UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





 

 



 

 



FORM 10-Q



 

 



 

 



(Mark One)



 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2017

-OR-





 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 001-33647





 

 



 

 

MercadoLibre, Inc.

(Exact name of Registrant as specified in its Charter)





 

 



 

 







 

 



 

 

Delaware

 

98-0212790

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

Arias 3751, 7th Floor

Buenos Aires, C1430CRG, Argentina

(Address of registrant’s principal executive offices)

(+5411) 4640-8000

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)





 

 



 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes       No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.    Yes       No  

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company , or an emerging growth company . See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:





 

 

 

 

 

 



 

 

 

 

 

 



 

 

 

 

 

 

Large accelerated filer

 

 

Accelerated filer

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

 

Smaller reporting company

 



 

 

 

Emerging growth company

 



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes       No  

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

44,157,3 64 shares of the issuer’s common stock, $0.001 par value, outstanding as of May 2, 2017 .







 



 

 


 



MERCADOLIBRE, INC.

IN DEX TO FORM 10-Q

 



 

PART I. FINANCIAL INFORMATION

 

Item 1 — Unaudited Interim Condensed Consolidated Financial Statements

 

 Interim Condensed Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016

 Interim Condensed Consolidated Statements of Income for the three-month periods ended March 31, 2017 and 2016

 Interim Condensed Consolidated Statements of Comprehensive Income for the three-month periods ended March 31, 2017 and 2016

 Interim Condensed Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2017 and 2016

 Notes to Interim Condensed Consolidated Financial Statements (unaudited)

 Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

21 

 Item 3 — Qualitative and Quantitative Disclosures About Market Risk

44 

 Item 4 — Controls and Procedures

49 

 PART II. OTHER INFORMATION

49 

 Item 1 — Legal Proceedings

49 

 Item 1A — Risk Factors

49 

 Item 6 — Exhibits

49 

 INDEX TO EXHIBITS

51 



 

 


 

M ercadoLibre, Inc.

Interim Condensed Consolidated Financial Statements

as of March 31, 2017 and December 31, 201 6

and for the three -month periods

ended March 31 , 201 7 and 201 6

 



 

 


 



M ercadoLibre, Inc.

Interim Condensed Consolidated Balance Sheets

As of March 31 , 201 7 and December 31, 2016

(In thousands of U.S. dollars, except par value)

(Unaudited)





 

 

 



March 31,

 

December 31,



2017

 

2016

Assets

 

 

 

Current assets:

 

 

 

Cash and cash equivalents

$                       301,388

 

$                       234,140

Short-term investments

265,165 

 

253,321 

Accounts receivable, net

24,097 

 

25,435 

Credit cards receivables, net

300,612 

 

307,904 

Loans receivable, net

11,380 

 

6,283 

Prepaid expenses

14,846 

 

15,060 

Inventory

432 

 

1,103 

Other assets

28,472 

 

26,215 

Total current assets

946,392 

 

869,461 

Non-current assets:

 

 

 

Long-term investments

170,352 

 

153,803 

Property and equipment, net

131,968 

 

124,261 

Goodwill

95,849 

 

91,797 

Intangible assets, net

26,227 

 

26,277 

Deferred tax assets

51,441 

 

45,017 

Other assets

61,417 

 

56,819 

Total non-current assets

537,254 

 

497,974 

Total assets

$                    1,483,646

 

$                    1,367,435

Liabilities and Equity

 

 

 

Current liabilities:

 

 

 

Accounts payable and accrued expenses

$                       108,507

 

$                       105,106

Funds payable to customers

396,487 

 

370,693 

Salaries and social security payable

73,342 

 

48,898 

Taxes payable

30,668 

 

27,338 

Loans payable and other financial liabilities

16,430 

 

11,583 

Other liabilities

5,606 

 

6,359 

Dividends payable

6,624 

 

6,624 

Total current liabilities

637,664 

 

576,601 

Non-current liabilities:

 

 

 

Salaries and social security payable

12,498 

 

16,173 

Loans payable and other financial liabilities

304,534 

 

301,940 

Deferred tax liabilities

36,830 

 

34,059 

Other liabilities

9,876 

 

9,808 

Total non-current liabilities

363,738 

 

361,980 

Total liabilities

$                    1,001,402

 

$                       938,581



 

 

 

Equity:

 

 

 



 

 

 

Common stock, $0.001 par value, 110,000,000 shares authorized,

 

 

 

 44,157,364 shares issued and outstanding at March 31,

 

 

 

2017 and December 31, 2016, respectively

$                                44

 

$                                44

Additional paid-in capital

137,982 

 

137,982 

Retained earnings

592,535 

 

550,641 

Accumulated other comprehensive loss

(248,317)

 

(259,813)

Total Equity

482,244 

 

428,854 

Total Liabilities and Equity

$                    1,483,646

 

$                    1,367,435













The accompanying notes are an integral part of these interim condensed consolidated financial statements.

 

 

1


 

M ercadoLibre, Inc.

Interim Condensed Consolidated Statements of Income

For the three -month periods ended March 31 , 201 7 and 201 6

(In thousands of U.S. dollars, except for share data)

(Unaudited)





 

 

 

 

 



 

Three Months Ended March 31,

 



 

2017

 

2016

 

Net revenues

 

$                  273,926

 

$                    157,630

 

Cost of net revenues

 

(105,070)

 

(55,448)

 

Gross profit

 

168,856 

 

102,182 

 

Operating expenses:

 

 

 

 

 

Product and technology development

 

(30,302)

 

(21,941)

 

Sales and marketing

 

(46,931)

 

(32,683)

 

General and administrative

 

(28,309)

 

(17,069)

 

Total operating expenses

 

(105,542)

 

(71,693)

 

Income from operations

 

63,314 

 

30,489 

 



 

 

 

 

 

Other income (expenses):

 

 

 

 

 

Interest income and other financial gains

 

12,157 

 

7,251 

 

Interest expense and other financial losses

 

(6,471)

 

(5,684)

 

Foreign currency gains

 

663 

 

5,147 

 

Net income before income tax expense

 

69,663 

 

37,203 

 



 

 

 

 

 

Income tax expense

 

(21,145)

 

(6,956)

 

Net income

 

$                    48,518

 

$                      30,247

 









 

 

 

 

 



 

Three Months Ended March 31,



 

2017

 

2016

 

Basic EPS

 

 

 

 

 

Basic net income

 

 

 

 

 

Available to shareholders per common share

 

$                     1.10

 

$                     0.68

 

Weighted average of outstanding common shares

 

44,157,364 

 

44,156,961 

 

Diluted EPS

 

 

 

 

 

Diluted net income

 

 

 

 

 

Available to shareholders per common share

 

$                     1.10

 

$                     0.68

 

Weighted average of outstanding common shares

 

44,157,364 

 

44,156,961 

 



 

 

 

 

 

Cash Dividends declared (per share)

 

0.150 

 

0.150 

 











The accompanying notes are an integral part of these interim condensed consolidated financial statements.

 

 

2


 

M ercadoLibre, Inc.

Interim Condensed Consolidated Statements of Comprehensive Income

For the three -month periods ended March 31 , 201 7 and 201 6

(In thousands of U.S. dollars)



 

 

 



Three Months Ended March 31,



2017

 

2016

Net income

$         48,518

 

$         30,247

Other comprehensive (loss) income, net of income tax:

 

 

 

Currency translation adjustment

9,665 

 

(11,191)

Unrealized net gains on available for sale investments

1,244 

 

448 

Less: Reclassification adjustment for losses on available for sale investments

(587)

 

(672)

Net change in accumulated other comprehensive loss, net of income tax

11,496 

 

(10,071)

Total Comprehensive Income

$         60,014

 

$         20,176





The accompanying notes are an integral part of these interim condensed consolidated financial statements.

 

 

3


 



Me rcadoLibre, Inc.

Interim Condensed Consolidated Statement s of Cash Flow

For the three -month periods ended March 31, 2017 and 2016

(In thousands of U.S. dollars)

(Unaudited)







 

 

 

 



 

Three Months Ended March 31,



 

2017

 

2016



 

 

Cash flows from operations:

 

 

 

 

Net income

 

$            48,518

 

$            30,247

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

Depreciation and amortization

 

9,003 

 

6,252 

Accrued interest

 

(5,679)

 

(3,877)

Non cash interest and convertible bonds amortization of debt discount and amortization of debt issuance costs

 

4,226 

 

4,431 

LTRP accrued compensation

 

9,176 

 

3,190 

Deferred income taxes

 

(2,798)

 

(1,896)

Changes in assets and liabilities:

 

 

 

 

Accounts receivable 

 

(1,305)

 

(22,920)

Credit Card Receivables

 

15,583 

 

(62,544)

Prepaid expenses

 

347 

 

(1,387)

Inventory

 

727 

 

(158)

Other assets

 

(4,472)

 

(6,738)

Accounts payable and accrued expenses

 

13,364 

 

14,376 

Funds payable to customers

 

13,929 

 

23,684 

Other liabilities

 

123 

 

1,152 

Interest received from investments

 

4,015 

 

4,386 

Net cash provided by (used in) operating activities

 

104,757 

 

(11,802)

Cash flows from investing activities:

 

 

 

 

Purchase of investments

 

(897,589)

 

(641,259)

Proceeds from sale and maturity of investments

 

876,040 

 

659,309 

Payment for acquired businesses, net of cash acquired

 

 -

 

(1,838)

Purchases of intangible assets

 

(17)

 

(11)

Advance for property and equipment

 

(2,505)

 

(872)

Changes in principal of loans receivable, net

 

(4,808)

 

 —

Purchases of property and equipment

 

(10,268)

 

(14,552)

Net cash (used in) provided by investing activities

 

(39,147)

 

777 

Cash flows from financing activities:

 

 

 

 

Proceeds from loans payable and other financial liabilities

 

4,290 

 

 —

Payments on loans payable and other financing liabilities

 

(2,875)

 

(661)

Dividends paid

 

(6,624)

 

(4,548)

Net cash used in financing activities

 

(5,209)

 

(5,209)

Effect of exchange rate changes on cash and cash equivalents

 

6,847 

 

(5,762)

Net increase (decrease) in cash and cash equivalents

 

67,248 

 

(21,996)

Cash and cash equivalents, beginning of the period

 

234,140 

 

166,881 

Cash and cash equivalents, end of the period

 

$          301,388

 

$          144,885







The accompanying notes are an integral part of these interim condensed consolidated financial statements.

 



 

 

4


 

Table of Contents

 

MercadoLibre, Inc.

Notes to Interim Condensed Consolidated Financial Statements (unaudited)

 



1.   Nature of Business

MercadoLibre, Inc. (“MercadoLibre” or the “Company”) was incorporated in the state of Delaware, in the United States of America in October 1999. MercadoLibre is the leading ecommerce company in Latin America, serving as an integrated regional platform and as an enabler of the necessary online and technology tools to allow businesses and individuals to trade products and services in the region. The Company enables commerce through its marketplace platform (including online classifieds for motor vehicles, vessels, aircraft, services and real estate), which allows users to buy and sell in most of Latin America. 

Through MercadoPago,   MercadoLibre enables individuals and businesses to send and receive online payments; through MercadoEnvios, MercadoLibre facilitates the shipping of goods from sellers to buyers; through our Advertising products, MercadoLibre facilitates advertising services to large retailers and brands to promote their product and services on the web; and through MercadoShops, MercadoLibre facilitates users to set-up, manage, and promote their own on-line web-stores under a subscription-based business model and through MercadoCredits extends loans to specific merchants. In addition, MercadoLibre develops and sells software enterprise solutions to e-commerce business clients in Brazil.

As of March 31, 201 7 , MercadoLibre, through its wholly-owned subsidiaries, operated online ecommerce platforms directed towards Argentina, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Peru, Mexico, Panama, Honduras, Nicaragua, Salvador, Portugal, Uruguay, Bolivia, Guatemala, Paraguay and Venezuela. Additionally, MercadoLibre operates an online payments solution directed towards Argentina, Brazil, Mexico, Venezuela, Colombia, Chile, Peru and Uruguay. It also offers a shipping solution directed towards Argentina, Brazil, Mexico, Colombia and Chile. In addition, the Company operates a real estate classified platform that covers some areas of State of Florida, in the United States of America.

 

2. Summary of significant accounting policies

Basis of presentation

The accompanying unaudited interim condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) and include the accounts of the Company and its wholly-owned subsidiaries. These interim condensed consolidated financial statements are stated in U.S. dollars , except for amounts otherwise indicated . Intercompany transactions and balances with subsidiaries have been eliminated for consolidation purposes.

Substantially all net revenues, cost of net revenues and operating expenses, are generated in the Company’s foreign operations, amounting to 98.8% and 99.8% of the con solidated amounts during the three -month periods ended March 31, 201 7 and 2016. Long-lived assets, Intangible assets and G oodwill located in the foreign jurisdictions totaled $244,075   thousands and $ 232,314   thousands as of March 31, 2017 and December 31, 2016 , respectively.

These interim condensed consolidated financial statements reflect the Company’s consolidated financial position as of March 31, 2017 and December 31, 201 6 . These financial statements also show the Company’s consolidated statements of income and comprehensive income for the   three-month periods ended March 31 , 201 7 and 201 6; and statement of cash flows for the three-month periods ended March 31, 2017 and 2016 . These interim condensed consolidated financial statements include all normal recurring adjustments that management believes are necessary to fairly state the Company’s financial position, operating results and cash flows.

Because all of the disclosures required by U.S. GAAP for annual consolidated financial statements are not included herein, these unaudited interim condensed financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for the year ended December 31, 201 6 , contained in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”). The condensed consolidated statements of income, of comprehensive income and of cash flows for the periods presented herein are not necessarily indicative of results expected for any future period. For a more detailed discussion of the Company’s significant accounting policies, see note 2 to the financial statements in the Form 10-K. During the three-month period ended March 31, 2017, there were no material updates made to the Company’s significant accounting policies.

 

5


 

Table of Contents

 

MercadoLibre, Inc.

Notes to Interim Condensed Consolidated Financial Statements (unaudited)

 

Foreign currency translation

All of the Company’s foreign operations have determined the local currency to be their functional currency, except for Venezuela since January 1, 2010, as described below. Accordingly, these foreign operating subsidiaries translate assets and liabilities from their local currencies into U.S. dollars by using period -end exchange rates while income and expense accounts are translated at the average rates in effect during the period , unless exchange rates fluctuate significantly during the period, in which case the exchange rates at the date of the transaction are used. The resulting translat ion adjustment is recorded as a component of other comprehensive   (loss) income.

Venezuelan currency status

Pursuant to U.S. GAAP, the Company has transitioned its Venezuelan operations to highly inflationary status as from January 1, 2010, which requires that transactions and balances are re-measured as if the U.S. dollar was the functional currency for such operation. The cumulative three year inflation rate as of December 31, 2010 exceeded 100%. As of the date of these interim condensed consolidated financial statements, the cumulative three -year inflation rate exceeds   100% . Thus , the Company continues to treat the economy of Venezuela as highly-inflationary.

On March 9, 2016 the Central Bank of Venezuela (“ BCV ”) issued the Exchange Agreement No.35, which is effective since March 10, 2016. The agreement established a “protected” exchange rate (“DIPRO”) for certain transactions, such as but not limited to: imports of goods of the food and health sectors, as well as supplies associated with the production of said sectors; expenses relating to health treatments, sports, culture, scientific research, and other urgent matters defined by the exchange regulations. All foreign currency transactions not expressly provided in Exchange Agreement No.35 will be processed on the alternate foreign currency markets governed by the exchange regulations, at the floating supplementary market exchange rate (“DICOM”).

Additionally, the agreement established that the alternate foreign currency markets referred to in Exchange Agreement No.33 of February 10, 2015 ( SIMADI ) will continue to operate until replaced by others. As of the date of issuance of these interim condensed consolidated financial statements, the SIMADI has not been replaced and for th at reason, the Company is still using SIMADI.

As of March 31, 2017 , the SIMADI exchange rate was 709.7 BsF per U.S. dollar.

Until 2010 the Company was able to obtain U.S. dollars for any purpose, including dividends distribution, using alternative mechanisms other than through the Commission for the Administration of Foreign Exchange Control (CADIVI). Those U.S. dollars, obtained at a higher exchange rate than the one offered by CADIVI, and held at U.S. bank accounts of its Venezuelan subsidiaries, were used until 2011 for dividend distributions from its Venezuelan subsidiaries. The Company has not distributed dividends from the Venezuelan subsidiaries since 2011.

The following table sets forth the assets, liabilities and net assets of the Company’s Venezuelan subsidiaries, before intercompany eliminations of a net liability of $20,177   thousands and $ 15,843 thousands , as of March 31, 2017 and December 31, 201 6 and net revenues for the three -month periods ended March 31, 2017 and 2016 :







 

 

 

 

 

 

 

 



 

 

 

March 31,



 

 

2017

 

2016

 



 

 

(In thousands)

Venezuelan operations

 

 

 

 

 

 



Net Revenues

 

$

14,397 

 

$

12,105 

 



 

 

 

 

 

 

 

 



 

 

March 31,

 

December 31,

 



 

 

2017

 

2016

 



 

 

(In thousands)

 



Assets

 

 

75,109 

 

 

66,165 

 



Liabilities

 

 

(30,223)

 

 

(22,950)

 



Net Assets

 

$

44,886 

 

$

43,215 

 



As of March 31, 2017 , net assets (before intercompany eliminations) of the Venezuelan subsidiaries amounted to 9.3%  o f consolidated net assets, and cash and investments of the Venezuelan subsidiaries held in local currency in Venezuela amounted to 2.9% of our consolidated cash and investments.

 

6


 

Table of Contents

 

MercadoLibre, Inc.

Notes to Interim Condensed Consolidated Financial Statements (unaudited)

 

The Company’s ability to obtain U.S. dollars in Venezuela is negatively affected by the exchange regulations in Venezuela that are described above and elsewhere in these interim condensed consolidated financial statements. In addition, its business and ability to obtain U.S. dollars in Venezuela would be negatively affected by additional material devaluations or the imposition of significant additional and more stringent controls on foreign currency exchange by the Venezuelan government.

Despite the current difficult macroeconomic environment in Venezuela, the Company continues to actively manage, through its Venezuelan subsidiaries, its investment in Venezuela.

Income and asset taxes

The Company is subject to U.S. and foreign income taxes. The Company accounts for income taxes following the liability method of accounting which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Deferred tax assets are also recognized for tax loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets or liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded when, based on the available evidence, it is more likely than not that all or a portion of the Company’s deferred tax assets will not be realized. The Company’s income tax expense consists of taxes currently payable, if any, plus the change during the period in the Company’s deferred tax assets and liabilities.

On August 17, 2011, the Argentine government issued a new software development law and on September 9, 2013 the regulatory decree was issued, which established the new requirement to become beneficiary of the new software development law. The decree establishes compliance requirements with annual incremental ratios related to exports of services and research and development expenses that must be achieved to remain within the tax holiday. The Company’s Argentine subsidiary   has to achieve certain required ratios annually under the software developm ent law in order to be eligible for the benefits mentioned below.

On September 17, 2015, the Argentine Industry Secretary issued Resolution 1041/2015 approving the Company’s application for eligibility under the new software development law for the Company’s Argentinean subsidiary, Mercadolibre S.R.L. Furthermore, on September 18, 2016, the Argentine Industry Secretary issued Resolutions 93/2016 and 97/2016 approving the Company’s application for eligibility under the new software development law for the Company’s Argentinean subsidiaries, Neosur S.RL. and Business Vision S.A. As a result, the Company’s Argentinean subsidiaries have been granted a tax holiday retroactive from September 18, 2014. A portion of the benefits obtained as beneficiaries of the new law is a relief of  60%  of total income tax related to software development activities and a  70%  relief in payroll taxes related to software development activities.

The benefits to the Company under the software development law will expire on December 31, 2019. As a result of the Company’s eligibility under the new law, it recorded an income tax benefit of $5,097 thousands and $ 4,342 thousands during the three-month periods ended March 31, 2017 and 2016 , respectively. Furthermore, the Company recorded a labor cost benefit of $1,991 thousands and $957 thousands during the three-month periods ended March 31, 2017 and 2016, respectively . Additionally, $496  t housands and  $372 thousands were accrued to pay software development law audit fees during the first quarter of 2017 and 2016 , respectively. Aggregate per share effect of the Argentine tax holiday amounted to $0.12   and   $0.12 for the three-month periods ended March 31, 2017 and 2016, respectively.

As of March 31, 2017 and December 31, 2016 , the Company had included under non-current deferred tax assets the foreign tax credit s related to the dividend distributions received from its subsidiaries for a total amount of $13,512 thousands and $13,515 thousands, respectively. Those foreign tax credits will be used to offset the future domestic income tax payable.

Accumulated other comprehensive loss

The following table sets forth the Co mpany’s accumulated other comprehensive loss as of March 31, 2017 and the year ended December 31, 201 6 :







 

 

 

 



 

March 31,

 

December 31,



 

2017

 

2016



 

(In thousands)

Accumulated other comprehensive loss:

 

 

 

 

Foreign currency translation

 

$                    (249,561)

 

$             (259,226)

Unrealized gains (losses) on investments

 

1,857 

 

(909)

Estimated tax (loss) gain on unrealized gains (losses) on investments

 

(613)

 

322 



 

$                    (248,317)

 

$             (259,813)

 

7


 

Table of Contents

 

MercadoLibre, Inc.

Notes to Interim Condensed Consolidated Financial Statements (unaudited)

 



The following tables summarize the changes in accumulated balances of other comprehensive loss for the three -month period ended March 31, 2017 :







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

Unrealized

 

Foreign

 

Estimated tax

 

 

 



 

(Losses) Gains on

 

Currency

 

(expense)

 

 

 



 

Investments

 

Translation

 

benefit

 

Total

 



 

(In thousands)

Balances as of December 31, 2016

 

$                          (909)

 

$             (259,226)

 

$                    322

 

$           (259,813)

 

Other comprehensive loss before reclassifications adjustments for gains (losses) on available for sale investments

 

1,857 

 

9,665 

 

(613)

 

10,909 

 

Amount of gain (loss) reclassified from accumulated other comprehensive loss

 

909 

 

 —

 

(322)

 

587 

 

Net current period other comprehensive income gain (loss)

 

2,766 

 

9,665 

 

(935)

 

11,496 

 

Ending balance

 

$                         1,857

 

$             (249,561)

 

$                  (613)

 

$           (248,317)

 



 





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

Amount of (Loss) Gain

 

 

 

 

 

 



 

Reclassified from

 

 

 

 

 

 

Details about Accumulated

 

Accumulated Other

 

 

 

 

 

 

Other Comprehensive Loss

 

Comprehensive

 

Affected Line Item

Components

 

Loss

 

in the Statement of Income



 

(In thousands)

 

 

 

 

 

 

Unrealized losses on investments

 

$                          (909)

 

Interest expense and other financial losses

Estimated tax gain on unrealized losses on investments

 

322 

 

Income tax gain

Total reclassifications for the year

 

$                          (587)

 

Total, net of income taxes



Use of estimates

The preparation of interim condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are used for, but not limited to accounting for allowance for doubtful accounts and chargeback provisions, recoverability of goodwill and intangible assets with indefinite useful life, useful life of long-lived assets and intangible assets, impairment of short-term and long-term investments, impairment of long-lived assets, compensation costs relating to the Company’s long term retention plan, fair value of convertible debt note, recognition of income taxes and contingencies. Actual results could differ from those estimates.

Recently issued accounting pronouncements

In 2014, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance related to revenue recognition. This new standard will replace all current GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition guidance provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. In 2016, the FASB issued several amendments to the standard, including principal versus agent considerations when another party is involved in providing goods or services to a customer and the application of identifying performance obligations. As the Company evaluates the expected impact of this ASU, the more significant changes that the Company identified in the new standard as compared with the prior standard relates to the timing and the amount of revenue to be recognized. The Company continues assessing all potential impacts that this standard, and related amendments and interpretive guidance, will have on its consolidated financial statements. The standard is required to be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application. The Company has not yet selected its transition method. The Company will adopt the new revenue standard in its first quarter of 2018.

 

8


 

Table of Contents

 

MercadoLibre, Inc.

Notes to Interim Condensed Consolidated Financial Statements (unaudited)

 

On   February   25, 2016 the FASB issued ASU 2016-02.   The   amendments in this update   create Topic 842, Leases, which supersedes Topic 840, Leases. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. Previous GAAP did not require lease assets and lease liabilities to be recognized for most leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. Topic 842 retains a distinction between finance leases and operating leases. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the previous leases guidance. The result of retaining a distinction between finance leases and operating leases is that under the lessee accounting model in Topic 842, the effect of leases in the statement of comprehensive income and the statement of cash flows is largely unchanged from previous GAAP. Based on existing leases currently classified as operating leases, the Company expects to recognize on the statements of financial position right-of-use assets and lease liabi lities. The amendments in this u pdate are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is assessing the effects that the adoption of this accounting pronouncement may have on the Company’s financial statements.

On June 16, 2016 the FASB issued ASU 2016-13 “Financial Instruments-Credit Losses (Topic 326): Measurement of credit losses on financial instruments”. This update amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, this update eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP, however this topic will require that credit losses be presented as an allowance rather than as a write-down. The new standard is effective for fiscal years beginning after December 15, 2019. The Company is assessing the effects that the adoption of this accounting pronouncement may have on its financial statements. 

On October 24, 2016 the FASB issued “ASU 2016-16—Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory”. This update eliminates the prohibition on recognizing current and deferred income tax consequences for an intra-entity asset transfer until the asset or assets have been sold to an outside party. Consequently, this update requires recognition of the current and deferred income tax consequences of an intra-entity asset transfer when the transfer occurs. The new standard is effective for fiscal years beginning after December 15, 2017. The Company is assessing the effects that the adoption of this accounting pronouncement may have on its financial statements.

On January 5, 2017 the FASB issued “ASU 2017-01—Business combinations (Topic 805): Clarifying the definition of a business”. The amendments in this update clarify the definition of a business with the objective of adding guidance to the evaluation of whether transactions should be accounted for as acquisitions (or disposals) of businesses. The amendments in this update provide a criteria to determine when a set of assets and activities is a business. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The adoption of this standard is not expected to have a material impact on the Company´s financial statements.

On February 22, 2017 the FASB issued “ASU 2017-05—Other Income— Gains and losses from the derecognition of nonfinancial assets (Subtopic 610-20): Clarifying the scope of asset derecognition guidance and accounting for partial sales of nonfinancial assets ”. The amendments in this update clarify that a financial asset is within the scope of Subtopic 610-20 if it meets the definition of an “in substance nonfinancial asset” which can include financial assets. Also, t his update eliminates several accounting differences between transactions involving assets and transactions involving businesses. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company is assessing the effects that the adoption of this accounting pronouncement may have on its financial statements. 

 

 

9


 

Table of Contents

 

MercadoLibre, Inc.

Notes to Interim Condensed Consolidated Financial Statements (unaudited)

 



3. Net income per share

Basic earnings per share for the Company’s common stock is computed by dividing, net income available to common shareholders attributable to common stock for the period by the weighted average number of common shares outstanding during the period.

On June 30, 2014, the Company issued 2.25% Convertible Senior Notes due 2019 ( see Note 9 of these interim condensed consolidated financial statements for discussion regarding these debt notes). The conversion of these debt notes are included in the calculation for diluted earnings per share utilizing the “if converted” method . T he effect of that conversion is not assumed for purposes of computing diluted earnings per share if the effect is antidilutive.

The denominator for diluted net income per share for the three-month periods ended   March 31, 2017 and 2016 does not include any effect from the capped call   issued in connection with the notes because it would be antidilutive. In the event of conversion of any or all of the Notes, the shares that would be delivered to the Company under the   Note hedges are designed to partially neutralize the dilutive effect of the shares that the Company would issue under the Notes.

For the period ended March 31, 2017 and 2016, the effects on diluted earnings per share were antidilutive and, as a consequence, they were not computed for diluted earnings per share.

Net income per share of common stock is as follows for the three-month periods ended March 31, 2017 and 2016:







 

 

 

 

 

 

 

 



 

Three Months Ended March 31,



 

2017

 

2016



 

(In thousands)



 

Basic

 

Diluted

 

Basic

 

Diluted

Net income per common share

 

$                       1.10

 

$                         1.10

 

$                        0.68

 

$                         0.68



 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

Net income

 

$                   48,518

 

$                     48,518

 

$                    30,247

 

$                     30,247



 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

Weighted average of common stock outstanding for Basic  earnings per share

 

44,157,364 

 

 

 

44,156,961 

 

 

Adjusted weighted average of common stock outstanding  for Diluted earnings per share

 

 

 

44,157,364 

 

 

 

44,156,961 



For the three-month periods ended March 31, 2017 and 2016 there was no impact on the calculation of diluted earnings per share as a consequence of the consideration of the Convertible Notes referred to above calculated using the “if converted” method.

 

4. G oodwill and intangible assets

Goodwill and intangible assets

The composition of goodwill and intangible assets is as follows:







 

 

 

 



 

March 31,

 

December 31,



 

2017

 

2016



 

(In thousands)

Goodwill

 

$                  95,849

 

$                  91,797

Intangible assets with indefinite lives

 

 

 

 

- Trademarks

 

13,170 

 

12,490 

Amortizable intangible assets

 

 

 

 

- Licenses and others

 

7,334 

 

8,738 

- Non-compete agreement

 

1,800 

 

1,787 

- Customer list

 

14,845 

 

14,580 

- Trademarks

 

1,051 

 

993 

Total intangible assets

 

$                  38,200

 

$                  38,588

Accumulated amortization

 

(11,973)

 

(12,311)

Total intangible assets, net

 

$                  26,227

 

$                  26,277

 

10


 

Table of Contents

 

MercadoLibre, Inc.

Notes to Interim Condensed Consolidated Financial Statements (unaudited)

 



Goodwill

The changes in the carrying amount of goodwill for the three -month period s ended March 31, 2017 and the year ended December 31, 2016 are as follows:







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Period ended March 31, 2017



 

Brazil

 

Argentina

 

Chile

 

Mexico

 

Venezuela

 

Colombia

 

Other Countries

 

Total



 

(In thousands)

Balance, beginning of the period

 

 

$           27,660 

 

 

$                6,587 

 

 

$              17,388 

 

 

$                  29,342 

 

 

$                5,989 

 

 

$                3,643 

 

 

$                1,188 

 

 

$                91,797 

- Effect of exchange rates changes

 

749 

 

311 

 

137 

 

2,485 

 

 —

 

148 

 

222 

 

4,052 

Balance, end of the period

 

 

$           28,409 

 

 

$                6,898 

 

 

$              17,525 

 

 

$                  31,827 

 

 

$                5,989 

 

 

$                3,791 

 

 

$                1,410 

 

 

$                95,849 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Year ended December 31, 2016



 

Brazil

 

Argentina

 

Chile

 

Mexico

 

Venezuela

 

Colombia

 

Other Countries

 

Total



 

(In thousands)

Balance, beginning of year

 

$             18,526 

 

$               7,430 

 

$             16,438 

 

$             33,834 

 

$                  5,729 

 

$                   3,437 

 

$               1,151 

 

$             86,545 

- Business acquisition

 

5,635 

 

700 

 

 —

 

190 

 

260 

 

57 

 

32 

 

6,874 

- Effect of exchange rates changes

 

3,499 

 

(1,543)

 

950 

 

(4,682)

 

 —

 

149 

 

 

(1,622)

Balance, end of the year

 

$             27,660 

 

$               6,587 

 

$             17,388 

 

$             29,342 

 

$                  5,989 

 

$                   3,643 

 

$               1,188 

 

$             91,797 



Intangible assets with definite useful life

Intangible assets with definite useful life are comprised of customer lists , non-compete and non- solicitation agreements , acquired software licenses, other acquired intangible assets including developed technologies and trademarks . Aggregate amortization expense for intangible assets totaled   $1,341   thousands and   $814   thousands for the three-month periods ended March 31, 2017 and 2016, respectively.

The following table summarizes the remaining amortization of intangible assets (in thousands of U.S. dollars) with definite useful life as of March 31, 2017 :







 

 

 

 

 

 

For year ended 12/31/2017

 

 

 

 

 

$              2,982

For year ended 12/31/2018

 

 

 

 

 

3,263 

For year ended 12/31/2019

 

 

 

 

 

2,474 

For year ended 12/31/2020

 

 

 

 

 

1,315 

Thereafter

 

 

 

 

 

3,023 



 

 

 

 

 

$            13,057



 

5. Segment reporting

Reporting segments are based upon the Company’s internal organizational structure, the manner in which the Company’s operations are managed and resources are assigned , the criteria used by management to evaluate the Company’s performance, the availability of separate financial information, and overall materiality considerations.

Segment reporting is based on geography as the main basis of segment breakdown to reflect the evaluation of the Company’s performance defined by the management. The Company’s segments include Brazil, Argentina, Mexico, Venezuela and other countries (such as Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Panama, Honduras, Nicaragua, Salvador, Bolivia, Guatemala, Paraguay, Peru, Portugal, Uruguay and USA).

 

11


 

Table of Contents

 

MercadoLibre, Inc.

Notes to Interim Condensed Consolidated Financial Statements (unaudited)

 

Direct contribution consists of net revenues from external cus tomers less direct costs . Direct costs include costs of net revenues, p roduct and technology development expenses ,   sales and marketing expenses, and general and administrative expenses over which segment managers have direct discretionary control, such as advertising and marketing programs, customer support expenses, allowances for doubtful accounts, payroll and third party fees. All corporate related costs have been excluded from the Company’s direct contribution.

Expenses over which segment managers do not currently have discretionary control, such as certain technology and general and administrative costs are monitored by management through shared cost centers and are not evaluated in the measurement of segment performance.

The following tables summarize the financial performance of the Company’s reporting segments:









 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended March 31, 2017



 

Brazil

 

Argentina

 

Mexico

 

Venezuela

 

Other Countries

 

Total



 

(In thousands)

Net revenues

 

$                    159,781 

 

$                      71,392 

 

$                   15,536 

 

$                   14,397 

 

$                   12,820 

 

$                        273,926 

Direct costs

 

(87,037)

 

(45,066)

 

(16,841)

 

(6,551)

 

(9,739)

 

(165,234)

Direct contribution

 

72,744 

 

26,326 

 

(1,305)

 

7,846 

 

3,081 

 

108,692 



 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses and indirect costs of net revenues

 

 

 

 

 

 

 

 

 

(45,378)

Income from operations

 

 

 

 

 

 

 

 

 

 

 

63,314 



 

 

 

 

 

 

 

 

 

 

 

 

Other income (expenses):

 

 

 

 

 

 

 

 

 

 

 

 

  Interest income and other financial gains

 

 

 

 

 

 

 

 

 

12,157 

  Interest expense and other financial losses

 

 

 

 

 

 

 

 

 

(6,471)

Foreign currency gains

 

 

 

 

 

 

 

 

 

 

 

663 

Net income before income tax expense

 

 

 

 

 

 

 

 

 

$                          69,663 

 





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended March 31, 2016



 

Brazil

 

Argentina

 

Mexico

 

Venezuela

 

Other Countries

 

Total



 

(In thousands)

Net revenues

 

$77,535 

 

$48,201 

 

$11,116 

 

$12,105 

 

$8,673 

 

$157,630 

Direct costs

 

(50,287)

 

(27,757)

 

(9,438)

 

(5,134)

 

(6,201)

 

(98,817)

Direct contribution

 

27,248 

 

20,444 

 

1,678 

 

6,971 

 

2,472 

 

58,813 



 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses and indirect costs of net revenues

 

 

 

 

 

 

 

 

 

(28,324)

Income from operations

 

 

 

 

 

 

 

 

 

 

 

30,489 



 

 

 

 

 

 

 

 

 

 

 

 

Other income (expenses):

 

 

 

 

 

 

 

 

 

 

 

 

  Interest income and other financial gains

 

 

 

 

 

 

 

 

 

7,251 

  Interest expense and other financial losses

 

 

 

 

 

 

 

 

 

(5,684)

Foreign currency gains

 

 

 

 

 

 

 

 

 

 

 

5,147 

Net income before income tax expense

 

 

 

 

 

 

 

 

 

$37,203 











The following table summarizes the allocation of property and equipment, net based on geography:









 

 

 

 



 

March 31,

 

December 31,



 

2017

 

2016



 

(In thousands)

US property and equipment, net

 

$                    9,764

 

$                    9,771

Other countries

 

 

 

 

Argentina

 

27,237 

 

25,071 

Brazil

 

60,536 

 

55,706 

Mexico

 

2,873 

 

2,307 

Venezuela

 

21,813 

 

21,615 

Other countries

 

9,745 

 

9,791 



 

$                122,204

 

$                114,490

Total property and equipment, net

 

$                131,968

 

$                124,261

 

12


 

Table of Contents

 

MercadoLibre, Inc.

Notes to Interim Condensed Consolidated Financial Statements (unaudited)

 

 

The following table summarizes the allocation of the goodwill and intangible assets based on geography:











 

 

 

 



 

March 31,

 

December 31,



 

2017

 

2016



 

(In thousands)

US intangible assets

 

$                      205

 

$                      250

Other countries goodwill and intangible assets

 

 

 

 

Argentina

 

7,864 

 

7,717 

Brazil

 

31,761 

 

31,170 

Mexico

 

41,871 

 

38,860 

Venezuela

 

7,332 

 

7,366 

Other countries

 

33,043 

 

32,711 



 

$               121,871

 

$               117,824

Total goodwill and intangible assets

 

$               122,076

 

$               118,074



Consolidated net revenues by similar prod ucts and services for the three-month periods ended   March 31, 2017 and 2016   were as follows:







 

 

 

 

 

 



 

Three-months Ended March 31,

 



 

 

 

 

 

 

Consolidated Net Revenues

 

2017

 

 

2016

 



 

(In thousands)

 

Marketplace

 

$                158,466

 

 

$                  94,098

 

Non-marketplace (*)

 

115,460 

 

 

63,532 

 

Total

 

$                273,926

 

 

$                157,630

 



(*)  Includes, among other things, Ad Sales, Real Estate, Motors, Financing Fees, Off-platform Payment Fees, Shipping and other ancillary services.



 



 

13


 

Table of Contents

 

MercadoLibre, Inc.

Notes to Interim Condensed Consolidated Financial Statements (unaudited)

 

6. Fair value measurement of assets and liabilities

The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2017 and December 31, 201 6 :









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

Quoted Prices in

 

 

 

 

 

 

 

Quoted Prices in

 

 

 

 



 

Balances as of

 

active markets for

 

Significant other

 

Unobservable

 

Balances as of

 

active markets for

 

Significant other

 

Unobservable



 

March 31,

 

identical Assets

 

observable inputs

 

inputs

 

December 31,

 

identical Assets

 

observable inputs

 

inputs

Description

 

2017

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

2016

 

(Level 1)

 

(Level 2)

 

(Level 3)



 

(In thousands)

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and Cash Equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money Market Funds

 

$            140,641 

 

$                  140,641 

 

$                       — 

 

$                    — 

 

$         111,198 

 

$              111,198 

 

$                 — 

 

$               — 

Corporate Debt Securities

 

7,289 

 

 —

 

7,289 

 

 —

 

 —

 

 —

 

 —

 

 —

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sovereign Debt Securities

 

$              47,030 

 

$                    47,030 

 

$                       — 

 

$                    — 

 

$           50,703 

 

$                50,703 

 

$                 — 

 

$               — 

Corporate Debt Securities

 

210,708 

 

118,148 

 

92,560 

 

 —

 

207,633 

 

61,986 

 

145,647 

 

 —

Certificates of deposit

 

33,376 

 

 —

 

33,376 

 

 —

 

35,374 

 

 —

 

35,374 

 

 —

Total Financial Assets

 

$            439,044 

 

$                  305,819 

 

$              133,225 

 

$                    — 

 

$         404,908 

 

$              223,887 

 

$        181,021 

 

$               — 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent considerations

 

$                3,156 

 

$                           — 

 

$                       — 

 

$               3,156 

 

$             4,213 

 

$                       — 

 

$                 — 

 

$          4,213 

Long-term retention plan

 

34,368 

 

 —

 

34,368 

 

 —

 

27,135 

 

 —

 

27,135 

 

 —

Total Financial Liabilities

 

$              37,524 

 

$                           — 

 

$                34,368 

 

$               3,156 

 

$           31,348 

 

$                       — 

 

$          27,135 

 

$          4,213 



As of March 31, 2017 and December 31, 2016, the Company’s financial assets valued at fair value consisted of assets valued using i) Level 1 inputs: unadjusted quoted prices in active markets (Level 1 instrument valuations are obtained from observable inputs that reflect quoted prices (unadjusted) for identical assets in active markets) and; ii) Level 2 inputs: obtained from readily-available pricing sources for comparable instruments as well as instruments with inactive markets at the measurement date.

As of March 31, 2017 and December 31, 2016 , the Company´s liabilities were valued at fair value using level 2 inputs and level 3 inputs (valuations based on unobservable inputs reflecting Company assumptions). Fair value of contingent considerations are determined based on the probability of achievement of the performance targets arising from each acquisition, as well as the Company’s historical experience with similar arrangements. For the three-month period ended March 31, 2017, the Company recognized in earnings a loss of $73 thousands and a gains of $85 thousands within other comprehensive   income, in relation with contingent considerations. In addition, during the three-month period ended March 31, 2017, the Company settled contingent considerations for an amount of $1,215 thousands.

The unrealized net gains or loss on short term and long term investments are reported as a component of other comprehensive income. The Company does not anticipate any significant realized losses associated with those investments in excess of the Company’s historical cost.

As of March 31, 2017 and December 31, 2016, the carrying value of the Company’s financial assets and liabilities measured at amortized cost approximated their fair value mainly because of its short term maturity. These assets and liabilities included cash, cash equivalents and short-term investments (excluding money markets funds and corporate debt security), accounts receivable, credit cards receivable, loans receivable, funds payable to customers, other assets, accounts payable, salaries and social security payable (excluding variable LTRP), taxes payable, provisions and other liabilities (excluding contingent consideration). The convertible senior notes (liability component), the rest of the loans payable and other financial liabilities approximate their fair value because the interest rates are not materially different from market interest rates .  

 

14


 

Table of Contents

 

MercadoLibre, Inc.

Notes to Interim Condensed Consolidated Financial Statements (unaudited)

 

The following table summarizes the fair value level for those financial assets and liabilities of the Company measured at amortized cost as of March 31, 2017 and December 31, 2016 :







 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

Balances as of

 

Significant other

 

Balances as of

 

Significant other

 

 



 

March 31,

 

observable inputs

 

December 31,

 

observable inputs

 

 



 

2017

 

(Level 2)

 

2016

 

(Level 2)

 

 



 

(In thousands)

 

 

Assets

 

 

 

 

 

 

 

 

 

 

Time Deposits

 

$        144,082

 

$144,082 

 

$          113,414

 

$        113,414

 

 

Accounts receivable

 

24,097 

 

24,097 

 

25,435 

 

25,435 

 

 

Credit Cards receivable

 

300,612 

 

300,612 

 

307,904 

 

307,904 

 

 

Loans receivable, net

 

11,380 

 

11,380 

 

6,283 

 

6,283 

 

 

Other assets

 

66,035 

 

66,035 

 

58,900 

 

58,900 

 

 

Total Assets

 

$        546,206

 

$                546,206

 

$          511,936

 

$        511,936

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$        108,507

 

$                108,507

 

$          105,106

 

$        105,106

 

 

Funds payable to customers

 

396,487 

 

396,487 

 

370,693 

 

370,693 

 

 

Salaries and social security payable

 

51,472 

 

51,472 

 

37,936 

 

37,936 

 

 

Taxes payable

 

30,668 

 

30,668 

 

27,338 

 

27,338 

 

 

Dividends payable

 

6,624 

 

6,624 

 

6,624 

 

6,624 

 

 

Loans payable and other financial liabilities (*)

 

320,964 

 

320,964 

 

313,523 

 

313,523 

 

 

Other liabilities

 

12,326 

 

12,326 

 

11,954 

 

11,954 

 

 

Total Liabilities

 

$        927,048

 

$                927,048

 

$          873,174

 

$        873,174

 

 





(*) The fair value of the convertible senior notes (including the equity component) is disclosed in Note 9.



As of March 31, 2017 and December 31, 2016 , the Company held no direct investments in auction rate securities, collateralized debt obligations or structured investment vehicles , and does not have any non-financial assets or liabilities measured at fair value .

 

15


 

Table of Contents

 

MercadoLibre, Inc.

Notes to Interim Condensed Consolidated Financial Statements (unaudited)

 

As of March 31, 2017 and December 31, 2016 , the fair value of money market funds, short and long-term investments classified as available for sale securities are as follows:







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

March 31, 2017



 

Cost

 

Gross Unrealized Gains (1)

 

Gross Unrealized Losses (1)

 

Estimated Fair Value



 

 

 

 

 

 

 

 



 

(In thousands)

Cash and cash equivalents

 

 

 

 

 

 

 

 

Money Market Funds

 

$          140,641

 

$                   —

 

$                   —

 

$              140,641

Corporate Debt Securities

 

7,291 

 

 

(3)

 

7,289 

Total Cash and cash equivalents

 

$          147,932

 

$                     1

 

$                    (3)

 

$              147,930



 

 

 

 

 

 

 

 

Short-term investments

 

 

 

 

 

 

 

 

Sovereign Debt Securities

 

$              1,096

 

$                   —

 

$                    (3)

 

$                  1,093

Corporate Debt Securities

 

89,723 

 

36 

 

(139)

 

89,620 

Certificates of deposit

 

30,339 

 

36 

 

(5)

 

30,370 

Total Short-term investments

 

$          121,158

 

$                   72

 

$                (147)

 

$              121,083



 

 

 

 

 

 

 

 

Long-term investments

 

 

 

 

 

 

 

 

Sovereign Debt Securities

 

$            46,236

 

$                   —

 

$                (299)

 

$                45,937

Corporate Debt Securities

 

121,217 

 

156 

 

(285)

 

121,088 

Certificates of deposit

 

3,007 

 

 

(2)

 

3,006 

Total Long-term investments

 

$          170,460

 

$                 157

 

$                (586)

 

$              170,031



 

 

 

 

 

 

 

 

Total

 

$          439,550

 

$                 230

 

$                (736)

 

$              439,044









 

 

 

 

 

 

 



December 31, 2016



Cost

 

Gross Unrealized Gains (1)

 

Gross Unrealized Losses (1)

 

Estimated Fair Value



 

 

 

 

 

 

 



(In thousands)

Cash and cash equivalents

 

 

 

 

 

 

 

Money Market Funds

$           111,198

 

$                —

 

$                —

 

$           111,198

Total Cash and cash equivalents

$           111,198

 

$                —

 

$                —

 

$           111,198



 

 

 

 

 

 

 

Short-term investments

 

 

 

 

 

 

 

Sovereign Debt Securities

$               2,166

 

$                —

 

$                —

 

$               2,166

Corporate Debt Securities

102,509 

 

26 

 

(168)

 

102,367 

Certificates of deposit

35,336 

 

40 

 

(2)

 

35,374 

Total Short-term investments

$           140,011

 

$                66

 

$              (170)

 

$           139,907



 

 

 

 

 

 

 

Long-term investments

 

 

 

 

 

 

 

Sovereign Debt Securities

$             48,943

 

$                —

 

$              (406)

 

$             48,537

Corporate Debt Securities

105,632 

 

90 

 

(456)

 

105,266 

Total Long-term investments

$           154,575

 

$                90

 

$              (862)

 

$           153,803



 

 

 

 

 

 

 

Total

$           405,784

 

$              156

 

$           (1,032)

 

$           404,908



(1)

Unrealized gains (losses) from securities are attributable to market price movements, net foreign exchange losses and foreign currency translation. Management does not believe any remaining significant unrealized losses represent other-than-temporary impairments based on the evaluation of available evidence including the credit rating of the investments, as of March 31, 2017 and December 31, 2016.

 

16


 

Table of Contents

 

MercadoLibre, Inc.

Notes to Interim Condensed Consolidated Financial Statements (unaudited)

 



The material portion of the Sovereign Debt Securities is U.S. Treasury Notes with no significant risk associated.

As of March 31, 2017 , the estimated fair values (in thousands of U.S. dollars) of cash equivalents , short-term and long-term investments classified by its effective maturities are as follows:







 

 

One year or less

$

269,013 

One year to two years

 

75,912 

Two years to three years

 

72,968 

Three years to four years

 

14,130 

Four years to five years

 

7,021 

Total

$

439,044 



 

7. Commitments and Contingencies

Litigation and Other Legal Matters

The Company is subject to certain contingent liabilities with respect to existing or potential claims, lawsuits and other proceedings. The Company accrues liabilities when it considers probable that future costs will be incurred and such costs can be reasonably estimated. The proceeding-related reserve is based on developments to date and historical information related to actions filed against the Company. As of March 31, 2017, the Company had established reserves for proceeding-related contingencies and other estimated contingencies of $6,044 thousands to cover legal actions against the Company in which its Management has assessed the likelihood of a final adverse outcome as probable. Expected legal costs related to litigations are accrued when the legal service is actually provided . In addition, as of March 31, 2017 the Company and its subsidiaries are subject to certain legal actions considered by the Company’s management and its legal counsels to be reasonably possible for an aggregate amount up to $4,875 thousands.

No loss amount has been accrued for such reasonably possible legal actions of which most significant (individually or in the aggregate) are described below.

As of March 31, 2017, there were 53 lawsuits pending against our Argentine subsidiary in the Argentine ordinary courts and  1,785 pending claims  in the Argentine Consumer Protection Agencies, where a lawyer is not required to file or pursue a claim.

As of March 31, 2017, there were 9 claims pending against our Mexican subsidiaries in the Mexican ordinary courts and 109 claims pending against our Mexican subsidiaries in the Mexican Consumer Protection Agencies, where a lawyer is not required to file or pursue a claim.

As of March 31, 2017, 678 legal actions were pending in the Brazilian ordinary courts. In addition, as of March 31, 2017, there were 3,357   cases still pending in Brazilian consumer courts. Filing and pursuing of an action before Brazilian consumer courts do not require the assistance of a lawyer.

In mo st of the cases filed against the Company, the plaintiffs asserted that the Company was responsible for fraud committed against them, or responsible for damages suffered when purchasing an item on the Company’s website, when using MercadoPago, or when the Company invoiced them.

Other third parties have from time to time claimed, and others may claim in the future, that the Company was responsible for fraud committed against them, or that the Company has infringed their intellectual property rights. The underlying laws with respect to the potential liability of online intermediaries like the Company are unclear in the jurisdictions where the Company operates. Management believes that additional lawsuits alleging that the Company has violated copyright or trademark laws will be filed against the Company in the future.

Intellectual property and regulatory claims, whether meritorious or not, are time consuming and costly to resolve, require significant amounts of management time, could require expensive changes in the Company’s methods of doing business, or could require the Company to enter into costly royalty or licensing agreements. The Company may be subject to patent disputes, and be subject to patent infringement claims as the Company’s services expand in scope and complexity. In particular, the Company may face additional patent infringement claims involving various aspects of the payments businesses.

 

17


 

Table of Contents

 

MercadoLibre, Inc.

Notes to Interim Condensed Consolidated Financial Statements (unaudited)

 

From time to time, the Company is involved in other disputes or regulatory inquiries that arise in the ordinary course of business. The number and significance of these disputes and inquiries are increasing as the Company’s business expands and the Company grows larger.

As of March 31, 2017, there have been no significant changes in litigation and other legal matters since the year ended December 31, 2016 and disclosed in our   Annual Report on Form 10-K for the fiscal year ended December 31, 2016.



 

8. Long term retention plan (“LTRP”)

On April 3, 2017, the Board of Directors, upon the recommendation of the Compensation Committee, adopted the 2017 Long-Term Retention Plan (“2017 LTRP”). In addition to the annual salary and bonus of each employee , certain employees (“Eligible Employees”) are eligible to participate in the 2017 LTRP, which provides for the grant to an eligible employee of a cash-settled fixed (a “2017 LTRP Fixed Award”) and a cash-settled variable award, (a “2017 LTRP Variable Award”, and together with any 2017 LTRP Fixed Award, the “2017 LTRP Awards”). Each eligible employee will be granted both a 2017 LTRP Fixed Award and a 2017 LTRP Variable Award, in addition to receiving their annual salary and bonus. In order to receive payment in respect of the 2017 LTRP Awards, each eligible employee must satisfy the performance conditions established by the Board of Directors for such employee. If these conditions are satisfied, the eligible employee will, subject to his or her continued employment as of each applicable payment date, receive the full amount of his or her 2017 LTRP Awards, payable as follows:

·

2017 LTRP Fixed Award: The eligible employee will receive a fixed payment equal to  16.66%  of his or her 2017 Fixed Award once a year for a period of  six  years starting i n March 2018 (the “Annual Fixed Payment”); and

·

2017   LTRP Variable Award: On each date the Company pays the Annual Fixed Payment to the eligible employee, he or she will also receive a 2017 LTRP Variable Award payment equal to the product of (i) 16.66% of the applicable 2017 LTRP Variable Award and (ii) the quotient of (a) divided by (b), where (a), the numerator, equals the Applicable Year Stock Price (as defined below) and (b), the denominator, equals the 2016 Stock Price (as defined below). For purposes of the 2017 LTRP, the “2016 Stock Price” shall equal $164.17 (the average closing price of the Company´s common stock on the NASDAQ Global Market during the final 60-trading days of 2016) and the “Applicable Year Stock Price” shall equal the average closing price of the Company´s common stock on the NASDAQ Global Market during the final 60-trading days of the year preceding the applicable payment date for so long as the Company´s common stock is listed on the NASDAQ.

The following table summarizes the 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016 and 2017 long term retention plan accrued compensation expense for the three-month periods ended March 31, 2017 and 2016 , which are payable in cash according to the decision s made by the Board of Directors:





 

 

 

 

 

 

 



 

 

Three Months Ended March 31,

 



 

 

2017

 

 

2016

 



 

 

(In thousands)

 

LTRP 2009

 

$

42 

 

$

33 

 

LTRP 2010

 

 

327 

 

 

62 

 

LTRP 2011

 

 

489 

 

 

96 

 

LTRP 2012

 

 

648 

 

 

130 

 

LTRP 2013

 

 

1,296 

 

 

413 

 

LTRP 2014

 

 

1,264 

 

 

505 

 

LTRP 2015

 

 

1,586 

 

 

893 

 

LTRP 2016

 

 

2,240 

 

 

 -

 

LTRP 2017

 

 

1,283 

 

 

 -

 

Total LTRP

 

$

9,175 

 

$

2,132 

 









 

 

18


 

Table of Contents

 

MercadoLibre, Inc.

Notes to Interim Condensed Consolidated Financial Statements (unaudited)

 

9. 2.25% Convertible Senior Notes Due 2019

On June 30, 2014, the Company issued  $330  million of  2.25%  convertible senior notes due 2019 (the “Notes”). The Notes are unsecured, unsubordinated obligations of the Company, which pay interest in cash semi-annually, on January 1 and July 1, at a rate of 2.25% per annum. The Notes will mature on  July 1, 2019  unless earlier repurchased or converted in accordance with their terms prior to such date. The Notes may be converted, under specific conditions, based on an initial conversion rate of  7.9353  shares of common stock per  $1,000  principal amount of Notes (equivalent to an initial conversion price of  $126.02  per share of common stock), subject to adjustment as described in the indenture governing the Notes. 

Holders may convert their notes at their option at any time prior to January 1, 2019 only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on September 30, 2014 (and only during such calendar quarter), if the last reported sale price of the common stock for at least  20  trading days (whether or not consecutive) during a period of  30  consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to  130%  of the conversion price on each applicable trading day; (2) during the  five  business day period after any  five  consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than  98%  of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events. On or after January 1, 2019 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their notes at any time, regardless of the foregoing circumstances. 

During the period from October 1, 2016 through December 31, 2016, 12 Notes were converted for a total amount of $12 thousands. During the first quarter of 2017, the conversion threshold had been met and the Notes became convertible at the holders’ option beginning on April 1, 2017 and ending on June 30, 2017 . The determination of whether or not the Notes are convertible must continue to be performed on a quarterly basis. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election. The intention of the Company is to share-settle the total amount due upon conversion of the Notes.

From April 1, 2017 to the date of issuance of these interim condensed consolidated financial statements, none of the holders had requested additional conversion of the Notes.

The total estimated fair value of the Notes was   $577.6 million   and   $458.8 million   as of March 31, 2017 and December 31, 2016 , respectively. The fair value was determined based on the closing trading price per $100 of the Notes as of the last day of trading for the period. The Company considered the fair value of the Notes as of March 31, 2017 and December 31, 2016   to be a Level 2 measurement. The fair value of the Notes is primarily affected by the trading price of our common stock and market interest rates.   Based on the  $211.5  closing price of the Company’s common stock on March 31, 2017 , the if-converted value of the Notes exceeded their principal amount by  $223.8 million.

The following table presents the carrying amounts of the liability and equity components related to the 2.25% Convertible Senior Notes Due 2019 as of March 31, 2017 and December 31, 2016 :







 

 

 

 

 



March 31, 2017

 

December 31, 2016



(In thousands)

Amount of the equity component (1)

$

45,808 

 

$

45,808 



 

 

 

 

 

2.25% convertible senior notes due 2019

$

330,000 

 

$

330,000 

Unamortized debt discount (2)

 

(22,723)

 

 

(25,097)

Unamortized transaction costs related to the debt component

 

(3,605)

 

 

(3,968)

Contractual coupon interest accrual

 

1,856 

 

 

7,425 

Contractual coupon interest payment

 

 —

 

 

(7,425)

Net carrying amount

$

305,528 

 

$

300,935 



(1)

Net of $1,177 thousands of transaction costs related to the equity component of the Notes.

(2)

As of March 31, 2017 , the remaining period over which the unamortized debt discount will be amortized is 2.25 years.

 

 

19


 

Table of Contents

 

MercadoLibre, Inc.

Notes to Interim Condensed Consolidated Financial Statements (unaudited)

 

The following table presents the interest expense for the contractual interest, the accretion of debt discount and the amortization of debt issuance costs:







 

 

 

 

 



Three-month period ended March 31, 2017

 

Three-month period ended March 31, 2016



 

 

 

 

 



(In thousands)

 

(In thousands)

Contractual coupon interest expense

$

1,856 

 

$

1,856 

Amortization of debt discount

 

2,374 

 

 

2,248 

Amortization of debt issuance costs

 

363 

 

 

327 

Total interest expense related to Notes

$

4,593 

 

$

4,431 



 

10. Cash Dividend Distribution

In each of February, May, August and November of 2016 , the Board of Directors approved a quarterly cash dividend of   $6,624   thousands (or   $0.150   per share) on the Company’s   outstanding   shares of common stock. The dividends were paid on   April 15 July 15 ,   October 14, 2016   and   January 16, 2017   to stockholders of record as of the close of business on   March 31 ,   June 30 September 30 , and   December 31, 2016 .

On March 2, 2017 , the B oard of D irectors approved a change to the Company’s dividend policy for providing for a fixed quarterly dividend payment in 2017 of $0.15 per share ( $0.60 per share annually). The new dividend policy will take effect following the payment of the $0.15 per share dividend declared by the Board of Directors of the Company payable on April 17, 2017 to shareholders of record as of the close of business on March 31, 2017 .  

On May 2, 2017, the Board of Directors approved a quarterly cash dividend of $6,624 thousands (or $0.150 per share) on the Company´s outstanding shares of common stock. The second quarterly dividend is   payable on July 14, 2017 to stockholders   of record as of the close of business on June 30, 2017.

 



 

 

20


 

It em 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement Regarding Forward-Looking Statements

Any statements   made or implied   in this report that are not statements of historical fact, including statements about our beliefs and expectations, are forward-looking statements within the meaning of Section 27   A of the Securities Exchange Act of 1933, as amended,   and Section 21E of the Securities Exchange Act of 1934, as amended, and should be evaluated as such. The words “anticipate,” “believe,” “expect,” “intend,” “plan,” “estimate,” “target,” “p roject,” “should,” “may,” “could,” “will” and similar words and expressions are intended to identify forward-looking statements. Forward-looking statements generally relate to information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities, future economic, political and social conditions in the countries in which we operate the effects of future regulation and the effects of competition. Such forward-looking statements reflect, among other things, our current expectations, plans, projections and strategies, anticipated financial results, future events and financial trends affecting our business, all of which are subject to known and unknown risks, uncertainties and other important factors (in addition to those discussed elsewhere in this report) that may cause our actual results to differ materially from those expressed or implied by these forward-looking statements. These risks and uncertainties include, among other things:

·

our expectations regarding the continued growth of online commerce and Internet usage in Latin America;

·

our ability to expand our operations and adapt to rapidly changing technologies;

·

government and central bank regulations;

·

litigation and legal liability;

·

systems interruptions or failures;

·

our ability to attract and retain qualified personnel;

·

consumer trends;

·

security breaches and illegal uses of our services;

·

competition ;

·

reliance on third-party service providers;

·

enforcement of intellectual property rights;

·

our ability to attract new customers, retain existing customers and increase revenues;

·

seasonal fluctuations; and

·

political, social and economic conditions in Latin America in general, and Venezuela in particular, and possible future currency devaluation and other changes to its exchange rate systems such as the “Sistema Marginal de Divisas” (“SIMADI”).

Many of these risks are beyond our ability to control or predict. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on our company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements .

These statements are based on currently available information and our current assumptions, expectations and projections about future events. While we believe that our assumptions, expectations and projections are reasonable in view of the currently available information, you are cautioned not to place undue reliance on our forward-looking statements. These statements are not guarantees of future performance. They are subject to future events, risks and uncertainties–many of which are beyond our control-as well as potentially inaccurate assumptions that could cause actual results to differ materially from our expectations and projections.   Some of the material risks and uncertainties that could cause actual results to differ materially from our expectations and projections are described in “Item 1A — Risk Factors” in Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016   filed with the Securities and Exchange Commission   (“SEC”)   on   February 24   , 2017, as updated by those described in “Item 1A — Risk Factors” in Part II of this report and in other reports we file from time to time with the SEC.

 

21


 

You should read that information in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2 of Part I of this report, our unaudited interim condensed consolidated financial statements and related notes in Item 1 of Part I of this report and our audited consolidated financial statements and related notes in Item 8 of Part II of our Annual Report on Form 10-K   for the year ended December 31, 201 6 . We note such information for investors as permitted by the Private Securities Litigation Reform Act of 1995. There also may be other factors that we cannot anticipate or that are not described in this report, generally because they are unknown to us or we do not perceive them to be a material risk that could cause results to differ m aterially from our expectations.

Forward-looking statements speak only as of the date they are made, and we do not undertake to update these forward-looking statements except as may be required by law. You are advised, however, to review any further disclosures we make on related subjects in our periodic filings with the SEC.

The discussion and analysis of our financial condition and results of operations presents the following:

·

a brief overview of our company;

·

a   discussion of our principal trends and results of operations for the three-month periods ended March 31, 2017 and 2016 ;

·

a   review of our financial presentation and accounting policies, including our critical accounting policies;

·

a   discussion of the principal factors that influence our results of operations, financial condition and liquidity;

·

a   discussion of our liquidity and capital resources and a discussion of our capital expenditures;

·

a description of our non-GAAP financial measures; and

·

a   discussion of the market risks that we face.

 

Business Overview

MercadoLibre, Inc. (together with its subsidiaries “us”, “we”, “our” or the “Company”) is one of the largest online commerce ecosystems in Latin America. Our platform is designed to provide users with a complete portfolio of services to facilitate commercial transactions. We are a market leader in e-commerce in each of Argentina, Brazil, Chile, Colombia, Costa Rica, Ecuador, Mexico, Peru, Uruguay and Venezuela, based on number of unique visitors and page views. We also operate online commerce platforms in the Dominican Republic, Honduras, Nicaragua, Salvador, Panama, Bolivia, Guatemala, Paraguay and Portugal.

Through our platform, we provide buyers and sellers with a robust environment that fosters the development of a large e-commerce community in Latin America, a region with a population of over 610 million people and one of the fastest-growing Internet penetration rates in the world. We believe that we offer technological and commercial solutions that address the distinctive cultural and geographic challenges of operating an online commerce platform in Latin America.

We offer our users an ecosystem of six integrated e-commerce services: the MercadoLibre Marketplace, the MercadoLibre Classifieds Service, the MercadoPago payments solution, the MercadoEnvios shipping service, the MercadoLibre advertising program and the MercadoShops online webstores solution.

The MercadoLibre Marketplace, which we sometimes refer to as our marketplace, is a fully-automated, topically-arranged and user-friendly online commerce service. This service permits both businesses and individuals to list merchandise and conduct sales and purchases online in either a fixed-price or auction-based format.

To complement the MercadoLibre Marketplace, we developed MercadoPago, an integrated online payments solution. MercadoPago is designed to facilitate transactions both on and off our marketplace by providing a mechanism that allows our users to securely, easily and promptly send and receive payments online. Mercado Pago is currently available in: Argentina, Brazil, Mexico, Colombia, Venezuela, Uruguay, Perú and Chile. MercadoPago allows merchants to facilitate checkout and payment processes on their websites and also enables users to simply transfer money to each other either through the website or using the MercadoPago App, available on iOS and Android. Additionally, during 2016, we launched MercadoCredito, which is designed to extend loans to specific merchants and consumers . Our MercadoCredito solution allows us to deepen our engagement with our merchants and consumers by offering them additional services.

To further enhance our suite of e-commerce services we launched the MercadoEnvios shippi ng program in Brazil, Argentina, Mexico , Colombia and Chi le . Through MercadoEnvios, we offer our sellers a cost-efficient way to utilize our existing distribution chain to fulfill their sales. Sellers opting into the program are able to offer a uniform and seamlessly integrated shipping experience to their buyers at competitive prices.

 

22


 

Through MercadoLibre Classifieds Service, our online classified listing service, our users can also list and purchase motor vehicles, vessels, aircraft, real estate and services in all countries where we operate. Classifieds listings differ from Marketplace listings as they only charge optional placement fees and never final value fees. Our classifieds pages are also a major source of traffic to our website, benefitting both the Marketplace and non-marketplace businesses.

To enhance the MercadoLibre Marketplace, we developed our MercadoLibre advertising program, to enable businesses to promote their products and services on the Internet. Through our advertising program, MercadoLibre’s sellers and large advertisers are able to display product ads on our webpages and our associated vertical sites in the region.

Additionally, through MercadoShops, our online store solution, users can set-up, manage and promote their own online store. These stores are hosted by MercadoLibre and offer integration with the other marketplace, payment and advertising services we offer. Users can choose from a basic, free store or pay monthly subscriptions for enhanced functionality and value added services on their store.

MercadoLibre also began developing and selling enterprise software solutions to e-commerce business clients in Brazil during the second quarter of 2015.

 

Reporting Segments and Geographic Information

Our segment reporting is based on geography, which is the current criterion we are using to evaluate our segment performance. Our geographic segments include Brazil, Argentina, Mexico, Venezuela and other countries (including Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Panama, Peru, Portugal, Bolivia, Honduras, Nicaragua, Salvador, Guatemala, Paraguay, Uruguay and the United States of America (real estate classifieds in the State of Florida only)).   Although we discuss long-term trends in our business, it is our policy to not provide earnings guidance in the traditional sense. We believe that uncertain conditions make the forecasting of near-term results difficult. Further, we seek to make decisions focused primarily on the long-term welfare of our company and believe focusing on short term earnings does not best serve the interests of our stockholders. We believe that execution of key strategic initiatives as well as our expectations for long-term growth in our markets will best create stockholder value. We, therefore, encourage potential investors to consider this strategy before ma king an investment in our common stock. A long-term focus may make it more difficult for industry analysts and the market to evaluate the value of our company, which could reduce the value of our common stock or permit competitors with short term tactics to grow stronger than us.

The following table sets forth the percentage of our consolid ated net revenues by segment for th e three -month periods ended March 31, 2017 and 2016 :







 

 

 

 

 

 

 



 

Three-month Periods Ended

 



 

March 31,

 

(% of total consolidated net revenues) (*)

 

2017

 

2016

 

Brazil

 

58.3 

%

 

49.2 

%

 

Argentina

 

26.1 

 

 

30.6 

 

 

Mexico

 

5.7 

 

 

7.1 

 

 

Venezuela

 

5.3 

 

 

7.7 

 

 

Other Countries

 

4.7 

 

 

5.5 

 

 



  (*) Percentages have been calculated using whole-dollar amounts rather than rounded amounts that appear in the table. The table above may not total due to rounding.



 

23


 

The following table summarizes the changes in our net re venues by segment for the three -month periods ended March 31, 2017 and 2016 :





 

 

 

 

 

 

 

 

 



 

Three-month Periods Ended

 

Change from 2016



 

March 31,

 

to 2017 (*)



 

2017

 

2016

 

in Dollars

 

in %

 



 

(in millions, except percentages)

 

Net Revenues:

 

 

 

 

 

 

 

 

 

Brazil

 

$        159.8

 

$             77.5

 

$        82.2

 

106.1 

%

Argentina

 

71.4 

 

48.2 

 

23.2 

 

48.1 

 

Mexico

 

15.5 

 

11.1 

 

4.4 

 

39.8 

 

Venezuela

 

14.4 

 

12.1 

 

2.3 

 

18.9 

 

Other Countries

 

12.8 

 

8.7 

 

4.1 

 

47.8 

 

Total Net Revenues

 

$        273.9

 

$           157.6

 

$      116.3

 

73.8 

%



(*)     Percentages have been calculated using whole -dollar amounts rather than rounded amounts that appear in the table. The table above may not total due to rounding.

 

Description of Line Items

Net revenues

We recognize revenues in each of our five geographical reporting segments. Within each of our segments, the services we provide generally fall into two distinct revenue streams, “Marketplace” which includes our core business and “Non-Marketplace” which includes ad sales, real estate listings, motor vehicles listings, financing fees, off-platform payment fees , shipping fees and other ancillary businesses.

The following table summarizes our consolidated net revenues by revenue stream for the three -month periods ended March 31, 2017 and 2016 :







 

 

 

 

 

 



 

 

 

 

 

 



 

 

Three-month Periods Ended



 

 

March 31, (*)

Consolidated net revenues by revenue stream

 

 

2017

 

2016



 

 

(in millions)

Marketplace

 

$

158.5 

 

$

94.1 

Non-Marketplace (**)

 

 

115.5 

 

 

63.5 

Total

 

$

273.9 

 

$

157.6 



(*) The table above may not total due to rounding.

(**) Includes, among other things, ad sales, real estate listings, motor vehicles listings, financing fees, off-platform payment fees, shipping fees and other ancillary services .

Revenues from Marketplace transactions are generated from:

·

final value fees; and

·

up-front fees .

For Marketplace services, final value fees representing a percentage of the sale value that are charged to the seller once the item is successfully sold. Up-front fees are charged to the seller in exchange for improved exposure of the listings throughout our platform and are not subject to the successful sale of the items listed.

Revenues for Non-Marketplace services are generated from:

·

financing fees;

·

off- platform payment fees;

·

motors up- front fees;

·

ad sales up-front fees;

·

real estate listings up-front fees;

·

shipping fees; and

 

24


 

·

fees from other ancillary businesses.

With respect to our MercadoPago service, we generate payment related revenues attributable to:

·

commissions representing a percentage of the payment volume processed that are charged to sellers in connection with off Marketplace-platform transactions;

·

commissions from additional fees we charge when a buyer elects to pay in installments through our MercadoPago platform, for transactions that occur either on or off our Marketplace platform;

·

interest and fees from merchant credits granted under our MercadoCredito solution; and

·

revenues from the sale of mobile points of sale products.

Although we also process payments on the Marketplace, we do not charge sellers an added commission for this service, as it is already included in the Marketplace final value fee we charge .

Through our classifieds offerings in motor vehicles, real estate and services, we generate revenues from up-front fees. These fees are charged to sellers who opt to give their listings greater exposure throughout our websites .

Our Advertising revenues are generated by selling either display product and/ or t ext link ads throughout our web site s to interested advertisers.

Finally, our shipping revenues are generated when a buyer elects to receive the item through our shipping service.

When more than one service is included in one single arrangement with the customer, we recognize revenue according to multiple element arrangements accounting, distinguishing between each of the services provided and allocating revenues based on their respective estimated selling prices.

We have a highly fragmented customer revenue base given the large numbers of sellers and buyers who use our platforms. For the three -month periods ended March 31, 2017 and 2016 , no single customer accounted for more than 5.0% of our net revenues.

Our MercadoLibre Marketplace is available in 19 countries (Argentina, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Mexico, Panama, Peru, Portugal, Uruguay, Venezuela, Bolivia, Honduras, Nicaragua, Salvador, Guatemala and Paraguay), a nd MercadoPago is available in 8 countries (Argentina, Brazil, Chile, Peru, Colombia, Mexico , Uruguay and Venezuela). Additionally, MercadoEnvios is available in 5 countries: Argentina, Brazil, Mexico, Colombia and Chile. The functional currency for each country’s operations is the country’s local currency, except for Venezuela where the functional currency is the U.S. dollar due to Venezuela’s status as a highly inflationary economy. See—“Critical accounting policies and estimates—Foreign Currency Translation” included below. Therefore, our net revenues are generated in multiple foreign currencies and then translated into U.S. dollars at the average monthly exchange rate.

Our subsidiaries in Brazil, Argentina, Venezuela and Colombia are subject to certain taxes on revenues which are classified as a cost of net revenues.  T hese taxes represented  9.0 % of net revenues for the three-month period ended   March 31, 2017, as compared to 8.3%   for the same period in 2016, mainly due to an increase in shipping and finance cost which are accounted for net of its costs   within net revenues.  

Cost of net revenues

Cost of net revenues primarily represents bank and credit card processing charges for transactions and fees paid with credit cards and other payment methods, fraud prevention fees, certain taxes on revenues, certain taxes on bank transactions, compensation for customer support personnel, ISP connectivity charges, depreciation and amortization, hos ting and site operation fees, cost of mob ile point of sale products sold and other operation costs.

Product and technology development expenses

Our product and technology development related expenses consist primarily of compensation for our engineering and web-development staff, depreciation and amortization costs related to product and technology development, telecommunications costs and payments to third-party suppliers who provide technology maintenance services to us.

 

25


 

Sales and marketing expenses

Our sales and marketing expenses consist primarily of costs of marketing our platforms through online and offline advertising and agreements with portals and search engines, charges related to our buyer protection programs, the salaries of employees involved in these activities, chargebacks related to our MercadoPago operations, bad debt charges, public relations costs, marketing activities for our users and depreciation and amortization costs.

We carry out the majority of our marketing efforts on the Internet. We enter into agreements with portals, search engines, social networks , ad networks and other sites in order to attract Internet users to the MercadoLibre Marketplace and convert them into registered users and active traders on our platform.

We also work intensively on attracting, developing and growing our seller community through our customer support efforts. We have dedicated professionals in most of our operations that work with sellers through trade show participation, seminars and meetings to provide them with important tools and skills to become effective sellers on our platform.

General and administrative expenses

Our general and administrative expenses consist primarily of salaries for management and administrative staff, compensation for outside directors, long term retention plan compensation, expenses for legal, audit and other professional services, insurance expenses, office space rental expenses, travel and business expenses, as well as depreciation and amortization costs. Our general and administrative expenses include the costs of the following areas: general management, finance, administration, accounting, legal and human resources.

Other income (expenses), net

Other income (expenses) consists primarily of interest income derived from our investments and cash equivalents, interest expense related to financial liabilities and foreign currency gains or losses .

Income tax

We are subject to federal and state taxes in the United States, as well as foreign taxes in the multiple jurisdictions where we operate. Our tax obligations consist of current and deferred income taxes and asset taxes incurred in these jurisdictions. We account for income taxes following the liability method of accounting. A valuation allowance is recorded when, based on the available evidence, it is more likely than not that all or a portion of our deferred tax assets will not be realized.   Therefore, our income tax expense consists of taxes currently payable, if any (given that in certain jurisdictions we still have net operating loss carry-forwards), plus the change in our deferred tax assets and liabilities during each period .

 

Critical A ccounting P olicies and E stimates

The preparation of our unaudited interim condensed consolidated financial statements and related notes requires us to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We have based our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our management has discussed the development, selection and disclosure of these estimates with our audit committee and our board of directors. Actual results may differ from these estimates under different assumptions or conditions.

An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact our interim condensed consolidated financial statements. We believe that the following critical accounting policies reflect the more significant estimates and assumptions used in the preparation of our interim condensed con solidated financial statements.

There have been no significant changes in our critical accounting policies, management estimates or accounting policies since the year ended December 31, 201 6 and disclosed in the Form 10-K. See Item – “Critical Accounting Policies” .  

 

26


 

Foreign Currency Translation

All of our foreign operations (other than Venezuela since January 1, 2010, as described below) use the local currency as their functional currency. Accordingly, these operating foreign subsidiaries translate assets and liabilities from their local currencies to U.S. dollars using period-end exchange rates while income and expense accounts are translated at the average exchange rates in effect during the period , unless exchange rates fluctuate significantly during the period, in which case the exchange rates at the date of the transaction are used. The resulting translation adjustment is recorded as part of other comprehensive income (loss), a component of equity. Gains and losses resulting from transactions denominated in non-functional currencies are recognized in earnings. Net foreign currency exchange losses or gains are included in the consolidated statements of income under the caption “Foreign currency gains”.

Venezuelan Currency Status

Pursuant to U.S. GAAP, we have classified our Venezuelan operations as highly inflationary since January 1, 2010, using the U.S. dollar as the functional currency for purposes of reporting our financial statements. Therefore, no translation effect has been accounted for in other comprehensive income related to our Venezuelan operations.

On March 9, 2016 the Central Bank of Venezuela (“ BCV ”) issued the Exchange Agreement No.35, which is effective since March 10, 2016. The agreement established a “protected” exchange rate ( DIPRO ) for certain transactions, such as but not limited to: imports of goods of the food and health sectors, as well as supplies associated with the production of said sectors; expenses relating to health treatments, sports, culture, scientific research, and other urgent matters defined by the exchange regulations. All foreign currency transactions not expressly provided in Exchange Agreement No.35 will be processed on the alternate foreign currency markets governed by the exchange regulations, at the floating supplementary market exchange rate ( DICOM ).  

Additionally, the agreement established that the alternate foreign currency markets referred to in Exchange Agree ment No.33 of February 10, 2015, the Sistema Marginal de Divisas, ( SIMADI ) will continue to operate until replaced by others. As of the date of issuance of these interim condensed consolidated financial statements, the SIMADI has not been replaced and for that reason, we continued using SIMADI.

As of March 31, 2017 , monetary assets and liabilities in Bolivares Fuertes (“BsF”) were re-measured to the U.S. dollar using the SIMADI closing exchange rate of 709.7 BsF per U.S. dollar.

Until 2010 we were able to obtain U.S. dollars for any purpose, including dividend distributions, using alternative mechanisms other than through the Commission for the Administration of Foreign Exchange Control (CADIVI). Those U.S. dollars, obtained at a higher exchange rate than the one offered by CADIVI and held in balance at U.S. bank accounts of our Venezuelan subsidiaries, were used for dividend distributions from our Venezuelan subsidiaries. We have not distributed dividends from our Venezuelan subsidiaries since 2011 .

The following table sets forth the assets, l iabilities and net assets of   our Venezuelan subsidiaries, before intercompany eliminations of a net liability of $20.2 million and $ 15.8 million , as of March 31, 2017 and December 31, 201 6 and net revenues for the three-month periods ended March 31, 2017 and 2016 :







 

 

 

 



 

 

 

 



 

Three-month Periods Ended March 31,



 

2017

 

2016

Venezuelan operations

 

(In millions)

Net Revenues

 

$             14.4

 

$               12.1



 





 

 

 

 

 



 

 

 

 

 



 

March 31,

 

 

December 31,



 

2017

 

 

2016



 

(In millions)

 

Assets

$

75.1 

 

$

66.2 

Liabilities

 

(30.2)

 

 

(23.0)

Net Assets

$

44.9 

 

$

43.2 



As of March 31, 2017 , the net assets (before intercompany eliminations) of our Venezuelan subsidiaries amounted to approximately 9.3 % of our consolidated net assets, and cash and investments of our Venezuelan subsidiaries held in local currency in Venezuela amounted to approximately 2.9 % of our consolidated cash and investments.

 

27


 

Our ability to obtain U.S. dollars in Venezuela is negatively affected by the exchange restrictions in Venezuela that are described above. If our access to U.S. dollars becomes widely available at a more unfavorable rate than the current SIMADI exchange rate (or if SIMADI exchange rate experiences significant devaluation in the future), and we decided to use that alternative mechanism considering that exchange rate as the one applicable for re-measurement, our results of operations, earnings and value of our net assets in Venezuela would be negatively impacted, and we cannot assure that the impact would not be material . In addition, our business and ability to obtain U.S. dollars in Venezuela would be negatively affected by any additional material devaluations or the imposition of significant additional and more stringent controls on foreign currency exchange by the Venezuelan government in the future.

Despite the current difficult macroeconomic environment in Venezuela, we continue managing, through our Venezuelan subsidiaries , our investment in Venezuela. Despite the current operating, political and economic conditions and certain other factors in Venezuela, we currently plan to continue supporting our business in Venezuela in the long run .

In November 2013 the Venezuelan Congress approved an “enabling law” granting the president of Venezuela the authority to enact laws and regulations in certain policy areas by decree. This authority includes the ability to restrict profit margins and impose greater controls on foreign exchange and the production, import, and distribution of certain goods. Among other actions, the president has used this decree power to pass the Law of Costs, Earnings, and Fair Profits, which became effective in January 2014 and, among other provisions, authorizes the Venezuelan government to set “fair prices” and maximum profit margins in the private sector. On October 26, 2015, the decree number 2,074 was published in the Official Gazette of Venezuela, establishing certain definitions related to the determination of prices in that country.

Despite we do not expect that this law together with the decree issued by the Venezuelan Government will have a material adverse impact on our financial condition or results of operations, considering the current difficult macroeconomic environment in Venezuela, the final potential effects remains uncertain. The effects of such potential effects, if any, would be recognized in our financial statements once the mentioned uncertainty is resolved.

Allowances for doubtful accounts and for chargebacks

We are exposed to losses due to uncollectible accounts and credits to sellers. Allowances for these items represent our estimate of future losses based on our historical experience. The allowances for doubtful accounts and for chargebacks are recorded as charges to sales and marketing expenses. Historically, our actual losses have been consistent with our charges. However, future adverse changes to our historical experience for doubtful accounts and chargebacks could have a material impact on our future consolidated statements of income and cash flows .

We believe that the accounting estimate related to allowances for doubtful accounts and for chargebacks is a critical accounting estimate because it requires management to make assumptions about future collections and credit analysis. Our management’s assumptions about future collections require significant judgment .  

Legal contingencies

In connection with certain pending litigation and other claims, we have estimated the range of probable loss and provided for such losses through charges to our interim condensed consolidated statement of income. These estimates are based on our assessment of the facts and circumstances and historical information related to actions filed against us at each balance sheet date and are subject to change based upon new information and future events .

Convertible Senior Notes

On June 30, 2014, we issued $330 million of 2.25% convertible senior notes due 2019 (the “Notes”). The Notes may be converted, under specific conditions, based on an initial conversion rate of 7.9353 shares of common stock per $1,000 principal amount of Notes, subject to adjustment as described in the indenture governing the Notes. The convertible debt instrument within the scope of the cash conversion subsection, was separated into debt and equity components at issuance and a fair value was assigned. The value assigned to the debt component was the estimated fair value, as of the issuance date, of a similar debt without the conversion feature. As of June 30, 2014, we determined the fair value of the liability component of the Notes by reviewing market data that was available for senior, unsecured nonconvertible corporate bonds issued by comparable companies. The difference between the cash proceeds and this estimated fair value, represents the value assigned to the equity component and was recorded as a debt discount. The debt discount is amortized using the effective interest method from the origination date through its stated contractual maturity date.

In connection with the issuance of the Notes, we paid $19.7 million to enter into capped call transactions with respect to shares of our common stock (the “Capped Call Transactions”), with certain financial institutions. The Capped Call Transactions are expected generally to reduce the potential dilution upon conversion of the Convertible Notes in the event that the market price of our common stock is greater than the strike price of the Capped Call Transactions. The $19.7 million cost of the capped call transactions, which net of deferred income tax effect amounts to $12.8 million, is included as a net reduction to additional paid-in capital in the stockholders’ equity section of our consolidated balance sheets.

 

28


 

For more   detailed information in relation to the Notes and the Capped Call transactions, see   “— Results of operations for the three -month period ended March 31, 2017 compared to the three -month period ended March 31, 2016  —       Debt” and Note 9 to our unaudited interim condensed consolidated financial statements.

Impairment of long-lived assets, goodwill and intangible assets with indefinite useful life

We review long-lived assets for impairments whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable . Furthermore, goodwill and certain indefinite life trademarks are reviewed for impairment at each year-end or more frequently when events or changes in circumstances indicate that their carrying value may not be recoverable.

We believe that the accounting estimate related to impairment of long lived assets and goodwill is critical since it is highly susceptible to change from period to period because: (i) it requires management to make assumptions about gross merchandise volume growth, total payment volume, total payment transactions, future interest rates, sales and costs; and (ii) the impact that recognizing an impairment would have on the assets reported on our balance sheet as well as our net income would be material. Management’s assumptions about future sales and future costs require significant judgment.

For additional information, see “ Critical Accounting Policies” section in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

Income taxes

We are required to recognize a provision for income taxes based upon taxable income and temporary differences between the book and tax bases of our assets and liabilities for each of the tax jurisdictions in which we operate. This process requires a calculation of taxes payable under currently enacted tax laws in each jurisdiction and an analysis of temporary differences between the book and tax bases of our assets and liabilities, including various accruals, allowances, depreciation and amortization. The tax effect of these temporary differences and the estimated tax benefit from our tax net operating losses are reported as deferred tax assets and liabilities in our consolidated balance sheet. We also assess the likelihood that our net deferred tax assets will be realized from future taxable income. To the extent we believe that it is more likely than not that some portion or all of our deferred tax assets will not be realized, we establ ish a valuation allowance. As of March 31, 2017, we had a valuation allowance on certain foreign net operating losses based on our assessment that it is more likely than not that the deferred tax asset will not be realized. To the extent we establish a valuation allowance or change the allowance in a period, we reflect the change with a corresponding increase or decrease in our “Income/asset tax expense” line in our consolidated statement of income.

Stock-based compensation

Our board of directors adopted long-term retention plans (“LTRP s ”), under which certain eligible employees receive awards. See “Item 3. Quantitative and Qualitative Disclosures About Market Risk —Equity Price Risk” for details on the LTRPs. The variable LTRP awards are calculated based on the fair value of our common stock on NASDAQ Global Market.

 

Results of operations for the three-month period ended March 31, 2017 compared to the three-month period ended March 31, 2016

The selected financial data for the three-month periods ended March 31, 2017 and 2016 discussed herein is derived from our unaudited interim condensed consolidated financial statements included in Item 1 of Part I of this report. These statements include all normal recurring adjustments that management believes are necessary to fairly state our financial position, results of operations and cash flows. The results of operations for the three-month period ended March 31, 2017 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2017 or for any other period.  

 

29


 

Statement of income data







 

 

 

 



Three-month Periods Ended
March 31,

(In millions)

2017 (*)

 

2016 (*)

 



(Unaudited)

 

Net revenues

$           273.9

 

$              157.6

 

Cost of net revenues

(105.1)

 

(55.4)

 

Gross profit

168.9 

 

102.2 

 



 

 

 

 

Operating expenses:

 

 

 

 



 

 

 

 

Product and technology development

(30.3)

 

(21.9)

 

Sales and marketing

(46.9)

 

(32.7)

 

General and administrative

(28.3)

 

(17.1)

 

Total operating expenses

(105.5)

 

(71.7)

 

Income from operations

63.3 

 

30.5 

 



 

 

 

 

Other income (expenses):

 

 

 

 

Interest income and other financial gains

12.2 

 

7.3 

 

Interest expense and other financial charges

(6.5)

 

(5.7)

 

Foreign currency gain

0.7 

 

5.1 

 

Net income before income tax expense

69.7 

 

37.2 

 



 

 

 

 

Income tax expense

(21.1)

 

(7.0)

 

Net income

$             48.5

 

$                30.2

 



(*) The table above may not total due to rounding.

 

Principal trends in results of operations

Growth in net revenues

Since our inception, we have consistently generated revenue growth from our Marketplace and Non-Marketplace revenue streams, driven by the strong growth of our key operational met rics. Our net revenues grew 73.8% in the three -month period ended March 31, 2017 as compared to the same period in 201 6 . Our successful items sold and total payment volume increased 38.8% and 89.0%, respectively, in the three -month period ended March 31, 2017 as com pared to the same period in 2016 . Additionally, our number of confirmed registered users was a 20.3 % higher as of March 31, 2017 as compared to the number of confirmed registered users as of March 31, 2016 .   Furthermore, our gross merchandise volume (“GMV”) increased 31.0% in the three -month period ended March 31, 2017 as compared to the same period in 201 6. Finally, our shipped items in creased 58.7% in the three -month period ended March 31, 2017 as compared to the same period in 201 6.

We believe that the growth in net revenues should continue in the future. However, despite this positive historical trend, the current weak global macro-economic environment, coupled with devaluations of certain local currencies in Latin America versus the U.S. dollar, the effects of Venezuelan translations of local currencies into the U.S. dollar, Venezuelan Government limits on prices and high interest rates in Latin America , could cause a decline year-over-year of our net revenues, particularly as measured in U.S. dollars.

Gross profit margins

During the past year, our business has experienced decreasing gross profit margins, as defined by total net revenues minus total cost of net revenues , as a percentage of net revenues.

Our gross profit margins were 61.6 % and 6 4 .8% for the three -month periods ended March 31, 2017 and 201 6 , respectively. The decrease in our gross profit margins resulted primarily from:

 

30


 

(i) Higher penetration of our payments and shipping solution into our Argentine, Brazilian and Mexican marketplaces. For the three-month period ended March 31, 2017 , total volume of payments on our marketplace represented 78.2 % of our total GMV (excluding motor vehicles, ves sels, aircraft and real estate) ; as compared to 5 6.8 % for the three-month period ended March 31, 2016 . Additionally, for the three-month period ended March 31, 2017 , the total number of items shipped through our shipping solution represented 51.3 % of our total n umber of successful items sold ; as compared to 44.9 % for the three-month period ended March 31, 2016 . Transactions that include such services intrinsically incur incremental costs such as collection fees, which result in lower gross profit margins. In addition, our financing and shipping revenues are disclosed net of third party provider costs while sales taxes are paid on the gross amount of revenues, thus, decreasing our gross profit margins. For the three-month period ended March 31, 2017 , collection fees and sales taxes increased $ 21.5 million and $ 11.4 million, respectively, as compared to the same period in 2016 .

(ii) Increased customer support costs of $ 5.5 million for the three-month period ended March 31, 2017 ,   as compared with the same period i n 2016 ; mainly as a consequence of an increase in salaries and wages. The number of employees related to customer support was   1,839 as of March 31, 2017 as compared with 1,419 as of March 31, 2016 .

(iii) Increased   hosting costs of $ 2.4 million for the three-month period ended March 31, 2017 ,   as compared with the same period i n 2016.

In the future , gross profit margins could decline if the penetration of our payment solution and shipping grows faster than our marketplace.

Operating income margins

For the three-month period ended March 31, 2017 as compared to the same period in 2016, our operating income margin increased from 19.3% to 23.1%, as a consequence of a decrease in product and technology development expenses and in sales and marketing expenses , calculated as a percentage of net revenues. These decreases were partially offset by increases in costs of net revenues, as described in Gross profit margins section above .

We anticipate that as we continue to invest in product development, sales, marketing and human resources in order to promote our services and capture the long-term business opportunity offered by the Internet in Latin America, it is increasingly difficult to sustain growth in operating income margins .

 

 

31


 

Other Data







 

 

 

 

 

 



 

 

Three-month Periods Ended
March 31,

(in millions)

 

 

2017 (*)

2016 (*)



  

 

 

  

 

 

Number of confirmed registered users at end of period (1)

  

 

182.2 

  

 

151.5 

Number of confirmed new registered users during period (2)

  

 

8.1 

  

 

6.9 

Gross merchandise volume (3)

  

$

2,334.0 

  

$

1,781.1 

Number of successful items sold (4)

  

 

53.2 

  

 

38.3 

Number of successful items shipped (5)

 

 

27.3 

 

 

17.2 

Total payment volume (6)

  

$

2,601.0 

  

$

1,376.1 

Total volume of payments on marketplace (7)

  

$

1,825.8 

  

$

1,012.4 

Total payment transactions (8)

 

 

44.1 

 

 

27.5 

Unique buyers (9)

 

 

13.3 

 

 

11.0 

Unique sellers (10)

 

 

4.1 

 

 

3.6 

Capital expenditures

  

$

12.8 

  

$

17.3 

Depreciation and amortization

  

$

9.0 

  

$

6.3 



(1)

Measure of the cumulative number of users who have registered on the MercadoLibre Marketplace and confirmed their registration.

(2)

Measure of the number of new users who have registered on the MercadoLibre Marketplace and confirmed their registration.

(3)

Measure of the total U.S. dollar sum of all transactions completed through the MercadoLibre Marketplace, excluding motor vehicles, vessels, aircraft and real estate.

(4)

Measure of the number of items that were sold/purchased through the MercadoLibre Marketplace.

(5)

Measure of the number of items that were shipped through our shipping service.

(6)

Measure of the total U.S. dollar sum of all transactions paid for using MercadoPago, including marketplace and non-marketplace transactions.

(7)

Measure of the total U.S. dollar sum of all marketplace transactions paid for using MercadoPago, excluding shipping and financing fees.

(8)

Measure of the number of all transactions paid for using MercadoPago.

(9)

New or existing users with at least one purchase made in the period .

(10)

New or existing users with at least one sale made in the period .  

 

 

Net revenues







 

 

 

 

 

 

 



 

 

 

 

 

 

 



Three-month Periods Ended

 

Change from 2016



March 31,

 

to 2017 (*)



2017

 

2016

 

in Dollars

 

in %



(in millions, except percentages)

Total Net Revenues

$         273.9

 

$         157.6

 

$      116.3

 

73.8% 

As a percentage of net revenues (*)

100.0% 

 

100.0% 

 

 

 

 



(*) Percentages have been calculated using whole-dollar amounts rather than rounded amounts that appear in the table. The table above may not total due to rounding.





 

32


 



 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

Three-month Periods Ended

 

Change from 2016



 

March 31,

 

to 2017 (**)

Consolidated Net Revenues by revenue stream

 

2017

 

2016

 

in Dollars

 

in %



 

(in millions, except percentages)

Brazil

 

 

 

 

 

 

 

 

Marketplace

 

$             89.6 

 

$                 43.7 

 

$        45.9 

 

105.0% 

Non-Marketplace

 

70.2 

 

33.8 

 

36.4 

 

107.5% 



 

159.8 

 

77.5 

 

82.2 

 

106.1% 

Argentina

 

 

 

 

 

 

 

 

Marketplace

 

$             39.8 

 

$                 29.8 

 

$        10.0 

 

33.5% 

Non-Marketplace

 

31.6 

 

18.4 

 

13.2 

 

71.9% 



 

71.4 

 

48.2 

 

23.2 

 

48.1% 

Mexico

 

 

 

 

 

 

 

 

Marketplace

 

$             10.7 

 

$                   5.8 

 

$          4.8 

 

82.7% 

Non-Marketplace

 

4.9 

 

5.3 

 

(0.4)

 

-7.8%



 

15.5 

 

11.1 

 

4.4 

 

39.8% 

Venezuela

 

 

 

 

 

 

 

 

Marketplace

 

$             13.2 

 

$                 11.2 

 

$          2.0 

 

18.0% 

Non-Marketplace

 

1.2 

 

0.9 

 

0.3 

 

29.8% 



 

14.4 

 

12.1 

 

2.3 

 

18.9% 

Other countries

 

 

 

 

 

 

 

 

Marketplace

 

$               5.2 

 

$                   3.6 

 

$          1.6 

 

45.3% 

Non-Marketplace

 

7.7 

 

5.1 

 

2.5 

 

49.6% 



 

12.8 

 

8.7 

 

4.1 

 

47.8% 



 

 

 

 

 

 

 

 

Marketplace

 

158.5 

 

94.1 

 

64.3 

 

68.4% 

Non-Marketplace (*)

 

115.5 

 

63.5 

 

52.0 

 

81.8% 

Total

 

$           273.9 

 

$               157.6 

 

$      116.3 

 

73.8% 



(*) Includes, among other things, ad sales, real estate listings, motor vehicles listings, financing fees, off-platform payment fees, shipping fees and other ancillary services.

(**) Percentages have been calculated using whole-dollar amounts rather than rounded amounts that appear in the table. The table above may not total due to rounding.



Net revenues for the three-month period ended March 31, 2017 increased in all of our geographic segments .

Brazil

Marketplace revenue s in Brazil increased 105.0 % in the three-month period ended March 31, 2017 as compared to the same period in 2016. The increase was primarily a consequence of a 39.6 % increase in local currency volume, a 1 8.1 % increase in our take rate (which we define as net revenues as a percentage of gross merchandise volume) and a 24.3 % average appreciation of local currency. Non-Marketplace revenues grew 107.5 % in the three-month period ended March 31, 2017 , a $ 36 .4 million increase during the same period, mainly driven by increases in the volume of financing transactions, shipping transactions and in ad sales.

Argentina

Marketplace revenues of our Argentine segment increased   33.5 % in the three-month period ended March 31, 2017 as compared to the same period in 201 6 .   The increase was primarily a consequence of a 15.6 % increase in local currency   volume and a   23.7% increase in our take rate (which we define as net revenues as a percentage of gross merchandise volume) , partially offset by a 6.7 %   average devaluation of the local currency. Non-Marketplace revenues grew 71.9 % in the three-month period ended March 31, 2017 , a $ 13.2 million increase, during the same period, mainly driven by increases in the volume of paymen ts of off-platform transactions, financing offered to our users and the volume of shipped items.

Mexico

Marketplace r evenues of our Mexican segment increased by approximately 82.7 % in the three-month period ended March 31, 2017 , as compared to the same period in 201 6 ,   mainly due to a 33.6 % increase in local currency volume and a 54.0 % increase in our take rate (which we define as net revenues as a percentage of gross merchandise volume) , partially offset by a local currency average devaluation of 1 1.2 %.   Non-Marketplace revenues decreased 7.8 % in the three-month period ended March 31, 2017, or $0.4 million during the same period, mainly driven by   a   decrease in our real e state listing fees.

 

33


 

Venezuela

Marketplace revenues of our Venezuelan segment increased by approximately 18.0 % in the three-month period ended March 31, 2017 , when com pared to the same period in 2016 , mainly due to a 228.0 % increase in lo cal currency volume and a 18.2% increase in our take rate ( which we define as net revenues as a percentage of gross merchandise volume), partially offset   by local curren cy average devaluation of 69.6% .   Non-Marketplace revenues   increased 29.8% mainly due to an increase in our classified fees offset by the local currency devaluation.

The following table sets forth our total net revenues and the sequential quarterly growth of these net revenues for the periods described below:







 

 

 

 



 

 

 

 



Quarter Ended



March 31,

June 30,

September 30,

December 31,



(in millions, except percentages)



(*)

2017

 

 

 

 

Net revenues

$              273.9

n/a

n/a

n/a

Percent change from prior quarter

7% 

n/a

n/a

n/a

2016

 

 

 

 

Net revenues

$              157.6

$              199.6

$              230.8

$              256.3

Percent change from prior quarter

-13%

27%  16%  11% 

 

(*) Percentages have been calculated using whole -dollar amounts rather than rounded amounts that appear in the table.



The following table sets forth the growth in net revenues in local currencies for the three-month period ended March 31, 2017 as compared to the same period in 2016:









 

 



 

 



 

Changes from 2016 to 2017 (*)

(% of revenue growth in Local Currency)

 

Three-months

Brazil

 

66.4% 

Argentina

 

58.5% 

Mexico

 

55.2% 

Venezuela

 

291.4% 

Other Countries

 

36.0% 

Total Consolidated

 

78.9% 



(*) The local currency revenue growth was calculated by using the average monthly exchange rates for each month during 2016 and applying them to the corresponding months in 2017, so as to calculate what our financial results would have been had exchange rates remained stable from one year to the next. See also “Non-GAAP Financial Measures” section below for details on FX neutral measures.



In Venezuela, the increase in our net revenues is mainly due to higher average selling prices posted by sellers during the three-month period ended March 31, 2017 , which we do not control. The increase in average selling prices in Venezuela is a consequence of: (i)  the high inflation rate; (ii) a shortage of products and (iii) changes in the mix of categories of the items sold in our Marketplace.

In Brazil, the increase in local currency growth is mainly a consequence of an increase of our Brazilian Marketplace volume, our shipped items volume and increases in   our   MercadoPago transactions.

In the case of Argentina, the increase in   our net revenues is due to an increase in the Argentine successful items volume,   shipped items   volume and increases in   our   MercadoPago   transactions.  

In Mexico, the increase in local currency growth is a consequence of an increase of our Mexican Marketplace volume and increases in   our   MercadoPago transactions .

 

34


 

Cost of net revenues







 

 

 

 

 

 

 

 



 

 

 

 

 

 



 

Three-month Periods Ended

 

Change from 2016



 

March 31,

 

to 2017 (*)



 

2017

 

2016

 

in Dollars

 

in %



 

(in millions, except percentages)

Total cost of net revenues

 

$           105.1

 

$             55.4

 

$        49.6

 

89.5% 

As a percentage of net revenues (*)

 

38.4% 

 

35.2% 

 

 

 

 



(*) Percentages have been calculated using whole-dollar amounts rather than rounded amounts that appear in the table. The table above may not total due to rounding.



For the three -month period ended March 31, 2017 as compared to the same period of 201 6 , the increase of $ 49.6 million in cost of net revenues was primarily attributable to : i) an increase in collection fees amounting to $ 21.5 million, or 78.6 %, which was mainly attributable to our Argentine and Brazilian operations as a result of the higher penetration and volume of MercadoPago in those countries; ii ) an increase in sales taxes amounting to $ 11.4 million, mainly related to the growth of our Argentine and Brazilian operations; iii) a $ 5.5 million increase in customer support costs mainly as a consequence of salaries and wages; iv) $2.4 million increase in hosting costs; and v) a $1.6 million increase in mobile points of sale costs.

Product and technology development expenses







 

 

 

 

 

 



 

 

 

 

 

 



Three-month Periods Ended

 

Change from 2016



March 31,

 

to 2017 (*)



2017

 

2016

 

in Dollars

in %



(in millions, except percentages)

Product and technology development

$           30.3

 

$           21.9

 

$          8.4

38.1% 

As a percentage of net revenues (*)

11.1% 

 

13.9% 

 

 

 



(*) Percentages have been calculated using whole-dollar amounts rather than rounded amounts that appear in the table. The table above may not total due to rounding.



For   the   three-month   period   ended   March 31, 2017 , the increase in product and technology development expenses as compared to the same periods in 201 6 amounted to $ 8.4 million , primarily attributable to : i) an increase of $ 4.1 million in salaries and wages; ii) a n   increase in depreciation and amortization expenses of $1.6 million ; ii i ) an increase in maintenance expenses of $ 0.7 million ; and iv) an increase in other product and technology development expenses of $1.8 million.

We believe development is one of our key competitive advantages and intend to continue to invest in hiring engineers to meet the increasingly sophisticated product expectations of our customer base.

Sales and marketing expenses







 

 

 

 

 

 



 

 

 

 

 

 



Three-month Periods Ended

 

Change from 2016



March 31,

 

to 2017 (*)



2017

 

2016

 

in Dollars

in %



(in millions, except percentages)

Sales and marketing

$          46.9

 

$          32.7

 

$        14.2

43.6% 

As a percentage of net revenues (*)

17.1% 

 

20.7% 

 

 

 



(*) Percentages have been calculated using whole-dollar amounts rather than rounded amounts that appear in the table. The table above may not total due to rounding.



For the   three- month period ended March 31, 2017 , the $ 14.2 million increase in sales and marketing expenses when comp ared to the same period in 2016 was primarily attributable to: i) an increase of $ 5.4 million in on   line portal deals expenses mainly in Brazil and M e xico ; ii) a $ 3.6 million increase in salaries and wages ; iii ) a $ 3.4 million increase in chargebacks from credit cards due to the increase in our MercadoPago volume, iv) a $1.3 million increase in our offline advertising expenses and v) a $0.7 million increase in our buyer protection program expenses. This increase was partially offset by a decrease of $0.4 million in our bad debt expense mainly due to a higher penetration of MercadoPago.

 

35


 

General and administrative expenses







 

 

 

 

 

 

 



 

 

 

 

 

 

 



Three-month Periods Ended

 

Change from 2016



March 31,

 

to 2017 (*)



2017

 

2016

 

in Dollars

 

in %



(in millions, except percentages)

General and administrative

$            28.3

 

$            17.1

 

$        11.2

 

65.9% 

As a percentage of net revenues (*)

10.3% 

 

10.8% 

 

 

 

 



(*) Percentages have been calculated using whole-dollar amounts rather than rounded amounts that appear in the table. The table above may not total due to rounding. 



For the three-month period March 31, 2017, the $11.2 million increase in general and administrative expenses when compared to the same period in 2016 was primarily attributable to: i) a $9.2 million increase in salaries and wages; ii) a $0.9 million increase in audit, tax and legal fees; and iii) a $0.3 million increase in depreciation and amortization expenses.

Other income, net



 

 

 

 

 

 

 



 

 

 

 

 

 



Three-month Periods Ended

 

Change from 2016



March 31,

 

to 2017 (*)



2017

 

2016

 

in Dollars

in %



(in millions, except percentages)

Other income, net

$           6.3

 

$             6.7

 

$       (0.4)

-5.4%

As a percentage of net revenues (*)

2.3% 

 

4.3% 

 

 

 



 

 

 

 

 

 



(*) Percentages have been calculated using whole-dollar amounts rather than rounded amounts that appear in the table. The table above may not total due to rounding.



F or the   three -month period ended March 31, 2017 , the $ 0.4   million   decrease in other income, net when compared to the same period in 2016 was   primarily attributable to: i) a $0.8 million increase in interest expense due mainly to our convertible notes and other financial charges in Brazil, and ii) a decrease in foreign exchange gain of $ 4.5 million, from a $ 5.1 million gain in 201 6 to a $0.7 million gain in 201 7. The 2016 foreign exchange gain was primarily attributable to   the impact of the Argentine Peso devaluation over our U.S. Dollar net asset position in Argentina. The 2017 foreign exchange gain was mainly as a consequence of a $3 . 8 million gain arising from the Mexican Peso revaluation over our U.S. Dollar net liability position in Mexico, partially offset by the $2.1 million and $0.9 million loss in Brazil (arising mainly due to the recognition in earning of foreign exchange of our available for sale securities) and Venezuela, respectively . These decreases were partially offset by a $4.9 million increase in i nterest income arising from a higher volume of financial investments mainly in Brazil and Argentina .

Income tax







 

 

 

 

 

 

 



 

 

 

 

 

 

 



Three-month Periods Ended

 

Change from 2016



March 31,

 

to 2017 (*)



2017

 

2016

 

in Dollars

 

in %



(in millions, except percentages)

Income tax

$         21.1

 

$              7.0

 

$     14.2

 

204.0% 

As a percentage of net revenues (*)

7.7% 

 

4.4% 

 

 

 

 



(*) Percentages have been calculated using whole-dollar amounts rather than rounded amounts that appear in the table. The table above may not total due to rounding.



During the three-month period ended March 31, 2017 as compared to the same period in 2016, income tax increased by $14.2 million, mainly as a consequence of: i) an increase in our pre-tax gains mainly in our Brazilian subsidiaries; and ii) the loss carryforward generated in Venezuela by the   devaluation of the local currency for tax purposes in 2016, which was not significant in 2017.

Our blended tax rate is defined as income tax expense as a percentage of income before income tax. Our effective income tax rate is defined as the provision for income taxes (net of charges related to dividend distributions from foreign subsidiaries that are offset with domestic foreign tax credits) as a percentage of income before income tax. The effective income tax rate excludes the effects of the deferred income tax, and complementary income tax.

 

36


 

The following table summarizes our blended and effective tax rates for the three-month periods ended March 31, 2017 and 2016:







 

 

 



 

 

 



Three-month Periods Ended



March 31,



2017

 

2016

Blended tax rate

30.4%

 

18.7%

Effective tax rate

34.4%

 

27.2%



Our blended and effective tax rate for the three-month period March 31, 2017 increased as compared to the same period in 2016 mainly due to: i) the devaluation loss recorded in our Venezuelan subsidiaries as described above; and ii) a higher increase in our pre-tax gains in our Brazilian subsidiaries as compared with other locations, which are taxable at a higher tax rate.

The following table sets forth our effective income tax rate on a segment basis for the three-month periods ended March 31, 2017 and 2016:









 

 

 

 



 

 

 

 



Three-month Periods Ended



March 31,



2017

 

2016

 

Effective tax rate by country

 

 

 

 

Argentina

24.0% 

 

23.9% 

 

Brazil

32.8% 

 

27.5% 

 

Venezuela

37.8% 

 

3.9% 

 

Mexico

-26.9%

 

-18.0%

 



The effective income tax rate for our Argentine segment remained stable during the three-month period ended March 31, 2017 as compared to the same period in 2016 .

On August 17, 2011, the Argentine government issued a new software development law and on September 9, 2013 a regulatory decree was issued, which established the new requirements to become a beneficiary of the new software development law. The new decree establishes compliance requirements with annual incremental ratios related to exports of services and research and development expenses that must be achieved to remain within the tax holiday. Our Argentine subsidiary will have to achieve certain required ratios annually under the new software development law to remain eligible for the benefits .  

On September 17, 2015, the Argentine Industry Secretary approved the Company’s application for eligibility under the new software development law for the Company’s Argentinean subsidiary, Mercadolibre S.R.L. Furthermore, on September 18, 2016, the Argentine Industry Secretary approved the Company’s application for eligibility under the new software development law for the Company’s Argentinean subsidiaries, Neosur S.RL. and Business Vision S.A. As a result, the Company’s Argentinean subsidiaries have been granted a tax holiday retroactive from September 18, 2014. A portion of the benefits obtained as beneficiaries of the new law is a relief of 60% of total income tax related to software development activities and a 70% relief in payroll taxes related to software development activities.

The decree establishes compliance requirements with annual incremental ratios related to exports of services and research and development expenses that must be achieved to remain within the tax holiday. The Argentine operation will have to achieve certain required ratios annually under the new software development law in order to be eligible to the benefits mentioned below.

As a result of the Company’s eligibility under the new law, we recorded an income tax benefit of $ 5.1 million and $4.3 million during the three-month periods ended March 31, 2017 and 2016, respectively. Additionally, we recorded a labor cost  benefit of $2.0 million and $1.0 million during the three-month periods ended March 31, 2017 and 2016, respectively. Furthermore, $0.5 million and $0.4 million were accrued to pay software development law audit fees during the three-month periods ended March 31, 2017 and 2016, respectively. Aggregate per share effect of the Argentine tax holiday amounted to $0.12 and $0.12 for the three-month periods ended March 31, 2017 and 2016, respectively.   

The increase in our Brazilian effective income tax rate for the three-month period ended March 31, 2017 as compared to the same period in 2016, was mainly related to temporary differences reversed in the current period.

For the three-month period ended March 31, 2017 and 2016, our Venezuelan effective income tax rate was driven mainly by losses recorded in our Venezuelan subsidiaries related to foreign exchange losses, which generated net loss before income tax. The main difference year over year is that in the three-month period ended March 31, 2016 , the loss carryforward generated by the devaluation of the local currency was significantly higher to the loss generated in the three-month period ended March 31, 2017.

 

37


 

The increase in our Mexican negative effective income tax rate for the three- month period ended March 31, 2017 as compared with the same period in 201 6 , is due to the higher pre-tax loss es recorded during 201 7, as a result mainly of an increase in our operating costs

We do not expect the domestic effective income tax rate related to dividend distributions from foreign subsidiaries to have a significant impact on our company since our strategy is to reinvest our cash surplus in our international operations, and to distribute dividends when they can be offset with available tax credits .

Segment information







 

 

 

 

 

 

 

 

 

 

 

(In millions, except for percentages)

Three-month Period Ended March 31, 2017



 

 

 



Brazil

 

Argentina

 

Mexico

 

Venezuela

 

Other Countries

 

Total

Net revenues

$             159.8 

 

$               71.4 

 

$             15.5 

 

$                14.4 

 

$                 12.8 

 

$              273.9 

Direct costs

(87.0)

 

(45.1)

 

(16.8)

 

(6.6)

 

(9.7)

 

(165.2)

Direct contribution

72.7 

 

26.3 

 

(1.3)

 

7.8 

 

3.1 

 

108.7 

Margin

45.5% 

 

36.9% 

 

-8.4%

 

54.5% 

 

24.0% 

 

39.7% 









 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Three-month Period Ended March 31, 2016



 

 

 



Brazil

 

Argentina

 

Mexico

 

Venezuela

 

Other Countries

 

Total

Net revenues

$               77.5 

 

$               48.2 

 

$             11.1 

 

$                12.1 

 

$                   8.7 

 

$              157.6 

Direct costs

(50.3)

 

(27.8)

 

(9.4)

 

(5.1)

 

(6.2)

 

(98.8)

Direct contribution

27.2 

 

20.4 

 

1.7 

 

7.0 

 

2.5 

 

58.8 

Margin

35.1% 

 

42.4% 

 

15.1% 

 

57.6% 

 

28.5% 

 

37.3% 









 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Change from the Three-month Period Ended March 31, 2016 to March 31, 2017 (*)



 

 

 



Brazil

 

Argentina

 

Mexico

 

Venezuela

 

Other Countries

 

Total

Net revenues

 

 

 

 

 

 

 

 

 

 

 

in Dollars

$               82.2 

 

$               23.2 

 

$               4.4 

 

$                  2.3 

 

$                   4.1 

 

$              116.3 

in %

106.1% 

 

48.1% 

 

39.8% 

 

18.9% 

 

47.8% 

 

73.8% 

Direct costs

 

 

 

 

 

 

 

 

 

 

 

in Dollars

$             (36.8)

 

$              (17.3)

 

$              (7.4)

 

$                (1.4)

 

$                 (3.5)

 

$              (66.4)

in %

73.1% 

 

62.4% 

 

78.4% 

 

27.6% 

 

57.1% 

 

67.2% 

Direct contribution

 

 

 

 

 

 

 

 

 

 

 

in Dollars

$               45.5 

 

$                 5.9 

 

$              (3.0)

 

$                  0.9 

 

$                   0.6 

 

$                49.9 

in %

167.0% 

 

28.8% 

 

-177.8%

 

12.6% 

 

24.6% 

 

84.8% 



(*) Percentages have been calculated using whole-dollar amounts rather than rounded amounts that appear in the table. The table above may not total due to rounding.

Net revenues

Net revenues for the three-month period ended March 31, 2017 as compared to the same period in 201 6 , are described above in “Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Net revenues”.

Direct costs

Brazil

For the three-month period ended March 31, 2017 as compared to the same period in 2016, direct costs increased by 73.1%, mainly driven by: i) a 92.6% increase in cost of net revenues, mainly attributable to an increase in collection fees as a consequence of higher penetration of our MercadoPago business, sales tax costs and salaries and wages related to customer service ; ii) a 48.3 % increase in product and technology development expenses, mainly due to an increase in depreciation and amortization expenses and other product development expenses ; iii) a 40.4 % increase in sales and marketing expenses, mainly due to an increase in online marketing expenses, salaries and wages and chargebacks ; and iv) a 95.9 % increase in general and administrative expenses , mainly due to an increase in salaries and wages and other general and administrative expenses .

 

38


 

Argentina

For the three-month period ended March 31, 2017 as compared to the same period in 2016, direct costs increased by 62.4%, mainly driven by: i) a 67.1% increase in cost of net revenues, mainly attributable to an increase in collection fees as a consequence of a higher penetration of MercadoPago, and sales tax costs; ii) a 55.0% increase in product and technology development expenses, mainly due to higher depreciation and amortization expenses; and iii) a 54.9% increase in sales and marketing expenses, mainly due to an increase in online marketing expenses, buyer protection program expenses and chargebacks. These increases were partially offset by a 4.3% decrease in general and administrative expenses.

Mexico

For the three-month period ended March 31, 2017 as compared to the same period in 2016, direct costs increased by 78.4%, mainly driven by: i) a 216.6% increase in cost of net revenues, mainly attributable to an increase in collection fees due to higher MercadoPago penetration, customer support costs and shipping costs; and ii) a 46.4% increase in sales and marketing expenses, mainly due to increases in online and offline marketing expenses and higher buyer protection program expenses. These increases were partially offset by: i) a 33.7% decrease   in general and administrative expenses, mainly attributable to salaries and wages;   and ii) a 39.3% decrease in product and technology development expenses, mainly attributable to salaries and wages.

Venezuela

For the three-month period ended March 31, 2017 as compared to the same period in 2016, direct costs increased by 27.6%, mainly driven by: i) a 62.9% increase in cost of revenues, mainly attributable to an increase in collection fees and customer services expenses; ii) a 41.4% increase in general and administrative expenses, mainly due to an increase in salaries and wages; and iii) a 17.1% increase in product and technology development expenses, mainly attributable to an increase in depreciation and amortization expenses. These increases were partially offset by a   16.1 %   decrease in sales and marketing expenses, mainly due to decreases in the buyer protection program and bad debt expenses.

Liquidity and Capital Resources

Our main cash requirement historically has been working capital to fund MercadoPago financing operations in Brazil. We also require cash for capital expenditures relating to technology infrastructure, software applications, office space,   business acquisitions, to fund the payment of quarterly cash dividends on shares of our common stock and to fund the interest payments on our Convertible Notes.

Since our inception, we have funded our operations primarily through contributions received from our stockholders during the first two years of operations, from funds raised during our initial public offering, and from cash generated from our operations. W e issued on June 30, 2014, $330 million principal balance of Convertible Notes for net proceeds to us of approximately $321.7 million. We have funded MercadoPago mainly by discounting credit card receivables and through cash advances derived from our business.

As of March 31, 2017 , our main source of liquidity, amounting to $ 566.6 million of cash and cash equivalents and short-term investments and $ 170.4 million of long-term investments ,   was provided by cash generated from operations and from the issuance of the Convertible Notes. We consider our long-term investments as part of our liquidity because long-term investments are comprised of available-for-sale securities classified as long-term as a consequence of their contractual maturities.

The significant components of our working capital are cash and cash equivalents, short-term investments, accounts receivable, loans receivable, accounts payable and accrued expenses, funds receivable from and payable to MercadoPago users, and short-term debt. As long as we continue transferring credit card receivables to financial institutions in return for cash, w e will continue generating cash from those receivables.

As of March 31, 2017, cash and investments of our foreign subsidiaries amounted to $ 449.7 million, or 61.0 % of our consolidated cash and investments, and approximately 52.9 % of our consolidated cash and investments were held outside the U.S., mostly in Brazil and Argentina. Our strategy is to reinvest the undistributed earnings of our foreign operations in those operations and to distribute dividends when they can be offset with available tax credits. We do not expect a material impact in any repatriation of undistributed earnings of foreign subsidiaries on our operations since the taxable domestic gains generated by any dividend distributions will be mostly offset with foreign tax credits that arise from income tax paid in our foreign operations, which we are allowed to compute for domestic income tax purposes.

In the event we change the way we manage our business, our working capital needs could be funded, as we did in the past, through a combination of the sale of credit card coupons to financial institutions and cash advances from our business.

 

39


 

The following table presents our cash flows from operating activities, investing activities and financing activities for the three -month periods ended March 31, 2017 and 201 6 :







 

 

 

 

 

 



 

 

Three-month Periods Ended



 

 

 

March 31, (*)

(In millions)

 

 

 

2017

 

2016

Net cash provided by (used in):

 

 

 

 

 

 

Operating activities

 

 

 

$                  104.8

 

$                     (11.8)

Investing activities

 

 

 

(39.1)

 

0.8 

Financing activities

 

 

 

(5.2)

 

(5.2)

Effect of exchange rates on cash and cash equivalents

 

 

 

6.8 

 

(5.8)

Net increase (decrease) in cash and cash equivalents

 

 

 

$                    67.2

 

$                     (22.0)



  (*) The table above may not total due to rounding.

Net cash provided by (used in) operating activities

Cash provided by (used in) operating activities consists of net income adjusted for certain non-cash items, and the effect of changes in working capital and other activities:







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

Three-month Periods Ended

 

 

 

 



 

March 31,

 

Change from 2016 to 2017 (*)



 

2017

 

2016

 

in Dollars

 

in %



 

(in millions, except percentages)

Net Cash provided by (used in):

 

   

 

   

 

 

 

 

Operating activities

 

$                        104.8

 

$                (11.8)

 

$                  116.6

 

987.6% 

 

(*) Percentages have been calculated using whole-dollar amounts rather than rounded amounts that appear in the table. The table above may not total due to rounding.

The $1 16.6 million increase in net cash provided by operating activities during the three-month period ended March 31, 2017, as compared to the same period in 2016, was primarily driven by a $ 21.6 million decrease in accounts receivables, a $7 8.1 million decrease in credit card receivables and a $18.3 million increase in our net income.

Net cash used in investing activities







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

Three-month Periods Ended

 

 

 

 



 

March 31,

 

Change from 2016 to 2017 (*)



 

2017

 

2016

 

in Dollars

 

in %



 

(in millions, except percentages)

Net Cash (used in) provided by:

 

   

 

   

 

 

 

 

Investing activities

 

$              (39.1)

 

$            0.8

 

$           (39.9)

 

-5138.3%

 

(*) Percentages have been calculated using whole-dollar amounts rather than rounded amounts that appear in the table. The table above may not total due to rounding.

Net cash used in investing activities in the three-month period ended March 31, 2017 resulted mainly from pu rchases of investments of $897.6 million, which was partially offset by proceeds from the sale and m aturity of investments of $876.0  million, as part of our financial strategy. We used $ 10.3 million in the purchase of property plant and equipment (mainly in information technology in Argentina and Brazil), $2.5 million in advances for property and equipment and $ 4.8 million in principal of loans receivable granted to merchants and consumers under our MercadoCredito solution.

Net cash used in financing activities







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

Three-month Periods Ended

 

 

 

 



 

March 31,

 

Change from 2016 to 2017 (*)



 

2017

 

2016

 

in Dollars

 

in %



 

(in millions, except percentages)

Net Cash used in:

 

   

 

   

 

 

 

 

Financing activities

 

$                (5.2)

 

$          (5.2)

 

$             0.0

 

0.0% 



 (*) Percentages have been calculated using whole-dollar amounts rather than rounded amounts that appear in the table. The table above may not total due to rounding.

For the three-month period ended March 31, 2017, our primary use of cash was to fund $6.6 million in cash dividends and $ 2.9 million for the payments on loans payable and other financing. In addition, we generated $ 4.3 million proceeds from the issuance of loans.

 

40


 

In the event that we decide to pursue strategic acquisitions in the future, we may fund them with available cash, third - party debt financing, or by raising equity capital, as market conditions allow.

Debt

On June 30, 2014, we issued $330 million of 2.25% Convertible Senior Notes due 2019 (the “Notes”). The Notes are unsecured, unsubordinated obligations of our Company, which pay interest in cash semi-annually, on January 1 and July 1, at a rate of 2.25% per annum. The Notes will mature on July 1, 2019 unless earlier repurchased or converted in accordance with their terms prior to such date. The Notes may be converted, under the conditions specified below, based on an initial conversion rate of 7.9353 shares of common stock per $1,000 principal amount of Notes (equivalent to an initial conversion price of approximately $126.02 per share of common stock), subject to adjustment as described in the indenture governing the Notes.

Holders may convert their notes at their option at any time prior to January 1, 2019 only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on September 30, 2014 (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events. On or after January 1, 2019 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their notes at any time, regardless of the foregoing circumstances.

As of March 31, 2017, t he conversion threshold had been met and the Notes became convertible at the holders’ option beginning on April 1, 2017 and ending on June 30, 2017. The determination of whether or not the Notes are convertible must continue to be performed on a quarterly basis. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election. The intention of the Company is to share-settle the amount due upon conversion of the Notes.

From April 1 to the date of issuance of this form , none of the holders had requested additional conversion of the Notes.

The total estimated fair value of the Notes was   $577.6 million   and   $ 458.8 million   as of March 31, 2017 and December 31, 2016, respectively. The fair value was determined based on the closing trading price per $100 of the Notes as of the last day of trading for the period. Based on the $211.5  closing price of the Company’s common stock on March 31, 2017 , the if-converted value of the Notes exceeded their principal amount by approximately  $ 223.8 million .

Capped   C all T ransactions

The net proceeds from the Notes were approximately $321.7 million after considering the transaction costs in an amount of $8.3 million. In connection with the issuance of the Notes, we paid approximately $19.7 million to enter into capped call transactions with respect to its common stock (the “Capped Call Transactions”), with certain financial institutions. The Capped Call Transactions are expected generally to reduce the potential dilution upon conversion of the Convertible Notes in the event that the market price of our common stock is greater than the strike price of the Capped Call Transactions, initially set at $126.02 per common share, which corresponds to the initial conversion price of the Notes and is subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of the Notes, and have a cap price of approximately $155. 78 per common share. Therefore, as a result of executing the Capped Call Transactions, we will reduce our exposure to potential dilution once the market price of its common shares exceeds the strike price of $126.02 and up to a ca p price of approximately $155.78 per common share. The Capped Call Transactions allow us to receive shares of our common stock and/or cash related to the excess conversion value that we would pay to the holders of the Notes upon conversion, up to the above mentioned cap price.

Cas h Dividends

In each of February, May, August and November of 2016, the Board of Directors approved a quarterly cash dividend of   $6,624   thousands (or   $0.150   per share) on the Company’s   outstanding   shares of common stock. The dividends were paid on   April 15, July 15,   October 14, 2016   and   January 16, 2017   to stockholders of record as of the close of business on   March 31, June 30, September 30, and   December 31, 2016.

On March 2 , 2017, the Board of Directors approved a change to the Company’s dividend policy for providing for a fixed quarterly dividend payment in 2017 of $0.15 per share ($0.60 per share annually). The new dividend policy will take effect following the payment of the $0.15 per share dividend declared by the Board of Directors of the Company payable on April 17, 2017 to shareholders of record as of the close of business on March 31, 2017.

 

41


 

On May 2, 2017, the Board of Directors approved a quarterly cash dividend of $6,624 thousands (or $0.150 per share) on our  outstanding shares of common stock. The second quarterly dividend is payable on July 14, 2017 to stockholders of record as of the close of business on June 30, 2017.

We currently expect to continue paying comparable cash dividends on a quarterly basis. However, any future determination as to the declaration of dividends on our common stock will be made at the discretion of our board of directors and will depend on our earnings, operating and financial condition, capital requirements and other factors deemed relevant by our board of directors, including the applicable requirements of the Delaware General Corporation Law .  

Capital expenditures

Our capital expenditures ( composed of our payments for property and equipment, intangible assets and acquired business) for the three -month periods ended March 31, 2017 and 2016   amounted to $12.8 million and $17.3 million, respectively.

During the three -month period ended March 31, 2017 we invested $7.8 million in Information Technology mainly in Brazil, Argentina and United States, and $1.0 mill ion in our Brazilian an d Argentinean offices.

On February 12, 2016, through our subsidiaries Meli Participaciones S.L. and Marketplace Investment LLC,   we acquired 100% of the issued and outstanding shares of capital stock   of Monits S.A., a software development company located a nd organized under the laws of Buenos Aires, Argentina , for the purchase price of $3.1 million, measured at its fair value.

We are permanently increasing the level of investment on hardware and software licenses necessary to improve and update the technology of our platform and cost of computer software developed internally. We anticipate continued investments in capital expenditures related to information technology in the future as we strive to maintain our position in the Latin American e-commerce market.

We believe that our existing cash and cash equivalents, including the sale of credit card receivables and cash generated from operations will be sufficient to fund our operating activities, property and equipment expenditures and to pay or repay obligations going forward.

 

Off-balance sheet arrangements

As of March 31, 2017 , we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources.

 

Recently issued accounting pronouncements

See Item   1 of Part I, “ Unaudited Interim Condensed Consolidated Financial Statements -Note   2-Summary of significant accounting policies-Recently issued accounting pronouncements.”

 

Non-GAAP Financial Measures

To supplement our consolidated financial statements presented in accordance with U.S. GAAP, we use free cash flows and foreign exchange (“FX”) neutral measures as non-GAAP measures.

These non-GAAP measures should not be considered in isolation or as a substitute for measures of performance prepared in accordance with U.S. GAAP and may be different from non-GAAP measures used by other companies. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. Non-GAAP measures have limitations in that they do not reflect all of the amounts associated with our results of operations as determined in accordance with U.S. GAAP. These non-GAAP financial measures should only be used to evaluate our results of operations in conjunction with the most comparable U.S. GAAP financial measures.

Reconciliation of these non-GAAP financial measures to the most comparable U.S. GAAP financial measures can be found in th e tables included in this quarterly report.

Non-GAAP financial measures are provided to enhance investors’ overall understanding of our current financial performance. Specifically, we believe that free cash flow provides useful information to both management and investors by excluding payments for the acquisition of property and equipment net of financial liabilities , of intangible assets and of acquired businesses net of cash acquired, that may not be indicative of our core operating results. In addition, we report free cash flows to investors because we believe that the inclusion of this measure provides consistency in our financial reporting.

 

42


 

Free cash flow represents cash from operating activities less payment and advances for the acquisition of property and equipment net of the related financial liabilities, intangible assets and acquired businesses net of cash acquired. We consider free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by our operations after the purchases of property and equipment, of intangible assets and of acquired businesses net of cash acquired. A limitation of the utility of free cash flow as a measure of financial performance is that it does not represent the total increase or decrease in our cash balance for the period.

The following table shows a r econciliation of Operating Cash Flows to Free Cash Flows :







 

 

 

 

 

 



 

 

Three-month Periods Ended



 

 

 

March 31,

(In millions)

 

 

 

2017

 

2016



 

 

 

 

 

 

Net Cash provided by (used in) Operating Activities

 

 

 

$        104.8

 

$           (11.8)

Payment for acquired business, net of cash acquired

 

 

 

 -

 

(1.8)

Advance for property and equipment

 

 

 

(2.5)

 

(0.9)

Purchase of intangible assets

 

 

 

(0.0)

 

(0.0)

Purchase of property and equipment

 

 

 

(10.3)

 

(14.6)

Free cash flow

 

 

 

$          92.0

 

$           (29.1)



(*) The table above may not total due to rounding.

W e believe that   reconciliation of FX neutral measures to the most directly comparable GAAP measure provides investors an overall understanding of our current financial performance and its prospects for the future. Specifically, we believe these non-GAAP measures provide useful information to both management and investors by excluding the foreign currency exchange rate impact that may not be indicative of our core operating results and business outlook.

The FX neutral measures were calculated by using the average monthly exchange rates for each month during 201 6 and applying them to the corresponding months in 201 7 ,   so as to calculate what our results would have been had exchange rates remained stable from one year to the next. The table below excludes intercompany allocation FX effects. Finally, these measures do not include any other macroeconomic effect such as local currency inflation effects, the impact on impairment calculations or any price adjustment to compensate local currency inflation or devaluations.

The following table se ts forth the FX neutral measures   related to our reported results of the operations for the three-month period s ended March 31, 2017 :







 

 

 

 

 

 

 

 

 

 

 

 



 

Three-months Periods Ended
March 31, (*)



 

As reported

 

FX Neutral Measures

(In millions, except percentages)

 

2017

 

2016

 

Percentage Change

 

2017

 

2016

 

Percentage Change



 

(Unaudited)

 

 

 

(Unaudited)

 

 

Net revenues

 

$                              273.9

 

$                   157.6

 

73.8% 

 

$                      282.0

 

$                    157.6

 

78.9% 

Cost of net revenues

 

(105.1)

 

(55.4)

 

89.5% 

 

(102.6)

 

(55.4)

 

85.1% 

Gross profit

 

168.9 

 

102.2 

 

65.3% 

 

179.4 

 

102.2 

 

75.5% 



 

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

(105.5)

 

(71.7)

 

47.2% 

 

(107.8)

 

(71.7)

 

50.4% 

Income from operations

 

$                              63.3

 

$                   30.5

 

107.7% 

 

$                   71.5

 

$                   30.5

 

134.6% 



(*) The table above may not total due to rounding.

 



 

43


 

It em 3 — Qualitative and Quantitative Disclosure About Market Risk

We are exposed to market risks arising from our business operations. These market risks arise m ainly from the possibility that changes in interest rates and the U.S. dollar exchange rate with local currencies, particularly the Brazilian r eal and Argentine p eso due to Brazil’s and Argentine’s respective share of our revenues, may affect the value of our financial assets and liabilities.

Foreign currencies

As of March 31, 2017 , we hold cash and cash equivalents in local currencies in our subsidiaries, and have receivables denominated in local currencies in all of our operations. Our subsidiaries generate revenues and incur most of their expenses in the respective local currencies   of the countries in which they operate . As a result, our subsidiaries use their local currency as their functional currency, except for our Venezuelan subsidiaries , which use the U.S. dollar as if it is the functional currency due to Venezuela being a highly inflationary environment. As of March 31, 2017, the total cash and cash equivalents denominated in f oreign currencies totaled $244.0  million, short-term investments denominated in foreign currencies totaled $ 144.1  million and accounts receiva ble, credit cards receivable and loans receivable in foreign currencies totaled $336.0  million. As of March 31, 2017 , we had no long-term investments denominated in foreign currencies. To manage exchange rate risk, our treasury policy is to transfer most cash and cash equivalents in excess of working capital requirements into U.S. dollar-denominated accounts in the United States. As of March 31, 2017, our U.S. dollar-denominated cash and cash equivalents and short-term investments totaled $178.5  million and our U.S. dollar-denominated long-term investments totaled $170.4 million.  

For the three -month period ended March 31, 2017 , we had a consolidated gain on foreign currency of $0 .7   million primarily as a result of a $3 . 8 million gain arising from the Mexican Peso revaluation over our U.S. Dollar net liability position in Mexico, partially offset by the $2.1 million and $0.9 million loss in Brazil and Venezuela, respectively .

If the U.S. dollar weakens against foreign currencies, the translation of these foreign-currency-denominated transactions will result in increased net revenues, operating expenses, and net income while the re-measurement of our net asset position in U.S. dollars will have a negative impact in our Statement of Income. Similarly, our net revenues, operating expenses and net income will decrease if the U.S. dollar strengthens against foreign currencies, while the re-measurement of our net asset position in U.S. dollars will have a positive impact in our Statement of Income.

The following table sets forth the percentage of consolidated net revenues by segment for the three-month periods ended March 31, 2017 and 2016 :







 

 

 

 

 

 

 



 

Three-month Periods Ended

 



 

March 31,

 

(% of total consolidated net revenues) (*)

 

2017

 

2016

 

Brazil

 

58.3 

%

 

49.2 

%

 

Argentina

 

26.1 

 

 

30.6 

 

 

Mexico

 

5.7 

 

 

7.1 

 

 

Venezuela

 

5.3 

 

 

7.7 

 

 

Other Countries

 

4.7 

 

 

5.5 

 

 



(*) Percentages have been calculated using whole -dollar amounts .  



 

44


 

Foreign Currency Sensitivity Analysis

The table below shows the impact on our net revenues, expenses, other expenses and income tax, net income and equity for a positive and a negative 10% fluctuation on all the foreign currencies to which we are exposed to for the three-month period ended March 31, 2017 :









 

 

 

 

 



 

 

 

 

 

Foreign Currency Sensitivity Analysis (*)

(In millions)

 

 

-10% (1)

Actual

+10% (2)



 

 

 

 

 

Net revenues

 

 

$                        304.4

$                       273.9

$                       249.0

Expenses

 

 

(234.0) (210.6) (191.5)

Income from operations

 

 

70.4  63.3  57.5 



 

 

 

 

 

Other expenses and income tax related to P&L items

 

 

(16.8) (15.5) (14.4)



 

 

 

 

 

Foreign Currency impact related to the remeasurement of our Net Asset position

 

 

0.8  0.7  0.6 

Net income

 

 

54.3  48.5  43.8 



 

 

 

 

 

Total Shareholders' Equity

 

 

$                        527.6

$                       482.2

$                       444.9



(1)

Appreciation of the subsidiaries local currency against U.S. Dollar

(2)

Depreciation of the subsidiaries local currency against U.S. Dollar

(*)  The table above may not total due to rounding.



The table above shows an increase in our net income w hen the U.S. dollar weakens against foreign currencies because the re-measurement of our net asset position in U.S. dollars has a lesser impact than the increase in our net revenues, operating expenses, and other expenses, net  and income tax lines related to the translation effect. Similarly, the table above shows a decrease in our net income when the U.S. dollar strengthens against foreign currencies because the re-measurement of our net asset position in U.S. dollars has a lesser impact than the decrease in our net revenues, operating expenses, and other expenses, net and income tax lines related to the translation effect.

D uring the three-month period ended March 31, 2017, we did not enter in to any such hedging transaction .

Venezuelan Segment

In accordance with U.S. GAAP, we have classified our Venezuelan operations as highly inflationary since January 1, 2010 , using the U.S. dollar as the functional currency for purposes of reporting our financial statements. Therefore, no translation effect has been accounted for in other comprehensive income related to our Venezuelan operations. As of March 31, 2017 , monetary assets and liabilities in BsF were re-measured to the U.S. dollar using the SIMADI closing exchange rate of 709.7   BsF per U.S. dollar .



See Item 2 of Part I, “Management’s discussion and analysis of financial condition and results of operations—Critical accounting policies and estimates—Foreign Currency Translation” for details on the currency status of our Venezuelan segment.

Although the current mechanisms available to obtain U.S. dollars for dividend distributions to shareholders outside of Venezuela imply increased restrictions, we do not expect that the current restrictions to purchase U.S. dollars will have a significant adverse effect on our business strategy with regard to the investment in Venezuela.

In order to assist investors in their overall understanding of the impact on our Venezuelan segment reporting, we developed a scenario that considers a 670 % additional devaluation over the SIMADI rate as of the date of this report, applied for the period starting on January 1, 2017 to March 31, 2017 .   These disclosures may help investors to project sensitivities, on segment information captions, to devaluations of whatever order of magnitude they choose by simple arithmetic calculations. The information is just a scenario and does not represent a forward-looking statement about our expectations or projections related to future events in Venezuela. The investors and other readers or users of the financial information presented in this caption are cautioned not to place undue reliance on this scenario. This information is not a guarantee of future events.

The information disclosed below does not include any inflation effect, nor the devaluation impact related to the assumed devaluation or any other effect derived from the assumed devaluation , such as further impairments of long-lived assets . The information below should not be considered in isolation or as a substitute for measures of performance prepared in accordance with U.S. GAAP. In addition, this information is not based on any comprehensive set of accounting rules or principles.

 

45


 

The evolution of the Venezuelan economy and any future governmental interventions in the Venezuelan economy are beyond our ability to control or predict. New events could happen in the future in Venezuela and it is not possible for management to predict all such events, nor can it assess the impact of all such events on our Venezuelan business.

The table below provides specific sensitivity information of our Venezuelan segment reporting for the period indicated assuming  approximately a 670% additional devaluation over the SIMADI rate as of the date of this report, applied for the period starting on January 1, 2017 to March 31, 2017 :





















 

 

 

 

 



 

Three-month period ended
March 31, 2017



 

Actual (*)

 

 

Sensitivity (**)



 

(In million)

Net revenues

$

14.4 

 

$

2.1 

Direct costs

 

(6.6)

 

 

(2.7)

Direct contribution

$

7.8 

 

$

(0.6)

Direct Contribution Margin %

 

54.5% 

 

 

-26.1%











(*) As reported.

( **) Computing a hypothetical devaluation of the Venezuelan segment from January 1 to March 31, 2017 assuming an exchange rate of 4,755.31 BsF per U.S. dollar (670 % of the exchange rate as of March 31, 2017 ).

Despite the continued uncertainty and restrictions relating to foreign currency exchange in Venezuela as described above, we believe that our underlying business in that country is competitively well-positioned and continues to exhibit solid growth, in terms of units sold, even while economic conditions in the Venezuelan economy remain difficult. As economic conditions in that country improve, we expect that our business in Venezuela will benefit accordingly. Although during the first half of 2016, we experienced a strong devaluation of our business in Venezuela, we cannot assure you that the BsF will not experience further devaluations or that the Venezuelan government will not default on its obligations to creditors in the future, which may be significant and could have a material negative impact on our future financial results of our Venezuela segment and value of our bolivar denominated net assets. However, for the reasons stated at the beginning of this paragraph, we remain strongly committed to our business and investment in Venezuela.

Argentine Segment

As of March 31, 2017, the Argentine Peso exchange rate against the U.S. dollar was 1 5 . 4 .  

Had a hypothetical devaluation of 10% of the Argentine peso against the U.S. dollar occurred on March 31, 2017 , the reported net assets in our Argentine subsidiaries would have decreased by approximately $16.5 million with a related impact on Other Comprehensive Income. Additionally, we would have recorded a foreign exchange gain amounting to approximately $1.7 million in our Argentine subsidiaries.

Brazilian Segment

As of March 31, 2017, the Brazilian   Reais exchange rate against the U.S. dollar was 3 . 2 .

Had a hypothetical devaluation of 10% of the Brazilian Reais against the U.S. dollar occurred on March 31, 2017 , the reported net assets in our Brazilian subsidiaries would have decreased by approximately $ 13.7 million with the related impact in Other Comprehensive Income. Additionally, we would have recorded a foreign exchange loss amounting to approximately $ 5.0 million in our Brazilian subsidiaries.

Interest

Our earnings and cash flows are also affected by changes in interest rates. These changes could have an impact on the interest rates that financial institutions charge us prior to the time we sell our MercadoPago receivables. As of   March 31, 2017 , MercadoPago’s receivable s   totaled $300.6 million .   Interest rate fluctuations could also impact interest earned through our MercadoCredito solution. As of March 31, 2017, loans granted under our MercadoCredito solution totaled $11.4 million. Interest rate fluctuations could also negatively affect certain of our fixed rate and floating rate investments comprised primarily of time deposits, money market funds, investment grade corporate debt secur ities and sovereign debt securities. Investments in both fixed rate and floating rate interest earning products carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than predicted if interest rates fall.

 

46


 

Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes. As of March 31, 2017 , the average duration of our available for sale securities, defined as the approximate percentage change in price for a 100-basis- point change in yield, was 1.31%. If interest rates were to instantaneously increase (decrease) by 100 basis points, the fair market value of our available for sale securities as of March 31, 2017 could decrease (increase) by approximately $4. 0  million.

As of March 31, 2017 , our short-term investments amounted to $265.2  million and our long-term investments amounted to $ 170.4 million . These investments can be readily converted at any time into cash or into securities with a shorter remaining time to maturity. We determine the appropriate classification of our investments at the time of purchase and re-evaluate such designations as of each balance sheet date.  

Equity Price Risk

Our board of directors adopted the 2009, 2010, 2011 and 2012 long-term retention plans (the “2009, 2010, 2011 and 2012 LTRPs”, respectively), under which certain eligible employees receive awards (“LTRP Awards”), which are payable as follows:

·

eligible employees will receive a fixed payment equal to 6.25% of his or her LTRP Award under the 2009, 2010,  2011, and/or 2012 LTRP, respectively, once a year for a period of eight years. The 2009 LTRP awards began paying out starting in 2010, the 2010 LTRP Awards starting in 2011, the 2011 LTRP Awards starting in 2012 and the 2012 LTRP Awards starting in 2013(the “2009, 2010, 2011 or 2012 Annual Fixed Payment”, respectively ); and

·

on each date we pay the respective Annual Fixed Payment to an eligible employee, he or she will also receive a payment (the “2009, 2010, 2011 or 2012 Variable Payment”, respectively) equal to the product of (i) 6.25% of the applicable 2009, 2010, 2011 and/or 2012 LTRP Award and (ii) the quotient of (a) divided by (b), where (a), the numerator, equals the Applicable Year Stock Price (as defined below) and (b), the denominator, equals the 2008 (with respect to the 2009 LTRP), 2009 (with respect to the 2010 LTRP), 2010 (with respect to the 2011 LTRP) and 2011 (with respect to the 2012 LTRP) Stock Price, ($13.81, $45.75, $65.41 and $77.77 for the 2009, 2010, 2011 and 2012 LTRP, respectively, which was the average closing price of the Company’s common stock on the NASDAQ Global Market during the final 60 trading days of 2008, 2009, 2010 and 2011, respectively. The “Applicable Year Stock Price” equals the average closing price of the Company’s common stock on the NASDAQ Global Market during the final 60 trading days of the year preceding the applicable payment date.

The 2009, 2010, 2011 and 2012 LTRPs are filed as Exhibits 10.01, 10.02, 10.03 and 10.04, respectively, to our Quarterly Report on Form 10-Q filed with the SEC on August 5, 2016 , and the above description of such LTRPs is qualified in its entirety by reference to such exhibits.

On September 27, 2013, our Board of Directors, upon the recommendation of the compensation committee, approved the 2013 Long Term Retention Plan (the “2013 LTRP”), on March 31, 2014, the Board of Directors, upon the recommendation of the compensation committee, approved the 2014 employee retention plan (the “2014 LTRP”) and on August 4, 2015, the Board of Directors, upon the recommendation of the compensation committee, approved the 2015 employee retention plan (the “2015 LTRP”).

In order to receive an award under the 2013, 2014 and/or 2015 LTRP, each eligible employee must satisfy the performance conditions established by the Board of Directors for such employee. If these conditions are satisfied, the eligible employee will, subject to his or her continued employment as of each applicable payment date, receive the full amount of his or her 2013, 2014 and/or 2015 LTRP award, payable as follows:

·

the eligible employee will receive a fixed payment, equal to 8.333% of his or her 2013, 2014 and/or 2015 LTRP bonus once a year for a period of six years starting in March 2014, 2015 and/or 2016 respectively (the “2013, 2014 or 2015 Annual Fixed Payment”, respectively); and

·

on each date we pay the Annual Fixed Payment to an eligible employee, he or she will also receive a payment (the “2013, 2014 or 2015 Variable Payment”, respectively) equal to the product of (i) 8.333% of the applicable 2013, 2014 and/or 2015 LTRP award and (ii) the quotient of (a) divided by (b), where (a), the numerator, equals the Applicable Year Stock Price (as defined below) and (b), the denominator, equals the 2012 (with respect to the 2013 LTRP), 2013 (with respect to the 2014 LTRP) and 2014 (with respect to the 2015 LTRP) Stock Price, d efined as $79.57, $118.48 and $127.29 for the 2013, 2014 and 2015 LTRP, respectively, which was the average closing price of our common stock on the NASDAQ Global Market during the final 60 trading days of 2012, 2013, 2014 and 2015 respectively. The “Applicable Year Stock Price” shall equal the average closing price of our common stock on the NASDAQ Global Market during the final 60 trading days of the year preceding the applicable payment date.

The 2013, 2014 and 2015 LTRPs are filed as Exhibits 10.05, 10.06 and 10.07, respectively, to our Quarterly Report on Form 10-Q filed with the SEC on August 5, 2016, and the above description of such LTRPs is qualified in its entirety by reference to such exhibits.

 

47


 

On August 2, 2016, the Board of Directors, upon the recommendation of the Compensation Committee, adopted the 2016 LTRP which provides for the grant to eligible employees of a fixed award (the 2016 LTRP Fixed Award) and a variable award (the 2016 LTRP Variable Award). In order to receive awards under the 2016 LTRP, each eligible employee must satisfy the performance conditions established by the Board of Directors for such employee, which generally are expected to be based on pre-set goals for the Company’s financial and operational performance. If these conditions are satisfied, the eligible employee will, subject to his or her continued employment as of each applicable payment date, receive the full amount of his or her 2016 LTRP Awards, payable as follows:

·

Fixed award: The eligible employee will receive a fixed payment equal to 16.66% of his or her 2016 LTRP Fixed Award once a year for a period of six years starting in March 2017 (the “Annual Fixed Payment”); and

·

Variable award: On each date the Company pays the Annual Fixed Award to the eligible employee, he or she will also receive the 2016 LTRP Variable Award payment equal to the product of (i) 16.66% of the applicable 2016 LTRP Variable Award and (ii) the quotient of (a) divided by (b), where (a), the numerator, equals the Applicable Year Stock Price (as defined below) and (b), the denominator, equals the 2015 Stock Price (as defined below). For purposes of the 2016 LTRP, the “2015 Stock Price” shall equal $111.02 (the average closing price of the Company´s common stock on the NASDAQ Global Market during the final 60 -trading days of 2015) and the “Applicable Year Stock Price” shall equal the average closing price of the Company´s common stock on the NASDAQ Global Market during the final 60-trading days of the year preceding the applicable payment date for so long as the Company´s common stock is listed on the NASDAQ.

The 2016 LTRP is filed as Exhibit 10.08 to our Quarterly Report on Form 10-Q filed with the SEC on August 5, 2016, and the description of the 2016 LTRP above is qualified in its entirety by reference to such exhibit.

On April 3, 2017, the Board of Directors, upon the recommendation of the Compensation Committee, adopted the 2017 LTRP which provides for the grant to eligible employees of a fixed award (the 2017 LTRP Fixed Award) and a variable award (the 2017 LTRP Variable Award). In order to receive awards under the 2017 LTRP, each eligible employee must satisfy the performance conditions established by the Board of Directors for such employee, which generally are expected to be based on pre-set goals for the Company’s financial and operational performance. If these conditions are satisfied, the eligible employee will, subject to his or her continued employment as of each applicable payment date, receive the full amount of his or her 2017 LTRP Awards, payable as follows:

·

Fixed award: The eligible employee will receive a fixed payment equal to 16.66% of his or her 2017 LTRP Fixed Award once a year for a period of six years starting in March 2018 (the “Annual Fixed Payment”); and

·

Variable award: On each date the Company pays the Annual Fixed Award to the eligible employee, he or she will also receive the 2017 LTRP Variable Award payment equal to the product of (i) 16.66% of the applicable 2017 LTRP Variable Award and (ii) the quotient of (a) divided by (b), where (a), the numerator, equals the Applicable Year Stock Price (as defined below) and (b), the denominator, equals the 2016 Stock Price (as defined below). For purposes of the 2017 LTRP, the “2016 Stock Price” shall equal $164.17 (the average closing price of the Company´s common stock on the NASDAQ Global Market during the final 60 -trading days of 2016) and the “Applicable Year Stock Price” shall equal the average closing price of the Company´s common stock on the NASDAQ Global Market during the final 60-trading days of the year preceding the applicable payment date for so long as the Company´s common stock is listed on the NASDAQ.

The 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016 and 2017 variable payment LTRP liability subjects us to equity price risk. The following table shows a sensitivity analysis of the risk associated with our contractual obligations related to the 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016 and 2017 Variable Payments if our common stock price per share were to increase or decrease by up to 40%:





 

 

 

 



 

 

 

 



 

As of March 31, 2017



 

MercadoLibre, Inc

 

2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016 and 2017



 

Equity Price

 

variable LTRP liability

(In thousands, except equity price)

 

 

Change in equity price in percentage

 

 

 

 



 

 

 

 

40% 

 

275.65 

 

88,838 
30% 

 

255.96 

 

82,492 
20% 

 

236.27 

 

76,146 
10% 

 

216.58 

 

69,801 

Static

(*)

196.89 

 

63,455 

-10%

 

177.20 

 

57,110 

-20%

 

157.51 

 

50,764 

-30%

 

137.82 

 

44,419 

-40%

 

118.13 

 

38,073 





(*) Average closing stock price for the last 60 trading days of the closing date.

 

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It em 4 — Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the   time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.



Evaluation of disclosure controls and procedures

Based on the evaluation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) required by Exchange Act Rules 13a-15(b) or 15d-15(b), our chief executive officer and our chief financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.



Changes in Internal Controls Over Financial Reporting

There were no changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the three-month period ended March 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  

 

PA RT II. OTHER INFORMATION

It em 1 — Legal Proceedings

See Item 1 of Part I, “Financial Statements Note 7 Commitments and Contingencies Litigation and other Legal Matters.”

 

Item 1A — Risk Factors

As of March 31, 2017, there have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

 

It em 6 — Exhibits

The information set forth under “Index to Exhibits” below is incorporated herein by reference.

 

 

49


 

Sign atures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 



 

 

 

 

 

 



 

 

 

 

 

 



 

 

 

MERCADOLIBRE, INC.



 

 

 

Registrant



 

 

 

Date: May 5, 2017.

 

 

 

By:

 

/s/ Marcos Galperin



 

 

 

 

 

Marcos Galperin



 

 

 

 

 

President and Chief Executive Officer



 

 

 



 

 

 

By:

 

/s/ Pedro Arnt



 

 

 

 

 

Pedro Arnt



 

 

 

 

 

Executive Vice President and Chief Financial Officer

 

 

50


 

Mer cadoLibre, Inc.

INDEX TO EXHIBITS

 



 

3.1

Registrant’s Amended and Restated Certificate of Incorporation. (1)

3.2

Registrant’s Amended and Restated Bylaws. (1)

4.1

Form of Specimen Certificate for the Registrant’s Common Stock. (2)

4.2

Second Amended and Restated Registration Rights Agreement, dated September 24, 2001, by and among the Registrant and the investors named therein. (1)

4. 3

Indenture with respect to the Registrant’s 2.25% Convertible Senior Notes due 2019, dated as of June 30, 2014, between the Registrant and Wilmington Trust, National Association, as trustee. (3)

31.1

Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *

31.2

Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *

32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *

32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase





 

*

Filed or furnished herewith, as applicable.

(1)

Incorporated by reference to the Registration Statement on Form S-1 filed on May 11, 2007.

(2)

Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009.

(3)

Incorporated by reference to the Registrant’s   C urrent R eport on form 8-K filed on June 30, 2014.

 



 

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