MercadoLibre, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Amounts are in U.S. dollars; financial figures below are in millions unless stated otherwise. MercadoLibre operates a Latin American commerce ecosystem spanning its marketplace, payments, logistics, advertising, online stores, and consumer and merchant lending.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net revenue | $1,115.7 | $603.0 | $2,646.2 | $1,622.0 |
| Gross profit | $480.2 | $284.3 | $1,220.2 | $793.8 |
| Operating income (loss) | $83.1 | $(81.9) | $152.8 | $(84.3) |
| Net income (loss) | $15.0 | $(146.1) | $49.9 | $(118.0) |
| Operating margin | 7.4% | (13.6%) | 5.8% | (5.2%) |
| Gross margin | 43.0% | 47.2% | 46.1% | 48.9% |
- Revenue grew 85.0% in Q3 and 63.1% year to date as reported; management’s foreign-exchange-neutral growth measure was 148.5% and 117.3%, respectively. Commerce revenue rose 109.3% in Q3 and 76.3% year to date; Fintech revenue rose 52.3% and 44.2%.
- Operating profit returned to positive territory in both comparison periods. Management attributed improved operating margins largely to marketing efficiencies as organic demand increased. Gross margin declined, primarily because shipping operating costs rose as a share of revenue.
- Operating cash flow was $926.0, compared with $372.8 a year earlier. Investing cash outflow was $838.1 versus $1,273.4; financing cash inflow was $242.4 versus $1,941.1. Operating cash flow benefited from growth in funds payable to customers and payables, among other factors.
- At September 30, cash and cash equivalents were $1,139.7, restricted cash $484.4, and short-term investments $2,187.5. Management identified $2,663.5 of cash and cash equivalents and short-term investments as its main liquidity source, excluding specified Brazilian guarantee and escrow investments.
- Loans payable and other financial liabilities totaled $1,236.5, including the 2028 convertible notes. The notes have $880.0 principal, a 2.00% coupon, and mature in 2028. Current loans payable and other financial liabilities rose to $618.2 from $186.1 at year-end 2019.
Business trends and changes versus prior period
- Q3 active users were 76.1 million versus 39.6 million; gross merchandise volume was $5,902.4 versus $3,640.7; total payment volume was $14,506.0 versus $7,565.2. Successful items shipped increased to 187.6 million from 81.2 million.
- Growth was broad-based: Q3 revenue increased 56.6% in Brazil, 145.0% in Argentina, 110.7% in Mexico, and 173.7% in other countries. Local-currency growth was substantially higher than reported U.S.-dollar growth, reflecting currency depreciation.
- The company repurchased 37,572 shares under a newly authorized program of up to $350.0, which expires August 31, 2021. A $30.5 foreign-currency loss arose from the difference between Argentina’s official exchange rate and the Blue Chip Swap Rate used in the share purchase pricing.
- MercadoLibre adopted the current expected credit loss standard (ASC 326) on January 1, 2020, reducing opening retained earnings by $4.6 million net of tax. It also recorded a $27.0 loss on receivables from an unaffiliated Argentine entity after collection aging exceeded expectations.
Outlook, risks, contingencies, and unusual items
- The company does not provide traditional earnings guidance, citing difficulty forecasting near-term results and a focus on long-term growth. Management said it could not reliably predict the pandemic’s effects on business development or cash generation for the remainder of 2020 and 2021.
- Management noted that e-commerce and online payments benefited from pandemic-related consumer shifts, but warned that lockdowns, logistics disruption, weaker merchant activity, changing consumer behavior, macroeconomic weakness, and local-currency depreciation could harm revenue, margins, and liquidity. Revenue is largely generated in local currencies.
- Argentina’s Blue Chip Swap Rate was 91.2% above the official rate at quarter-end; the company continued to report Argentine operations using the official exchange rate. The filing estimates Argentine segment revenue would have been lower using the Blue Chip Swap Rate, but does not present that as reported revenue.
- Buyer protection program maximum potential exposure was estimated at $2,037.5, with a recorded allowance of $7.4. Legal contingencies included $8.0 accrued for matters assessed as probable and up to $21.0 of reasonably possible claims for which no loss was accrued. A Brazilian tax dispute included $42.8 of court deposits; the company said it intended to continue appealing and had not recorded a liability.
- The company had $270.5 of cloud-services purchase commitments, of which $16.4 had been paid by quarter-end. It reported no off-balance-sheet arrangements expected to have a material effect.
- Disclosure controls and procedures were deemed ineffective because of a material weakness involving documentation and review of receivables from an unaffiliated Argentine entity. Remediation was underway; the weakness was not considered resolved until controls operated effectively for a sufficient period and were tested.
Important facts for investors to verify
- Whether revenue and user growth remain strong after pandemic-related behavior changes, and how much reported growth is affected by foreign exchange.
- Whether margin improvement can persist as shipping costs, buyer-protection costs, credit losses, and technology investment rise.
- The quality and collectability of payment receivables and Mercado Credito loans, including the receivable exposure to the Argentine unaffiliated entity.
- Availability of liquidity after accounting for restricted and guarantee-related balances, and the terms and refinancing needs of increased borrowing.
- Progress and testing of the internal-control remediation plan, alongside the status of the Brazilian tax litigation and other contingencies.