MercadoLibre, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are to Q1 2016 unless stated otherwise. Amounts are in U.S. dollars. MercadoLibre operates an online commerce ecosystem across Latin America, including its marketplace, payments, shipping, advertising, classifieds, stores and merchant lending services.
Financial and operating performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net revenue | $273.9 million | $157.6 million | +73.8% reported; +78.9% FX-neutral |
| Gross profit / margin | $168.9 million / 61.6% | $102.2 million / 64.8% | Margin down 3.2 percentage points |
| Operating income / margin | $63.3 million / 23.1% | $30.5 million / 19.3% | Income +107.7%; margin up 3.8 points |
| Net income | $48.5 million | $30.2 million | +60.4% |
| Basic and diluted EPS | $1.10 | $0.68 | +61.8% |
| Operating cash flow | $104.8 million | $(11.8) million | Improved by $116.6 million |
| Free cash flow, non-GAAP | $92.0 million | $(29.1) million | Improved by $121.1 million |
- Marketplace revenue grew 68.4% to $158.5 million; non-marketplace revenue grew 81.8% to $115.5 million.
- Brazil contributed $159.8 million of revenue (+106.1%); Argentina $71.4 million (+48.1%); Mexico $15.5 million (+39.8%); Venezuela $14.4 million (+18.9%); and other countries $12.8 million (+47.8%).
- Operating expenses rose to $105.5 million from $71.7 million, but fell to 38.5% of revenue from 45.5%. Cost of revenue increased 89.5%, faster than revenue.
- Gross margin pressure reflected greater use of payments and shipping, higher collection fees and sales taxes, and increased customer-support and hosting costs. Management said further payments or shipping penetration could weigh on gross margins.
- Key activity measures grew: gross merchandise volume 31.0% to $2.33 billion; successful items sold 38.8% to 53.2 million; total payment volume 89.0% to $2.60 billion; and items shipped 58.7% to 27.3 million.
Balance sheet, liquidity and debt
- At March 31, 2017, cash and cash equivalents were $301.4 million, short-term investments $265.2 million and long-term investments $170.4 million. The company described cash and cash equivalents plus short- and long-term investments as $737.0 million of liquidity.
- Total assets were $1.484 billion; total liabilities $1.001 billion; and equity $482.2 million. Current assets were $946.4 million versus current liabilities of $637.7 million.
- Loans payable and other financial liabilities totaled approximately $321.0 million across current and non-current balances. The 2.25% convertible notes have $330 million principal due July 2019 and a $305.5 million net carrying amount. Notes became convertible at holders’ option from April 1 through June 30, 2017; the company said it intended to settle conversions in shares. No additional conversion requests had been received by the filing date.
- The company paid $6.6 million in dividends during the quarter. It adopted a 2017 quarterly dividend policy of $0.15 per share ($0.60 annually), subject to future board decisions.
- Capital expenditures were $12.8 million, compared with $17.3 million in Q1 2016. Management stated existing liquidity and operating cash generation should be sufficient for operations, capital expenditures and obligations.
Outlook, risks and notable items
- MercadoLibre does not provide traditional earnings guidance, citing uncertainty in forecasting near-term results and a focus on long-term growth. Management said revenue growth could continue, but warned that macroeconomic weakness, currency devaluations, Venezuelan currency translation, price controls and high regional interest rates could reduce year-over-year revenue measured in U.S. dollars.
- Management expects ongoing investment in product development, marketing and personnel, and noted that sustaining operating-margin growth may become more difficult. It also expects continued technology-related capital investment.
- Foreign-exchange exposure is significant, particularly to the Brazilian real and Argentine peso. The company reported a $0.7 million foreign-currency gain, down from $5.1 million in Q1 2016. It did not enter into currency hedges during the quarter.
- Venezuela remained highly inflationary and used the SIMADI rate of 709.7 bolivars per U.S. dollar for remeasurement. Venezuelan operations represented 9.3% of consolidated net assets before intercompany eliminations; local-currency cash and investments in Venezuela were 2.9% of consolidated cash and investments. Management warned further devaluation or tighter exchange controls could adversely affect results and asset values.
- The company reported $6.0 million of reserves for probable legal contingencies and up to $4.9 million of reasonably possible legal exposure for which no loss was accrued. It described ongoing consumer, fraud, intellectual-property and regulatory litigation risks.
- Q1 income tax expense rose to $21.1 million from $7.0 million; the blended tax rate was 30.4%, versus 18.7%. The Argentine software-development tax holiday provided a $5.1 million income-tax benefit and a $2.0 million labor-cost benefit in Q1 2017. Eligibility depends on meeting annual requirements; benefits are scheduled to expire in 2019.
- The company adopted a new long-term retention plan on April 3, 2017, with cash-settled fixed and stock-price-linked variable awards payable over six years, subject to performance and continued employment.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. No material changes to the company’s previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether strong reported and FX-neutral revenue growth persists, and how much reflects underlying volumes, take-rate changes, currency movements and inflation-driven pricing.
- Whether rising payments and shipping activity can be monetized without further gross-margin deterioration, especially given higher collection fees, sales taxes and customer-support costs.
- The quality and sustainability of operating cash flow and free cash flow, including the effect of changes in credit-card receivables and other working-capital balances.
- The scale and potential dilution or settlement implications of the convertible notes, including the outcome of the April–June 2017 conversion window and the capped-call protection limits.
- Developments in Venezuela’s exchange controls, inflation, currency valuation and price regulation, as well as legal and consumer-protection exposures across operating countries.
- Continued eligibility for Argentina’s tax benefits, and the future cash and expense effects of retention-plan awards and the quarterly dividend policy.