MercadoLibre, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013; financial statements are unaudited and presented in U.S. dollars. MercadoLibre operates Latin American e-commerce marketplace, payments, advertising, classifieds, online-store and shipping services. Nearly all revenue and operating costs arise outside the United States.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net revenue | $112.2m | $88.8m | $214.9m | $172.6m |
| Gross profit | $81.1m | $65.0m | $155.2m | $127.6m |
| Income from operations | $35.4m | $31.9m | $64.0m | $56.8m |
| Net income | $30.0m | $25.4m | $47.5m | $45.0m |
| Net income attributable to shareholders | $30.0m | $25.4m | $47.5m | $45.0m |
| EPS, diluted | $0.67 | $0.57 | $1.07 | $1.02 |
| Operating cash flow | Not separately provided for Q2 | $59.2m | $58.5m |
- Q2 revenue grew 26.3% year over year; first-half revenue grew 24.5%. Marketplace revenue rose 25.8% in Q2 and 22.4% in the first half; non-marketplace revenue rose 27.5% and 29.6%, respectively.
- Q2 gross margin was approximately 72.3% versus 73.1%; operating margin was 31.6% versus 35.9%; net margin was 26.8% versus 28.6%. First-half gross, operating and net margins were approximately 72.2%, 29.8% and 22.1%, compared with 73.9%, 32.9% and 26.1%.
- Operating expenses increased faster than Q2 revenue: product and technology development rose 59.1%, sales and marketing 23.9%, and general and administrative 48.8%. Management cited engineering investment, marketing campaigns and higher compensation, including long-term retention plan costs.
- At June 30, cash and cash equivalents were $131.2m; short-term investments were $71.3m and long-term investments $59.4m. Current assets totaled $313.0m against current liabilities of $198.8m. Customer funds payable were $114.4m.
- Six-month investing cash flow was a $3.9m use, including substantial investment purchases and maturities; financing cash flow was a $12.1m use, primarily dividends. Cash increased $29.7m to $131.2m, after a $13.4m adverse exchange-rate effect. Capital expenditures were reported as $53.3m for the first half; cash purchases of property and equipment were $38.1m.
- Loans payable were approximately $46,000, mainly Argentine vehicle leases. The company also recorded $12.2m due on the Buenos Aires office purchase; this is a purchase obligation, not described as borrowing. Total liabilities were $216.7m.
Material changes and business developments
- All geographic segments grew in reported dollars in Q2. Brazil, the largest segment, generated $51.1m (up 15.6%); Argentina $29.0m (up 41.0%); Venezuela $17.6m (up 41.4%); Mexico $7.8m (up 29.4%); and other countries $6.7m (up 19.0%). Reported Venezuelan growth is exposed to inflation and exchange-rate effects.
- Gross merchandise volume was $1.73bn in Q2, up from $1.30bn; items sold increased to 20.1m from 15.8m. MercadoPago payment volume was $577.9m, up from $411.6m.
- Property and equipment rose to $80.1m from $37.7m at year-end, including office acquisitions in Buenos Aires and Caracas. The Caracas property cost $20.0m, paid in bolivares; the Buenos Aires purchase price was $18.0m plus VAT. The company also acquired an Argentine software developer for an aggregate $3.45m.
- Shareholders’ equity was $308.9m. Accumulated other comprehensive loss widened to $64.4m from $48.8m, principally reflecting currency translation adjustments.
Outlook, risks and unusual items
- No quantified revenue or earnings guidance was provided. Management said it expects continued IT-related capital investment and believes cash, operating cash generation and credit-card receivable funding will be sufficient for operations, capital spending and obligations. It expected comparable quarterly cash dividends, subject to board discretion; a $0.143-per-share third-quarter dividend was declared after quarter-end.
- Venezuela devalued its official exchange rate from 4.3 to 6.3 bolivares per U.S. dollar in February. MercadoLibre recorded a $6.4m remeasurement loss in the first half; it could not access the new SICAD foreign-currency auction system and had not requested CADIVI approval for dividend repatriation in 2012 or the first half of 2013. Venezuelan subsidiaries held 14.7% of consolidated net assets and about 13.0% of consolidated cash and investments in local currency in Venezuela.
- Management’s non-GAAP adjustment for the Venezuelan devaluation showed first-half adjusted net income of $53.4m and adjusted EPS of $1.21, versus GAAP net income of $47.5m and EPS of $1.07. These adjustments are company-defined and should not replace GAAP results.
- Brazilian proposed legislation could require authorization or impose new limits on MercadoPago payment processing. Proposed Venezuelan vehicle-price restrictions could affect listings and automobile-related business. Other risks include currency controls and volatility in Argentina and Venezuela, regulatory changes, competition, fraud and security, service disruptions and legal claims.
- Legal reserves were $3.4m; management identified an additional $4.0m of reasonably possible losses for certain matters, with no accrual for those claims. More than 4,099 Brazilian ordinary and consumer-court cases were pending. A separate São Paulo tax assessment was approximately R$23m, or $11.4m at the cited 2012 exchange rate; management assessed loss as remote and recorded no reserve.
- Interest-rate sensitivity: a 100-basis-point move could change the fair value of available-for-sale securities by approximately $1.4m. The filing reported no material off-balance-sheet arrangements. Management stated disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How much reported growth, particularly in Venezuela and Argentina, reflects local-currency activity versus inflation, devaluation and translation effects.
- Whether faster growth in operating costs and customer-support, payment-processing and fraud-prevention costs will pressure margins.
- MercadoPago receivables and working-capital needs: credit-card receivables reached $61.6m, up from $35.8m at year-end, and contributed to cash-flow demands.
- Cash availability and convertibility by country, especially Venezuelan funds, foreign-exchange access and dividend repatriation restrictions.
- Completion and cash-flow implications of the Buenos Aires and Caracas property purchases, and the distinction between reported capital expenditures and cash-flow statement purchases.
- Developments in Brazilian payment regulation, Venezuelan vehicle-price legislation, and the litigation and tax matters described in the filing.