MercadoLibre, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014; comparisons are with the corresponding 2013 periods. Amounts are in U.S. dollars. MercadoLibre operates a Latin American e-commerce and payments platform, including its marketplace, MercadoPago, advertising, classifieds, web stores and shipping services.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net revenue | $147.9m | $123.1m | $395.2m | $338.0m |
| Gross profit | $104.5m | $88.9m | $283.9m | $244.1m |
| Operating income | $47.1m | $37.4m | $75.2m | $101.4m |
| Net income attributable to shareholders | $33.8m | $29.3m | $38.4m | $76.7m |
| Basic and diluted EPS | $0.76 | $0.66 | $0.87 | $1.73 |
| Operating cash flow | $50.5m | $63.7m | $138.4m | $122.8m |
- Revenue grew 20.2% in Q3 and 16.9% year to date. Gross margin was approximately 70.7% in Q3 and 71.8% year to date; operating margin was approximately 31.9% and 19.0%, respectively.
- Year-to-date operating income and net income fell despite revenue growth, principally because of a $49.5m impairment of two Venezuelan office properties and Venezuela-related currency losses. Q3 operating income and net income increased year over year.
- Cash and cash equivalents were $237.5m and short-term investments $169.8m at September 30; management reported these together as $407.3m of liquidity. Long-term investments were $158.8m. Current assets were $569.9m versus current liabilities of $282.9m.
- Cash flow from investing was negative $271.6m, driven mainly by investment purchases net of maturities and sales, plus the Chile and Mexico acquisition and capital spending. Financing provided $276.1m, principally from the convertible-note issuance.
- Free cash flow, as defined by the company, was $81.3m for the first nine months, versus $43.5m in 2013. Capital expenditures, including acquired businesses under the company’s definition, were $57.1m versus $79.3m.
Material changes and operating trends
- Brazil led growth: Q3 revenue increased 49.6% to $78.2m. Argentina revenue rose 23.6% to $41.0m. Venezuela revenue fell 59.7% to $9.3m, largely reflecting bolivar devaluation. Other countries and Mexico also grew.
- Q3 marketplace revenue grew 11.7%; non-marketplace revenue grew 40.5%, supported by shipping, financing and real-estate classifieds. The acquired Chilean and Mexican real-estate classifieds businesses contributed from April 8, 2014.
- Q3 gross merchandise volume was $1.68bn, down from $1.88bn; items sold increased to 26.9m from 22.0m. Payment volume rose to $975.1m from $641.6m, and payment transactions increased to 12.5m from 8.4m.
- Cost of revenue grew faster than revenue in Q3, reaching 29.3% of revenue versus 27.7%, with higher payment-processing costs and sales taxes among the drivers. Product and technology development and sales and marketing expenses also increased.
- The company issued $330m of 2.25% unsecured convertible senior notes due 2019, receiving approximately $321.7m net proceeds after issuance costs. The September 30 carrying amount was $280.1m; the notes’ initial conversion price was approximately $126.02 per share. A $19.7m capped-call transaction was intended to reduce dilution within specified share-price limits.
Outlook, commentary and risks
- No quantified revenue, earnings or cash-flow guidance is provided. Management expects continued investment in technology and anticipates comparable quarterly cash dividends, subject to board discretion. It also stated its intention to support its Venezuelan business over the long term.
- Venezuela adopted the SICAD 2 exchange rate for remeasurement effective May 16, 2014; the September 30 rate was 49.99 bolivars per U.S. dollar. The company recorded a $16.5m second-quarter foreign-exchange loss and a $49.5m impairment after reducing expected U.S.-dollar cash flows. Further currency devaluation or tighter exchange controls could materially affect results and access to funds.
- Argentina’s peso weakened during 2014, and restrictions may delay or limit currency conversion. The Argentine software-development tax holiday expired in September 2014; management expected no holiday benefit in Q4, while its application under a replacement program remained pending.
- Legal proceedings include consumer, seller-fraud, intellectual-property and tax matters. The company reported $4.1m of reserves for probable losses and up to $4.4m of reasonably possible legal exposures for which no loss was accrued. Management described the Brazilian state prosecutor fraud claim as a possible loss.
- After quarter-end, the board declared a $7.3m quarterly dividend, payable January 15, 2015. The company also disclosed an October 2014 memorandum of understanding to acquire a Caracas office property for approximately $3.4m; 80% of the price had been paid by the report date.
Investor verification points
- Assess underlying earnings and margins excluding, but not overlooking, the Venezuelan impairment and currency effects; reconcile the company’s non-GAAP adjusted results with GAAP results.
- Track Venezuela’s exchange-rate access, local-currency exposure, revenue trend and any further impairment or operating restrictions.
- Monitor payment-volume growth alongside credit-card receivables, processing costs, customer-funds obligations and operating cash conversion.
- Review the terms, potential dilution and effective interest cost of the 2019 convertible notes and the protection limits of the capped calls.
- Follow the outcome of material litigation, the Argentine tax-incentive application and the post-quarter Caracas property transaction.