MercadoLibre, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Dollar amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context
MercadoLibre operates an integrated Latin American e-commerce and fintech ecosystem, including its marketplace, payments, logistics, advertising, storefronts, and consumer and merchant lending businesses. Its results are reported across Brazil, Argentina, Mexico, and other countries. Fintech and credit operations continued to contribute a growing share of revenue.
Financial results and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net revenue | $2,597 | $1,703 | $4,845 | $3,081 |
| Gross profit | $1,284 | $754 | $2,357 | $1,345 |
| Income from operations | $250 | $166 | $389 | $257 |
| Net income | $123 | $68 | $188 | $34 |
| Diluted EPS | $2.43 | $1.37 | $3.73 | $0.69 |
- Growth and mix: Q2 revenue increased 52.5% year over year. Commerce revenue was $1,404 million, up 22.9%; fintech revenue was $1,193 million, up 112.7%. For the first half, fintech revenue more than doubled to $2,163 million.
- Margins: Q2 gross margin increased to 49.4% from 44.3%; operating margin was 9.6% versus 9.8%. First-half gross margin was 48.6% versus 43.7%; operating margin was 8.0% versus 8.3%.
- Credit costs: Provision for doubtful accounts was $303 million in Q2 and $557 million in the first half, versus $82 million and $166 million in the comparable 2021 periods. Management cited loan originations, particularly consumer and credit-card lending, and a higher non-performing ratio. Gross loans receivable were $2,687 million, with an $842 million allowance, at June 30.
- Cash flow: First-half operating cash flow was $674 million, compared with a $1 million outflow in 2021. Investing cash outflow was $2,561 million, including $1,170 million of net loan originations and $236 million of property and equipment purchases. Financing cash inflow was $586 million. Cash, cash equivalents, and restricted cash ended at $2,253 million, down from $3,648 million at year-end.
- Debt and liquidity: Loans payable and other financial liabilities totaled $4,440 million at June 30, 2022, versus $3,518 million at December 31, 2021. Management identified $2,226 million of cash, cash equivalents, and short-term investments as its main liquidity source, excluding $748 million of investments held mainly for a Brazilian Central Bank guarantee. A $400 million revolving facility was undrawn at quarter-end.
- Balance sheet: Total assets were $11,447 million and equity was $1,580 million at June 30, 2022, compared with $10,101 million and $1,531 million at December 31, 2021. Customer funds payable were $2,528 million.
Material changes versus the prior comparable period
- Q2 growth was led by fintech, with credit revenue rising to $529 million from $163 million; commerce revenue grew more slowly than fintech.
- Higher gross margin reflected lower shipping, carrier, collection-fee and other costs as a proportion of revenue, according to management.
- Credit-loss provision increased sharply, while product and technology expense rose 78.2% in Q2 and general and administrative expense rose 60.2%.
- Q2 other expense worsened to $87 million from $28 million, reflecting higher foreign-exchange losses and interest expense. First-half foreign-currency losses were $63 million.
- First-half 2021 results included a $49 million loss on the 2028 Notes repurchase; this affected comparability of interest expense and the effective tax rate.
Outlook, risks, contingencies, and unusual items
- MercadoLibre does not provide traditional earnings guidance. Management said it was taking a more moderate approach to investment intensity in groceries and first-party retail while continuing to invest for long-term growth, including in technology and logistics.
- Management stated that existing cash, short-term investments, cash generated from operations, and receivables-sale funding were expected to be sufficient for operating activities, capital expenditures, and obligations. It cautioned that pandemic-related and broader macroeconomic uncertainty makes future business development and cash generation uncertain.
- Key risks include Latin American political and economic conditions, foreign-exchange and interest-rate volatility, lending losses, regulation, competition, cybersecurity, and reliance on third parties. Argentina’s currency controls and informal exchange mechanisms contributed to currency losses; the company uses the official exchange rate for Argentine subsidiary reporting.
- Legal proceedings: $26 million was accrued for matters assessed as probable losses. Additional reasonably possible legal actions were estimated at up to $219 million, with no accrual recorded for those matters.
- The estimated maximum potential exposure under the buyer protection program was $3,301 million; the recorded provision was $5 million. The filing says this maximum is not representative of expected actual exposure.
- The company disclosed an ongoing investigation into unauthorized access to part of its source code. It said the affected users were not a significant percentage of registered users and that passwords, account balances, investment information, and credit-card information were not accessed.
- Material commitments include $932 million of cloud-service purchase agreements and a 10-year Brazil air-logistics agreement with a minimum annual cost of $43 million. The company also reported $686 million of future operating-lease payments and $65 million of finance-lease payments, undiscounted.
Important facts for investors to verify
- Whether the rise in loan-loss provisions and non-performing ratios continues, and how credit performance varies by product and country.
- How much of reported fintech growth and profitability is attributable to credit revenue, and how lending growth is funded.
- Availability and restrictions on reported liquidity, particularly customer-related and regulatory-guarantee balances, alongside debt maturities and funding costs.
- Whether gross-margin gains persist as logistics capacity, first-party sales, and transaction volumes expand.
- Updates on the source-code incident, the Brazilian and Argentine regulatory matters, and legal and tax contingencies.