MercadoLibre, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter ended June 30, 2015; financial statements are unaudited. The company operates a Latin American e-commerce platform spanning its marketplace, payments, shipping, advertising, classifieds and online-store services. Unless noted otherwise, amounts below are in U.S. dollars.
Key financial results
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net revenue | $154.3 million | $131.8 million | $302.4 million | $247.2 million |
| Gross profit / margin | $104.0 million / 67.4% | $95.5 million / 72.4% | $207.4 million / 68.6% | $179.3 million / 72.5% |
| Operating income (loss) / margin | $34.6 million / 22.4% | $(5.9) million / (4.5)% | $60.2 million / 19.9% | $28.1 million / 11.4% |
| Net income (loss) attributable to shareholders | $19.5 million | $(25.6) million | $21.2 million | $4.7 million |
| Basic and diluted EPS | $0.44 | $(0.58) | $0.48 | $0.11 |
| Operating cash flow | $58.7 million | $60.3 million | $96.8 million | $87.9 million |
- Revenue grew 17.0% in Q2 and 22.3% in the first half, while cost of revenue rose faster—38.3% and 39.9%, respectively—compressing gross margin. Management attributed the cost increase primarily to higher payment-processing fees as MercadoPago penetration increased, and to sales taxes and customer-support costs.
- Marketplace revenue increased 1.8% in Q2 and 7.4% in the first half; non-marketplace revenue rose 51.6% and 58.4%, respectively. Growth in financing, shipping and off-platform payment services contributed to the latter. Total payment volume rose to $1.206 billion in Q2, up from $785.5 million, and to $2.243 billion for the first half, up from $1.450 billion.
- Gross merchandise volume was $1.654 billion in Q2 versus $1.805 billion and $3.303 billion for the first half versus $3.602 billion. Items sold increased to 30.2 million in Q2 from 23.6 million and to 57.7 million for the first half from 45.4 million.
- Q2 operating results improved sharply versus 2014, which included a $49.5 million Venezuelan asset impairment. First-half 2015 included a separate $16.2 million impairment recorded in Q1. The comparison therefore includes significant unusual items.
- Management’s non-GAAP adjusted net income was $19.5 million in Q2 2015 versus $31.8 million in Q2 2014, and $54.0 million for the first half versus $59.5 million. Adjusted EPS was $0.44 and $1.22, respectively, for 2015. These measures exclude specified Venezuelan foreign-exchange losses and asset impairments; they are not U.S. GAAP results.
- First-half free cash flow, as defined by the company, was $26.7 million versus $39.2 million. Operating cash generation increased, but acquisitions, capital investment and other investing uses reduced free cash flow.
Balance sheet, debt and liquidity
- At June 30, 2015, cash and cash equivalents were $170.4 million, short-term investments $167.2 million and long-term investments $209.3 million. Combined cash and investments were approximately $546.9 million; the company also reported $130.97 million of net credit-card receivables.
- Current assets were $547.4 million and current liabilities $345.7 million. Current liabilities included $197.8 million of funds payable to customers, so the headline current ratio should be considered alongside payment-platform obligations and working-capital needs.
- Total liabilities were $676.2 million and equity $344.4 million. Loans and other financial liabilities totaled $288.0 million, including the convertible notes. The $330 million, 2.25% notes mature in 2019; their balance-sheet carrying amount was $285.5 million. No note-conversion conditions had been met by June 30.
- Cash declined by $52.8 million during the first half to $170.4 million, including a $35.8 million negative effect from exchange-rate changes. Operating cash flow of $96.8 million was largely offset by $94.7 million of investing outflows and $19.0 million of financing outflows.
- Capital expenditures, including acquisitions under the company’s definition, were $70.2 million, compared with $48.7 million. Cash used for the two acquisitions was $45.0 million. Management said existing cash, operating cash generation and the sale of credit-card receivables should be sufficient for operating needs, capital expenditures and obligations.
Material changes, outlook and risks
- Reported revenue trends varied materially by country. First-half Argentina revenue increased 70.3% and Brazil increased 22.0%; Venezuela declined 45.2%. In Q2, Argentina increased 70.8%, Brazil 14.9%, and Venezuela declined 65.5%. Local-currency revenue growth was considerably higher than reported U.S.-dollar growth, reflecting currency depreciation.
- Venezuela changed to the SIMADI exchange rate for remeasurement effective March 31, 2015. The company recorded a $20.4 million Venezuelan foreign-exchange loss and a $16.2 million long-lived-asset impairment in Q1. The June 30 SIMADI rate was 197.3 bolivars per U.S. dollar. Management cited exchange restrictions, potential further devaluation and government actions as risks, while stating it planned to support the business there over the long term.
- Argentina’s currency controls may delay or restrict conversion of pesos into foreign currencies. The company reported no material change to its previously disclosed risk factors and stated it did not expect current restrictions to materially harm its overall business, while acknowledging the limitations on converting local cash.
- There is no specific company-wide revenue or earnings forecast in the supplied filing text. Management anticipated continued investment in technology and capital expenditures and said it expected to continue comparable quarterly cash dividends, subject to board discretion. A $0.103-per-share dividend was approved in August 2015 for payment in October.
- The company acquired a Mexican real-estate classifieds platform for a reported purchase price of $29.9 million and a Brazilian e-commerce software developer for $22.7 million. Goodwill rose to $101.8 million from $68.8 million, primarily reflecting these acquisitions.
- At June 30, the company had accrued $2.755 million for probable legal losses and disclosed up to $4.609 million of reasonably possible legal actions. It reported substantial consumer and ordinary-court claims in Brazil and Argentina. A Brazilian consumer-liability settlement was approved in July 2015, after quarter-end; it provides for joint liability in certain purchases made using MercadoPago.
- Other notable legal matters include a Nike-related Argentine judgment awarding AR$200,000 in damages, which the subsidiary appealed and for which management’s external counsel assessed loss as probable; and Brazilian municipal tax disputes for which court deposits had been made and management assessed loss risk as remote. The filing describes additional litigation and regulatory uncertainty involving online-platform liability and intellectual property.
- Management stated disclosure controls were effective as of quarter-end and reported no material changes in internal control over financial reporting during the first half.
Important facts for investors to verify
- How much of reported revenue and profit growth reflects underlying activity versus local inflation, foreign-exchange translation and changes in payment or shipping mix.
- Whether higher MercadoPago volumes can be monetized without further pressure on gross margin, processing costs, credit-card receivables and working capital.
- The sustainability of earnings after excluding the Venezuelan impairment and foreign-exchange effects, and the assumptions behind management’s non-GAAP adjustments.
- The company’s liquidity after customer funds payable, acquisition spending, capital expenditures, dividends and convertible-note interest are considered.
- Future developments in Venezuelan exchange access, currency valuation, asset recoverability and regulation, and in Argentine currency restrictions and the pending software-tax-holiday application.
- Updates on the Nike appeal, Brazilian tax disputes, platform-liability cases and the financial or operational effects of the MercadoPago-related settlement.