MercadoLibre, Inc. — 2014 Form 10-K Summary
Business and reporting period. MercadoLibre operates an e-commerce platform across Latin America, including its marketplace, MercadoPago payments, classifieds, advertising, online stores and shipping services. This annual report covers the fiscal year ended December 31, 2014; quarterly figures below identify the fourth quarter where relevant. Unless noted otherwise, financial amounts are in U.S. dollars.
Financial performance and key metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net revenue | $556.5 million | $472.6 million | +17.8% |
| Gross profit / gross margin | $397.6 million / 71.4% | $342.5 million / 72.5% | Margin down 1.1 percentage points |
| Operating income / operating margin | $120.5 million / 21.6% | $153.5 million / 32.5% | Income down 21.5% |
| Net income attributable to MercadoLibre shareholders | $72.6 million | $117.5 million | Down 38.2% |
| Diluted earnings per share | $1.63 | $2.66 | Down 38.7% |
| Cash from operating activities | $196.8 million | $142.5 million | Up 38.1% |
| Free cash flow (non-GAAP) | $120.7 million | $24.8 million | Up $95.9 million |
- Fourth-quarter 2014 revenue was $161.4 million versus $134.6 million in Q4 2013; net income was $34.2 million versus $40.8 million.
- Marketplace revenue was $376.2 million, up 13.5%; non-marketplace revenue was $180.4 million, up 27.7%.
- Marketplace GMV was $7.08 billion, down from $7.31 billion, while successful items sold rose 22.0% to 101.3 million. Management attributed reported-dollar pressure in part to currency depreciation. MercadoPago payment volume increased 41.1% to $3.52 billion.
- Registered users reached 120.9 million, up from 99.5 million. Brazil and Argentina represented 49.2% and 27.1% of revenue, respectively; Venezuela represented 10.4%, down from 17.9%.
- Cost of revenue grew 22.2%, faster than revenue; payment processing fees and sales taxes were major contributors. Sales and marketing expense rose 23.4% and product and technology development expense rose 31.1%.
Liquidity, debt and financial position
- At year-end, cash and cash equivalents were $223.1 million, short-term investments $148.8 million and long-term investments $205.3 million. The filing describes total cash and investments of approximately $577.2 million.
- Current assets were $532.8 million and current liabilities $292.6 million. Current liabilities include $165.0 million of funds payable to customers.
- Total assets were $966.8 million, total liabilities $611.1 million and equity $355.8 million.
- In June 2014, the company issued $330 million of 2.25% convertible senior notes due 2019. Their year-end carrying value was $280.6 million; the notes’ initial conversion price was approximately $126.02 per share. The company also paid $19.7 million for capped-call transactions intended to limit dilution within specified price bounds.
- Operating cash flow was $196.8 million. Investing activities used $322.4 million, including investment purchases and acquisitions; financing activities provided $264.3 million, principally from the note issuance. Capital expenditures were $76.1 million, including acquisitions and property and equipment.
Material changes, outlook and notable items
- Venezuela: A shift to the SICAD 2 exchange rate in May 2014 resulted in a reported $16.5 million foreign-exchange loss. The company also recorded a $49.5 million impairment on two Caracas office properties as expected recoverable value fell; it planned to rent the properties and consider disposal. Venezuelan revenue fell 31.4% in reported dollars. Subsequent to year-end, Venezuela announced new exchange mechanisms, including SIMADI; the company said it was assessing their effects.
- Management reported that currency movements reduced 2014 revenue by approximately $297.4 million and reduced aggregate cost of revenue and operating expenses by approximately $234.5 million compared with exchange rates unchanged from 2013. It cautioned that adverse currency and macroeconomic conditions could pressure future U.S.-dollar revenue.
- Management does not provide traditional near-term earnings guidance, citing uncertainty and a long-term strategic focus. It intends to keep investing in marketplace, payments, shipping, product development and marketing, while acknowledging that operating margins may remain under pressure.
- The company acquired real-estate classifieds businesses in Chile and Mexico for approximately $38.0 million, acquired an Argentine software development company for approximately $4.8 million, and bought the remaining 40% of Autopark for $4.0 million.
- Argentina’s software tax benefit expired in September 2014; approval for a replacement program was pending at filing. The company recorded no holiday benefit for the fourth quarter and warned that failure to qualify could increase taxes.
- Material risks include foreign-exchange controls and devaluations, inflation and political or economic instability, payment-services regulation and authorization (including pending Brazilian Central Bank authorization), shipping and payment costs, competition, cybersecurity and service interruptions, user fraud, and legal exposure for user transactions and listed goods.
- At year-end, legal reserves were approximately $3.0 million; additional reasonably possible legal actions were estimated at up to $4.5 million. A Brazilian claim alleging joint liability for seller fraud remained pending appeal. The filing also reports numerous consumer claims and other litigation.
- The company reported effective disclosure controls and internal control over financial reporting; the independent auditor gave an unqualified opinion on the financial statements and internal controls. Certain recently acquired businesses were excluded from management’s internal-control assessment.
Most important facts for investors to verify
- Whether reported growth in local currencies translates into durable U.S.-dollar revenue and GMV growth, especially given the high concentration in Brazil and Argentina and continuing Venezuela exposure.
- Whether payment-volume growth can be monetized without further pressure on gross margin from processing costs, installments, fraud and regulatory requirements.
- How much of 2014’s earnings decline reflects the one-time $49.5 million impairment and Venezuela currency losses, versus recurring cost growth; review the company’s non-GAAP adjusted net income of $127.4 million and adjusted EPS of $2.89 alongside GAAP results.
- The company’s liquidity, investment maturity and credit quality, and ability to meet the $330 million notes’ 2019 maturity and any cash settlement or repurchase obligations.
- Developments in Venezuela’s exchange-rate systems, the recoverability of remaining local assets and the potential impact of price or profit controls.
- Outcomes of Brazilian payment authorization and litigation matters, Argentine tax-incentive approval, and the adequacy of legal and contingency reserves.
- Whether the cash-flow improvement is sustainable: 2014 operating cash flow benefited from increases in payables and customer funds, while free cash flow is a company-defined non-GAAP measure.