MercadoLibre, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Financial amounts below are in U.S. dollars and generally rounded to millions. MercadoLibre operates an online commerce ecosystem across Latin America, including its marketplace, payments, shipping, advertising, classifieds, webstores and consumer and merchant lending businesses.
Key financial results
| Metric | Q1 2019 | Q1 2018 | Change or context |
|---|---|---|---|
| Net revenue | $473.8m | $321.0m | Up 47.6% |
| Gross profit / margin | $237.0m / 50.0% | $162.8m / 50.7% | Margin down 0.7 percentage points |
| Operating income (loss) / margin | $10.1m / 2.1% | $(29.4)m / (9.2)% | Returned to operating profit |
| Net income (loss) | $11.9m | $(12.9)m | Basic and diluted EPS: $0.13 vs. $(0.29) |
| Operating cash flow | $138.4m | $(37.0)m | Improved, partly reflecting working-capital movements |
| Investing cash flow | $(1,260.1)m | $(24.1)m | Primarily investment purchases |
| Financing cash flow | $1,974.7m | $24.0m | Primarily equity issuance proceeds |
At March 31, cash and cash equivalents were $1,295.9m, restricted cash $10.4m, short-term investments $1,648.5m and long-term investments $275.4m. Management reported approximately $2,706.3m of cash and short-term investments excluding the $238.0m Brazilian Central Bank guarantee investment, plus $275.4m of long-term investments. Current assets were $3,520.5m and current liabilities $1,248.2m. Loans payable and other financial liabilities totaled $743.2m; operating lease liabilities were $155.6m.
Business trends and comparison with prior period
- Revenue growth reflected marketplace and payments expansion, lower shipping subsidies netted against revenue ($74.0m versus $112.5m), and a new flat fee on certain low-value transactions in Brazil. Reported revenue was also affected by currency devaluation.
- Enhanced Marketplace revenue rose 79.8% to $253.0m; Non-Marketplace revenue rose 22.4% to $220.7m. Payment fees were $187.0m versus $144.8m.
- Brazil revenue increased 64.2% to $302.4m; Mexico increased 219.7% to $54.6m; Argentina declined 8.0% to $93.8m, principally reflecting peso devaluation. Management reported consolidated revenue growth of 92.9% on an FX-neutral basis, a non-GAAP measure.
- Gross margin edged lower as shipping and collection costs, sales taxes, payment transaction expenses, customer support and hosting costs increased. Shipping penetration rose: shipped items represented 81.3% of successful items sold in countries with Mercado Envios, versus 71.3% a year earlier.
- Sales and marketing expense increased 18.0% to $130.7m but fell as a share of revenue, from 34.5% to 27.6%. Product and technology expense rose 36.4% to $52.4m; general and administrative expense was $43.8m, up 1.8%.
- Operational indicators included total payment volume of $5.64bn, up from $4.18bn; gross merchandise volume of $3.09bn versus $3.13bn; and successful items shipped of 62.4m versus 52.5m.
Capital, debt, outlook and risks
- In March, the company raised approximately $1.965bn net: a public common-stock offering, a $750m PayPal private placement and a $100m perpetual convertible preferred-stock placement with a Dragoneer affiliate. The preferred stock carries a 4% annual cash dividend and conversion rights. Common shares issued during the quarter increased by approximately 4.1m.
- The company had $880m principal amount of 2.00% convertible notes due 2028. Remaining 2.25% convertible notes due July 1, 2019 had a $66.0m principal balance at quarter-end. The 2028 notes’ estimated fair value was $1.18bn; this is not their balance-sheet carrying amount.
- Management does not provide traditional earnings guidance, citing uncertainty in near-term forecasting and a long-term strategic focus. It expects continued investment in product development, marketing, personnel, technology and logistics, and cautions that operating margins may be difficult to maintain. Free shipping and continued growth in payments and shipping may pressure margins.
- Management highlighted weak macroeconomic conditions, high interest rates and currency devaluation in parts of Latin America, particularly Argentina. Argentina has been treated as highly inflationary since July 2018, with the U.S. dollar as its functional currency. The filing notes that these conditions could weigh on dollar-reported growth.
- Legal contingencies accrued as probable totaled $4.8m; reasonably possible claims were estimated at up to $12.6m, with no accrual for those claims. The buyer protection program’s estimated maximum potential exposure was $993.5m, against a recorded allowance of $4.7m; management says the maximum is not representative of expected losses.
- Adoption of lease accounting standard ASC 842 brought operating lease right-of-use assets of $153.5m and liabilities of $155.6m onto the balance sheet. Management reported effective disclosure controls and no material changes to risk factors from the 2018 Form 10-K.
Important facts for investors to verify
- How much of reported revenue growth came from underlying transaction expansion, lower shipping subsidies, changes in revenue presentation and foreign-exchange movements.
- Whether shipping, payments and customer-support costs continue to outpace revenue growth and affect gross margin or profitability.
- The remaining 2019 convertible-note balance, its settlement or conversion, and the dilution implications of the 2028 notes and preferred stock.
- The quality and sustainability of operating cash flow, including the effects of customer funds payable and credit-card receivables, and the liquidity and restrictions associated with investments.
- Credit performance and funding needs in MercadoCredito, including loan losses, securitization obligations and exposure to local interest rates and economic conditions.
- Developments in legal and regulatory matters, the buyer protection program, and Argentina’s inflation, currency and tax environment.