MercadoLibre, Inc. — 2010 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2010. The filing also provides unaudited quarterly results, including the quarter ended December 31, 2010. Financial amounts below are in U.S. dollars unless stated otherwise.
Business context
MercadoLibre operates an online commerce platform across Latin America, with marketplace, payments, advertising and hosted online-store services. In 2010 it reported 52.9 million confirmed registered users, 39.2 million successful items sold and $3.406 billion in gross merchandise volume (GMV). MercadoPago processed $697.5 million of payment volume, up 82.3% year over year; this was 20.5% of GMV.
Financial performance and liquidity
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Net revenue | $216.7 million | $172.8 million | +25.4% |
| Gross profit / margin | $170.2 million / 78.5% | $136.9 million / 79.2% | Margin down 0.7 percentage points |
| Operating income / margin | $74.6 million / 34.4% | $56.0 million / 32.4% | +33.1% income |
| Net income | $56.0 million | $33.2 million | +68.7% |
| Diluted EPS | $1.27 | $0.75 | Up from prior year |
| Operating cash flow | $67.9 million | $49.7 million | +36.6% |
| Investing cash flow | $(58.8) million | $(3.1) million | Higher investment purchases and capital spending |
Fourth-quarter 2010 revenue was $62.3 million versus $49.0 million in Q4 2009; net income was $15.9 million versus $11.3 million. The fourth quarter was the year’s highest-revenue quarter, consistent with the company’s stated holiday-season seasonality.
At year-end, cash and cash equivalents were $56.8 million, short-term investments $5.3 million and long-term investments $78.8 million. Total assets were $269.7 million, liabilities $98.0 million and shareholders’ equity $171.7 million. Debt was limited: $0.1 million current and $0.2 million non-current, primarily related to an Argentine vehicle lease. Current liabilities include $48.8 million payable to customers through MercadoPago; consider these payment-related obligations when assessing liquidity.
Material changes versus prior year
- Revenue grew 25.4%, while GMV rose 23.8% and successful items sold increased 33.1%. Reported revenue growth was 31.3% in local currencies, using the company’s constant-currency calculation.
- Operating margin improved as operating expenses grew more slowly than revenue. Gross margin declined because payment processing, which carries higher costs, penetrated further into marketplace transactions.
- MercadoPago processing was offered without a separate fee for marketplace purchases in Brazil and Argentina beginning in 2010; management incorporated those economics into marketplace fees. The company also changed reporting from marketplace/payments segments to geographic segments starting in Q3.
- Venezuela revenue fell 23.6% in U.S. dollars to $20.9 million, although management reported 56.9% local-currency growth. The change reflects currency devaluation and the shift to highly inflationary accounting using the U.S. dollar as functional currency.
- Operating cash flow rose, and the company ended 2010 with increased investment balances. Capital expenditures were $13.6 million, versus $4.8 million in 2009, including technology and office spending.
Outlook, management commentary and risks
- Management does not provide traditional earnings guidance. It emphasizes long-term growth and investment in product development, technology, marketing and personnel, while cautioning that historical growth rates are not sustainable and may decline.
- Management expects continued investment in capital expenditures and says existing cash, investments, operating cash generation and sales of credit-card receivables should fund planned operations and spending.
- Foreign exchange is a major exposure: Brazil generated 56.7% of 2010 revenue, Argentina 18.4%, Venezuela 9.6% and Mexico 8.8%. Management estimated that 2010 exchange-rate movements reduced revenue by about $10.2 million, partly offset by lower expenses.
- Venezuela’s currency controls and restricted access to foreign exchange create uncertainty; the filing describes a regulated exchange system with trading limits. Additional devaluation or changes to accounting treatment could materially affect reported results.
- Legal and regulatory exposure includes online-platform liability, fraud and consumer claims, intellectual-property disputes, payment regulation and taxes. At year-end the company disclosed 321 Brazilian ordinary-court cases and more than 1,408 consumer-court cases, mostly involving alleged fraud, purchases, payments or billing.
- Legal reserves were approximately $1.5 million. A Brazilian state-court ruling holding the subsidiary liable for seller fraud was stayed pending appeal. A São Paulo tax dispute also remained active; after year-end, the municipal tax council reduced a fine to approximately $4.7 million, which the company said it would appeal. The filing describes the overall claim, including surcharges and interest, as approximately $14.7 million and management’s counsel considered a material adverse outcome remote or unlikely.
- The filing highlights competition, payment fraud and chargebacks, service interruptions and security breaches, third-party provider dependence, and political and economic volatility in Latin America. It also says the company had no business-interruption insurance and no formal disaster-recovery plan for its primary data-center arrangement.
- In February 2011, the board declared the company’s first quarterly dividend: $3.5 million, or $0.08 per share, payable April 15, 2011. Future dividends remain at board discretion. Management reported effective disclosure controls and internal control over financial reporting; the auditor issued an unqualified opinion.
Important facts for investors to verify
- Whether growth in revenue, GMV and MercadoPago volume is translating into sustainable margins as payment adoption and processing costs increase.
- Cash availability and investment quality, including the liquidity and risk profile of the substantial long-term investment portfolio and the handling of customer funds.
- The continuing effects of Venezuela’s exchange restrictions, highly inflationary accounting and any subsequent exchange-rate changes on reported results and cash repatriation.
- Developments in the Brazilian consumer and intellectual-property litigation, the stayed platform-liability ruling, and the São Paulo tax assessment and appeal.
- Whether the declared dividend was paid as scheduled and whether quarterly distributions continue; the filing provides no guarantee of future dividends.