MercadoLibre, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited, consolidated results in U.S. dollars. MercadoLibre operates an integrated Latin American commerce and fintech ecosystem, including marketplace, payments, logistics, advertising, and consumer and merchant credit businesses.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 or prior period |
|---|---|---|
| Net revenue | $2,248 million | $1,378 million; up 63.1% |
| Commerce revenue | $1,277 million | $911 million; up 40.2% |
| Fintech revenue | $971 million | $467 million; up 107.9% |
| Gross profit / margin | $1,073 million / 47.7% | $591 million / 42.9% |
| Operating income / margin | $139 million / 6.2% | $91 million / 6.6% |
| Net income (loss) | $65 million | $(34) million |
| Basic and diluted EPS | $1.30 | $(0.68) |
| Net cash used in operating activities | $(233) million | $(265) million |
| Net cash used in investing activities | $(1,224) million | $(98) million |
| Net cash from (used in) financing activities | $152 million | $(859) million |
Revenue growth reflected expansion in both businesses: gross merchandise volume rose 26.5%, total payment volume rose 72.0%, and fintech credit revenue increased 204.5%, according to management. The company reported 81 million unique active users, versus 70 million; 267 million successful items sold, versus 222 million; and $25.319 billion in total payment volume, versus $14.718 billion.
Operating expenses increased to $934 million from $500 million. Sales and marketing rose 87.8%, including a $170 million increase in bad-debt expense, primarily associated with credit growth. Product and technology development rose 85.7%, and general and administrative expense rose 84.9%. The company attributed improved gross margin mainly to growth in credit and lower shipping costs and collection fees as a share of revenue; higher bad-debt expense contributed to the decline in operating margin.
At March 31, cash and cash equivalents were $1.573 billion, restricted cash was $841 million, and short-term investments were $1.412 billion. Management described $2.044 billion as cash and cash equivalents plus short-term investments, excluding the $941 million Brazilian Central Bank guarantee investment. Cash, cash equivalents, and restricted cash totaled $2.414 billion, down from $3.648 billion at year-end 2021. Loans payable and other financial liabilities totaled $4.097 billion, up from $3.518 billion; total liabilities were $9.434 billion and total equity was $1.589 billion. Customer funds payable were $2.483 billion. These balances reflect the company’s payment, credit, and securitization activities.
Material changes and notable items
- Net revenue increased 63.1% year over year; fintech revenue grew faster than commerce revenue. Argentina revenue rose 74.4%, Brazil 62.8%, Mexico 58.3%, and other countries 39.0%.
- Loans receivable, net, increased to $1.737 billion from $1.260 billion at year-end. The allowance for uncollectible loan accounts rose to $678 million from $435 million; the quarter included $253 million of allowance charges to income.
- Cash used in investing increased substantially, including $607 million of net principal deployed into loans receivable and $137 million in property and equipment purchases. Capital expenditures were $137 million, compared with $113 million.
- The company repurchased 40,999 shares in March for approximately $39 million. Its repurchase authorization was increased to $450 million and extended through August 31, 2023.
- Adoption of convertible-debt accounting guidance on January 1, 2022 increased the carrying value of the 2028 Notes by $123 million, reduced deferred tax liabilities by $26 million, and reduced opening equity by $97 million.
Outlook, risks, and contingencies
Management does not provide traditional earnings guidance, citing uncertainty in near-term forecasting and a focus on long-term investment and growth. It anticipates continued investment in technology and logistics capacity and stated that existing cash, investments, receivables-sale capacity, and operating cash generation are expected to fund operations, capital expenditures, and obligations. Results are not presented as a forecast for the full year.
- Credit and funding: Credit growth is accompanied by rising bad-debt expense and loan-loss allowances. Funding needs include credit-card receivables, merchant and consumer loans, securitizations, and borrowings; $1.924 billion of loans payable and other financial liabilities carried variable rates.
- Currency and local regulation: Most revenue and expenses arise in foreign operations. Argentina’s foreign-exchange controls and highly inflationary accounting status create uncertainty; the company uses the official peso exchange rate for reporting. A challenge to an Argentine Central Bank rule requiring reserve deposits of certain customer funds remained unresolved. Brazil’s new payment-institution capital rules are expected to begin in 2023, with full implementation by 2025.
- Cybersecurity: The company disclosed unauthorized access to part of its source code; the investigation was ongoing. It said affected users were not a significant percentage of more than 471 million registered users and that passwords, account balances, investment information, and payment-card information were not accessed.
- Legal matters: The company accrued $23 million for probable proceeding-related and other contingencies. It disclosed up to $81 million of reasonably possible legal actions for which no loss was accrued. The buyer-protection program had estimated maximum potential exposure of $2.958 billion, with a $6 million allowance; management said the maximum is not representative of expected actual exposure.
- Commitments and subsequent events: Cloud-service purchase commitments totaled $932 million, with $54 million paid by quarter-end. Operating-lease payments were $707 million and finance-lease payments $67 million. Subsequent to quarter-end, the company signed a 10-year Brazilian air-logistics agreement covering six dedicated aircraft and received final Mexican e-money institution license approval, subject to official publication.
- Accounting and market risks: The company was assessing the potential effect of SEC Staff Accounting Bulletin No. 121 on safeguarding user crypto-assets. It also cited interest-rate, foreign-exchange, competition, political and economic, pandemic, systems, and regulatory risks. No material risk-factor changes from the 2021 Form 10-K were reported.
Important facts for investors to verify
- Whether revenue growth and gross-margin improvement can continue as credit, logistics, and first-party sales expand, and whether bad-debt costs constrain operating profitability.
- Loan portfolio quality, delinquency trends, allowance adequacy, and the funding and interest-rate sensitivity of credit operations.
- How much reported liquidity is unrestricted and available, given customer-fund protections and the $941 million Brazilian guarantee investment.
- Developments in the source-code incident, Argentine customer-fund regulation and litigation, and the disclosed legal contingencies.
- The eventual financial-statement effects of SAB 121 and other pending accounting guidance.