52.5 million | $40.9 million | $98.4 million | $73.2 million |
| Gross profit | $41.1 million | $32.3 million | $77.1 million | $58.0 million |
| Operating income | $18.8 million | $12.4 million | $34.3 million | $19.2 million |
| Net income | $11.7 million | $6.7 million | $21.3 million | $12.1 million |
| Diluted EPS | $0.26 | $0.15 | $0.48 | $0.27 |
- Q2 revenue rose 28.4% and H1 revenue rose 34.4% year over year in U.S. dollars. Management reported local-currency growth of 38.5% and 41.4%, respectively.
- Q2 gross margin was approximately 78.3% versus 79.0%; H1 gross margin was 78.4% versus 79.2%. Operating margin improved to 35.8% from 30.3% in Q2 and to 34.9% from 26.2% in H1.
- Payments revenue grew 54.9% in Q2 and 73.8% in H1; Marketplace revenue grew 19.9% and 23.2%, respectively. Payments’ share of H1 revenue increased to 28.7% from 22.2%.
- For H1, gross merchandise volume was $1.53 billion, up 30.4%; items sold were 17.6 million versus 12.9 million. MercadoPago payment volume was $271.6 million versus $132.8 million.
- Net cash provided by operating activities was $26.1 million, versus $13.0 million. Investing activities used $41.3 million, largely reflecting net investment purchases; financing activities used $3.0 million. Cash and equivalents declined $18.2 million to $31.6 million.
- At June 30, cash and equivalents were $31.6 million, short-term investments $11.3 million, and long-term investments $66.1 million. Current assets were $67.3 million and current liabilities $65.5 million. Total liabilities were $74.9 million and shareholders’ equity $133.7 million.
- Loans payable and other financial liabilities totaled approximately $0.2 million at June 30; the company reported that DeRemate acquisition promissory notes had been fully repaid. Interest expense and other financial charges were $6.4 million for H1, including financing costs associated with MercadoPago working capital.
Material changes and management commentary
- Management attributed growth primarily to higher marketplace activity and rapid MercadoPago expansion. Payments take rate fell to 10.4% for both Q2 and H1, from 12.4% and 12.2%, respectively, mainly because installment-related charges declined with interest rates. Marketplace take rate also declined, to 4.7% in Q2 and 4.6% in H1.
- Operating leverage lifted margins, while management cautioned that continued investment in product development, marketing, and personnel could make further margin expansion harder. Gross margin was pressured by faster growth in Payments, which carries higher collection costs and lower gross margins than Marketplace.
- Income and asset tax expense rose to $8.7 million in H1 from $3.3 million; management cited higher taxable income, particularly in Brazil and Argentina. Argentina’s software-law tax benefit was $2.0 million for H1.
- Venezuela was treated as highly inflationary from January 1, 2010, with the U.S. dollar as functional currency. After the parallel foreign-exchange market closed in May, the company began using the regulated SITME rate of 5.27 bolívares per U.S. dollar from June 9. Venezuelan dollar-reported revenue fell 44.2% in H1, although management reported local-currency marketplace revenue growth of 64.0%. The SITME system restricts foreign-currency purchases; management said the rules had not materially affected normal operations to date.
- MercadoPago 3.0 was opened to Brazilian off-platform transactions in March 2010 and launched for all Brazilian marketplace transactions on July 16, after quarter-end.
- Management expected continued revenue growth and ongoing capital investment, but warned that currency depreciation, macroeconomic conditions, interest rates, and changing Payments growth could affect results. It stated existing liquidity, operating cash generation, and the receivables-funding approach were expected to fund operations and planned expenditures. No quantified earnings or revenue guidance was provided.
Risks, contingencies, and unusual items
- Foreign-exchange exposure is significant: 58.0% of H1 revenue was denominated in Brazilian reais, 18.1% in Argentine pesos, and 8.1% in Venezuelan bolívares. The company disclosed sensitivity of earnings and equity to currency movements and had entered no currency hedges during 2010.
- Brazilian exchange restrictions and Venezuela’s new controls could limit currency conversion or settlement. The filing warns that worsening Venezuelan restrictions could require deconsolidation of Venezuelan operations, reducing reported revenue, net income, and EPS.
- At June 30, reserves were $981,595 for 288 legal actions where losses were considered probable. No loss was accrued for more than 1,273 other actions, with aggregate claims up to $3.6 million, because losses were not considered probable. Brazilian consumer and ordinary-court cases largely involve alleged fraud, purchases, payments, or invoicing; intellectual-property claims are also a risk.
- Settlements in Brazil included a Qix intellectual-property matter and a consumer-protection case requiring changes to terms and user-data practices, with an approximately $1,000-per-day noncompliance fine in the latter. The company also disclosed a separate Brazilian prosecutor judgment under appeal.
- The company reported $5.6 million of contractual obligations, including $2.4 million of operating leases and $2.8 million of purchase commitments. It had invested $9.1 million in an Argentine office-building trust and disclosed a further $0.4 million construction-cost payment notice received after quarter-end.
- Variable-payment obligations under the 2009 and 2010 long-term retention plans had a disclosed total contractual fair value of approximately $7.5 million; the 2010 plan’s expected compensation cost was approximately $6.1 million.
Important facts for investors to verify
- Whether Venezuela’s SITME limits, exchange rate, and future policy changes affect cash access, reported revenue, or the ability to continue consolidating the business.
- Whether fast Payments growth can continue while take rates and gross margins decline, and how receivables funding affects financing costs and working capital.
- Whether improved operating margins and operating cash flow are sustainable amid higher taxes, bad-debt charges, and planned investment.
- The outcome and potential financial or operational impact of Brazilian consumer, fraud-liability, and intellectual-property litigation, including compliance with settlements.
- The composition, maturity, fair-value risk, and practical liquidity of the company’s investment portfolio, alongside its near-term commitments and Argentine office investment.