10-QPeriod: Q1 FY2018

MERCADOLIBRE INC Quarterly Report for Q1 Ended Mar 31, 2018

Filed May 10, 2018For Securities:MELI

Summary

MercadoLibre, Inc. (MELI) reported its first quarter 2018 financial results, revealing a significant shift from profit to a net loss of $12.9 million, a stark contrast to the $48.5 million net income in the prior year's comparable period. This change was driven by a substantial increase in cost of net revenues and operating expenses, particularly sales and marketing, which more than doubled compared to Q1 2017. Despite these challenges, net revenues saw robust growth of 19% year-over-year, reaching $321.0 million, bolstered by strong performance in Argentina and Mexico, and a significant rebound in non-marketplace revenues. The company also continued its strategic investments in technology and infrastructure, evidenced by a nearly doubling of capital expenditures. The company's strategic focus on expanding its payment and shipping solutions, while driving overall volume growth, has led to increased costs and pressure on gross margins. The adoption of ASC 606 also impacted revenue recognition, notably with a significant increase in shipping subsidies being netted against revenue. While the company navigates these operational shifts and a challenging macroeconomic environment in some Latin American countries, it remains committed to long-term growth and reinvesting capital into its platforms rather than issuing dividends.

Financial Highlights

52 data points
Beta

Revenue

$320.98M

50.7% Gross Margin

Net Income

-$12.92M

-4.0% Net Margin

EPS (Diluted)

$-0.29

Total Assets

$1.72B

Cash & Equivalents

$350.41M

Free Cash Flow

-$56.55M

Financial Statements
Beta
Revenue$320.98M
Cost of Revenue$158.22M
Gross Profit$162.76M
R&D Expenses$38.40M
Operating Expenses$192.18M
Operating Income-$29.42M
Interest Expense$4.76M
Net Income-$12.92M
EPS (Basic)$-0.29
EPS (Diluted)$-0.29
Shares Outstanding (Basic)44.16M
Shares Outstanding (Diluted)44.16M

Key Highlights

  • 1Net loss of $12.9 million in Q1 2018, a significant decline from a net income of $48.5 million in Q1 2017.
  • 2Net revenues increased by 19.0% to $320.98 million, driven by strong growth in Argentina and Mexico, and a surge in non-marketplace revenues.
  • 3Gross profit margin decreased significantly to 50.7% from 62.6% in the prior year's quarter, primarily due to increased shipping subsidies and higher penetration of payment and shipping solutions.
  • 4Operating expenses surged, with Sales and Marketing expenses more than doubling to $110.7 million, contributing to an operating loss of $29.4 million compared to an operating income of $63.3 million.
  • 5Capital expenditures increased significantly to $23.0 million from $12.8 million in the prior year's quarter, reflecting continued investment in technology infrastructure.
  • 6The company suspended dividend payments to reinvest capital into its business, signaling a focus on growth opportunities.
  • 7Adoption of ASC 606 impacted revenue recognition, with a substantial increase in shipping subsidies ($112.5 million) netted against revenues.

Frequently Asked Questions

The primary driver for the net loss in Q1 2018 was a substantial increase in the cost of net revenues and operating expenses. Specifically, cost of net revenues rose by 56.9% and sales and marketing expenses more than doubled year-over-year, leading to an operating loss where there was an operating profit in the prior year. The adoption of ASC 606 also impacted revenue presentation due to increased shipping subsidies.

The adoption of ASC 606, effective January 1, 2018, led to a change in revenue recognition, particularly for shipping subsidies. In Q1 2018, $112.5 million in shipping subsidies were netted against revenues, a significant increase from $4.3 million in Q1 2017. This presentation reduced reported net revenues and cost of net revenues for the prior period and significantly impacted gross profit margins in the current period.

MercadoLibre has decided to suspend its quarterly cash dividend payments as of Q1 2018. The company's management believes there are more attractive investment opportunities within the business that can generate greater returns for shareholders compared to issuing dividends. This decision frees up capital for investment in various platforms and strategic initiatives.

Despite the net loss, several operational KPIs demonstrated robust growth. Gross Merchandise Volume (GMV) increased by 34.0%, successful items sold by 50.6%, and successful items shipped by 92.4%. Total payment volume grew by 60.5%, and total payment transactions increased by 74.3%. These metrics, particularly the growth in non-marketplace revenue streams like payment fees, contributed to the overall 19.0% increase in net revenues.