MercadoLibre, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Dollar amounts are U.S. dollars; financial statement figures are in millions unless otherwise noted.
Business context
MercadoLibre operates a Latin American commerce and fintech ecosystem spanning its marketplace, Mercado Pago payments and lending, Mercado Envios shipping, advertising, classifieds, and online stores. Brazil generated 64.7% of Q3 revenue, Argentina 19.3%, Mexico 11.8%, and other countries 4.2%.
Financial results and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net revenue | $603.0 | $355.3 | $1,622.0 | $1,011.6 |
| Gross profit | $284.3 | $169.7 | $793.8 | $492.2 |
| Gross margin | 47.2% | 47.8% | 48.9% | 48.7% |
| Operating loss | $(81.9) | $(11.0) | $(84.3) | $(68.7) |
| Net loss | $(146.1) | $(10.1) | $(118.0) | $(34.2) |
| Basic and diluted loss per share | $(2.96) | $(0.23) | $(2.60) | $(0.77) |
- Q3 revenue rose 69.7% year over year; nine-month revenue rose 60.3%. The company reported FX-neutral revenue growth of 90.5% for Q3 and 95.1% for the first nine months.
- Q3 operating margin declined to negative 13.6% from negative 3.1%; the nine-month operating margin improved to negative 5.2% from negative 6.8%.
- Q3 sales and marketing expense more than doubled to $252.9 million, including higher marketing, branding, and bad-debt costs. Management cited marketing and credit-business bad debt in Brazil as key contributors to the wider quarterly operating loss.
- Q3 income tax expense was $79.2 million, versus a $4.2 million tax benefit in Q3 2018. The increase in tax expense reflected valuation allowances on deferred tax assets, particularly in Mexico and Colombia. Nine-month tax expense was $73.7 million, versus a $24.4 million benefit in 2018.
- Operating cash flow for the first nine months was $372.8 million, versus $196.1 million in 2018. Investing cash flow was $(1,273.4) million, mainly reflecting investment purchases, lending activity, and capital expenditures; financing cash flow was $1,941.1 million.
- Cash, cash equivalents, and restricted cash totaled $1,457.0 million at quarter-end. Short-term investments were $1,726.2 million, including $371.6 million pledged as a Brazilian Central Bank guarantee. Management reported $2,774.6 million of cash, cash equivalents, and short-term investments excluding that guarantee.
- Loans payable and other financial liabilities totaled $732.0 million, including the 2028 convertible notes. Those notes have $880 million principal, a 2.00% coupon, and mature in 2028; their reported net carrying amount was $565.2 million. Operating lease liabilities were $176.4 million following adoption of the new lease standard.
Material changes and operating trends
- Growth reflected expansion in marketplace and payments activity. Q3 gross merchandise volume was $3.64 billion, up from $3.00 billion, while total payment volume was $7.57 billion, up from $4.55 billion. For the first nine months, total payment volume increased 49.9% to $19.72 billion.
- Non-marketplace revenue, including payment fees, grew 68.6% in Q3 to $294.9 million. Enhanced marketplace revenue grew 70.9% to $308.1 million. Payment fees were $256.8 million in Q3.
- Brazil revenue increased 76.6% in Q3; Mexico increased 146.4%; Argentina increased 38.8%. Argentina’s U.S.-dollar revenue growth was dampened by currency devaluation. Management also identified a change in shipping revenue presentation in Mexico and lower shipping subsidies as contributors to reported revenue growth.
- Q3 cost of revenue increased 71.7%, faster than revenue, with higher shipping, carrier, payment collection, and product costs. The company attributed the slight year-over-year gross-margin decline mainly to shipping and carrier costs.
- The company raised approximately $1.966 billion net through March 2019 common and preferred stock offerings, including a $750 million PayPal private placement and a $100 million preferred-stock investment. Financing cash flow also reflects the timing of prior-year convertible-note issuance and repayments.
Outlook, risks, and unusual items
- MercadoLibre does not provide traditional earnings guidance, citing uncertainty in forecasting near-term results and its focus on long-term initiatives. Management said it expects revenue growth to continue but warned that weak regional economic conditions, currency devaluations, and high interest rates could reduce U.S.-dollar results.
- Management expects continued investment in product development, marketing, logistics, technology, and credit offerings. It said existing liquidity and operating cash generation should be sufficient for operations, capital expenditures, and obligations.
- Key exposures include Latin American macroeconomic and political conditions, foreign-exchange movements, interest rates, competition, regulation, systems and security risks, and credit losses. Argentina was treated as highly inflationary, with the U.S. dollar as its functional currency.
- Buyer-protection-program maximum potential exposure was estimated at $1.058 billion, with an allowance of $3.8 million; management cautioned that maximum exposure is not representative of expected losses. Probable legal and other contingency accruals were $6.5 million; reasonably possible legal actions were estimated at up to $13.5 million, with no accrual for those matters.
- The Argentine software-development tax law was due to expire December 31, 2019. The company was assessing eligibility for a successor tax-benefit regime, subject to government approval. The filing also records valuation allowances of $91.5 million in Mexico and $7.2 million in Colombia.
- The company adopted ASC 842 leases in 2019, materially increasing reported assets and liabilities. Management reported effective disclosure controls and no material change in internal control over financial reporting; it reported no material change in risk factors from its 2018 Form 10-K.
Important facts for investors to verify
- Whether rapid payments and marketplace growth can translate into improved operating margins as marketing, shipping, and credit costs rise.
- The quality and performance of Mercado Credito receivables, related bad-debt allowances, and securitized lending assets.
- How much reported growth reflects underlying activity versus foreign exchange, shipping-subsidy changes, and changes in revenue presentation.
- The realizability of deferred tax assets and the eventual impact of Mexican and Colombian valuation allowances and Argentine tax incentives.
- Availability of liquidity after accounting for restricted cash and investments, customer funds payable, debt obligations, and the Brazilian regulatory guarantee.
- Potential outcomes and financial effects of legal claims, buyer-protection obligations, and regional regulatory changes.