Item 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,”
“project,” “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:
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our expectations regarding the continued growth of online commerce and Internet usage in Latin
America;
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our ability to expand our operations and adapt to rapidly changing technologies;
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our ability to attract new customers, retain existing customers and increase revenues;
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the impact of government and central bank regulations on our business;
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litigation and legal liability;
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systems interruptions or failures;
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our ability to attract and retain qualified personnel;
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security breaches and illegal uses of our services;
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reliance on third-party service providers;
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enforcement of intellectual property rights;
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seasonal fluctuations; and
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political, social and economic conditions in Latin America.
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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,
2017 filed with the Securities and Exchange Commission (“SEC”) on February 23, 2018, 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.
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, 2017. 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 materially 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:
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a brief overview of our company;
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a discussion of our principal trends and results of operations for the three-month periods ended
March 31, 2018 and 2017;
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a review of our financial presentation and accounting policies, including our critical accounting
policies;
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a discussion of the principal factors that influence our results of operations, financial condition
and liquidity;
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a discussion of our liquidity and capital resources and a discussion of our capital expenditures;
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a description of our non-GAAP financial measures; and
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a discussion of the market risks that we face.
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Other Information
We routinely post
important information for investors on our Investor Relations website, http://investor.mercadolibre.com. We use this website as
a means of disclosing material, non-public information and for complying with our disclosure obligations under SEC Regulation FD
(Fair Disclosure). Accordingly, investors should monitor our Investor Relations website, in addition to following our press releases,
SEC filings, public conference calls and webcasts. The information contained on, or that may be accessed through, our website is
not incorporated by reference into, and is not a part of, this report.
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 635 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,
Chile, Uruguay and Perú. 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, 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, in Argentina, Brazil and Mexico, and consumers,
in Argentina, by offering them additional services.
To further enhance
our suite of e-commerce services, we launched the MercadoEnvios shipping program in Brazil, Argentina, Mexico, Colombia and Chile.
Through MercadoEnvios, we offer a cost-efficient way to utilize our existing distribution chain to fulfill sales on our platform.
Sellers opting into the program are able to offer a uniform and seamlessly integrated shipping experience to their buyers at competitive
prices. As of March 31, 2018, we also offer free shipping to buyers in Brazil, Argentina, Mexico, Chile and Colombia.
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.
Furthermore, 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
develops and sells enterprise software solutions to e-commerce business clients in Brazil.
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 and other countries (including Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Panama,
Peru, Portugal, Bolivia, Honduras, Nicaragua, El Salvador, Guatemala, Paraguay, Uruguay and the United States of America (through
real estate classifieds in the State of Florida only)). Venezuela was one of our geographic segments until we deconsolidated our
Venezuelan operations, effective as of December 1, 2017 and first disclosed on our Annual Report on Form 10-K for the fiscal year
ended December 31, 2017. Although we discuss long-term trends in our business, it is our policy not to 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 making 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 consolidated net revenues by segment for the three-month periods ended March 31, 2018 and
2017:
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Three-month Periods Ended
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March 31,
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(% of total consolidated net revenues) (*)(**)
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2018
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2017
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Brazil
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57.4
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%
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59.2
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%
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Argentina
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31.8
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26.5
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Mexico
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5.3
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4.2
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Venezuela (***)
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—
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5.3
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Other Countries
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5.6
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4.7
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(*) 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 amount incurred in shipping subsidies, which under ASC 606
are netted from revenues was $112.5 million and $4.3 million for the three-month periods ended March 31, 2018 and 2017, respectively.
Please refer to Note 2 of our unaudited interim condensed consolidated financial statements for additional detail.
(***) Venezuelan revenues have been deconsolidated since December
1, 2017. Please refer to Note 2 of our unaudited interim condensed consolidated financial statements for additional detail.
The following table summarizes
the changes in our net revenues by segment for the three-month periods ended March 31, 2018 and 2017:
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Three-month Periods Ended
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Change from 2017
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March 31,
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to 2018 (*)
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2018
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2017
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in Dollars
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in %
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(in millions, except percentages)
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Net Revenues(**):
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Brazil
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$ 184.2
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$ 159.8
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$ 24.4
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15.3
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%
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Argentina
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101.9
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71.4
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30.5
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42.8
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Mexico
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17.1
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11.3
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5.7
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50.7
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Venezuela (***)
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—
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14.4
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(14.4)
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(100.0)
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Other Countries
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17.8
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12.8
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5.0
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39.4
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Total Net Revenues
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$ 321.0
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$ 269.7
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$ 51.3
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19.0
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%
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(*) 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 amount incurred in shipping subsidies, which under ASC 606
are netted from revenues, was $112.5 million and $4.3 million for the three-month periods ended March 31, 2018 and 2017, respectively.
Please refer to Note 2 of our unaudited interim condensed consolidated financial statements for additional detail.
(***) Venezuelan revenues have been deconsolidated since December
1, 2017. Please refer to Note 2 of our unaudited interim condensed consolidated financial statements for additional detail.
Recent Developments
2018 Capped Call Transactions
In March 2018, we paid $45.7 million (including
transaction expenses) to enter into privately negotiated capped call transactions with respect to shares of our common stock with
several financial institutions. The 2018 Capped Call Transactions are in addition to the 2014 and 2017 Capped Call Transactions
and are expected generally to reduce the potential dilution upon conversion of the 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 $426.73 per common share. The
2018 Capped Call Transactions are subject to anti-dilution adjustments substantially similar to those applicable to the conversion
rate of the Notes, and have a cap price of approximately $467.38 per common share. If any portion of the Notes are converted prior
to maturity or we repurchase any portion of the Notes prior to maturity, a corresponding portion of the Capped Call Transactions
may be terminated for value at our election.
Description of Line Items
Net revenues
Effective January
1, 2018, we adopted ASC 606 – Revenue from Contracts with Customers related to revenue recognition (“ASC 606”)
issued by the Financial Accounting Standards Board (“FASB”) in 2014. ASC 606 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. We adopted ASC 606 using the full retrospective transition method and recast the prior reporting period
presented.
Under the full
retrospective method, we retrospectively applied ASC 606 to the three-month period ended March 31, 2017. For the three-month periods
ended March 31, 2018 and 2017, we incurred $112,497 thousands and $4,251 thousands, respectively, of subsidized shipping costs
that have been incurred and included as a reduction of revenues. The total impact resulting from the change in presentation of
shipping subsidies was a decrease in Net revenues and Cost of net revenues of $4,251 thousands in the Interim Condensed Consolidated
Statement of Income for the three-month period ended March 31, 2017.
We recognize revenues
in each of our four
(*****)
geographical reporting segments. Within each of our segments, the services we provide generally
fall into two distinct revenue streams, “Enhanced Marketplace” which includes our core business and “Non-Marketplace”
which includes ad sales, classified fees, payment fees and other ancillary businesses.
The following table
summarizes our consolidated net revenues by revenue stream for the three-month periods ended March 31, 2018 and 2017:
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Three-month Periods Ended
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March 31, (*)
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Consolidated net revenues by revenue stream (****)
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2018
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2017
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(in millions)
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Enhanced Marketplace
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$
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140.7
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$
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177.9
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Non-Marketplace (**) (***)
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180.3
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91.7
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Total
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$
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321.0
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$
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269.7
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(*) The table above may not total due to rounding.
(**) Includes final value fees and shipping
fees. The amount incurred in shipping subsidies, which under ASC 606 are netted from revenues, was $112.5 million and $4.3 million
for the three-month periods ended March 31, 2018 and 2017, respectively. Please refer to Note 2 of our unaudited interim condensed
consolidated financial statements for additional detail.
(***) Includes, among other things, ad sales,
classified fees, payment fees and other ancillary services.
(****) Includes $144.8 million and $65.2 million
of Payment Fees for the three-month periods ended March 31, 2018 and 2017, respectively.
(*****) Revenues from Venezuela have been deconsolidated
since December 1, 2017. Please refer to Note 2 of our unaudited interim condensed consolidated financial statements for additional
detail.
Revenues from Enhanced
Marketplace transactions are mainly generated from final value fees and shipping fees net of the third-party carrier costs.
For Enhanced Marketplace
services, final value fees represent a percentage of the sale value that is charged to the seller once an item is successfully
sold. Our shipping revenues are generated when a buyer elects to receive an item through our shipping service net of the third-party
carrier costs.
Revenues for Non-Marketplace
services are generated from:
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ad sales up-front fees; and
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fees from other ancillary businesses.
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With respect to
our MercadoPago service, we generate payment fees attributable to:
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commissions representing a percentage of the payment volume processed that are charged to sellers
in connection with off Marketplace-platform transactions;
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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;
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commissions from additional fees we charge when our sellers elect to withdraw cash;
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interest, cash advances and fees from customers and merchant and consumer credits granted under
our MercadoCredito solution; and
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revenues from the sale of mobile points of sale products.
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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 text link ads throughout our websites to interested advertisers.
When more than
one service is included in one single arrangement with the same 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, 2018 and 2017, 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), and 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 was 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. Venezuelan revenues have been deconsolidated since December 1, 2017. Please refer to Note
2 to our unaudited interim condensed consolidated financial statements for Venezuela’ deconsolidation details.
Our subsidiaries
in Brazil, Argentina and Colombia are subject to certain taxes on revenues which are classified as a cost of net revenues. These
taxes represented 9.3% of net revenues for the three-month period ended March 31, 2018, as compared to 9.1% for
the same period in 2017.
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, hosting and site operation fees, cost of mobile 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.
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 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 Accounting Policies and Estimates
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 consolidated financial statements.
There have been
no significant changes in our critical accounting policies, management estimates or accounting policies since the year ended December 31,
2017 and disclosed in the Form 10-K, see Item – “Critical Accounting Policies”, other than those discussed in
Note 2 of our unaudited interim condensed consolidated financial statements in connection with the adoption of ASC 606 and ASU
2016-16- Income taxes (Topic 740) as of January 1, 2018.
Foreign Currency Translation
All of our foreign
consolidated operations 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 (loss) income, 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 unaudited
interim condensed consolidated statements of income under the caption “Foreign currency (losses) gains”.
Venezuelan deconsolidation
Effective December
1, 2017, we determined that deteriorating conditions in Venezuela had led us to no longer meet the accounting criteria for control
over our Venezuelan subsidiaries. Venezuela’s recent selective default determination, restrictive exchange controls and suspension
of foreign exchange market in Venezuela, the lack of access to U.S. dollars through official currency exchange mechanisms together
with the worsening in Venezuela’s macroeconomic environment resulted in other-than-temporary lack of exchangeability between
the Venezuela bolivar and the U.S. dollar, and restricted our ability to pay dividends and our ability to satisfy other obligations
denominated in U.S. dollars. Therefore, in accordance with the applicable accounting standards, as of December 1, 2017, we deconsolidated
the financial statements of our subsidiaries in Venezuela and began reporting the results under the cost method of accounting.
Beginning December
1, 2017, we no longer include the results of the Venezuelan subsidiaries in our consolidated financial statements.
Allowances for doubtful accounts,
loan receivables 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, loan receivables 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, loan receivables 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, loans receivables 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, $67.3 million and $45.7 million (including transaction expenses) in June 2014,
September 2017 and March 2018, respectively, 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 Notes in the event that the market price of our common stock is greater
than the strike price of the Capped Call Transactions. The cost of the Capped Call Transactions is included as a net reduction
to additional paid-in capital in the stockholders’ equity section of our consolidated balance sheets.
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, 2018 compared to the three-month period ended March 31, 2017 —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, 2017.
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 establish a valuation allowance. As of March 31, 2018, 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 tax expense” line in our unaudited interim condensed consolidated statement of
income.
Stock-based compensation
Our board of directors
adopted long-term retention plans (“LTRPs”), 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 the NASDAQ Global Market.
Results of operations for the three-month period ended March
31, 2018 compared to the three-month period ended March 31, 2017
The selected financial
data for the three-month periods ended March 31, 2018 and 2017 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, 2018 are not necessarily indicative of the results that may
be expected for the full year ending December 31, 2018 or for any other period.
Statement of income data
|
|
|
|
|
|
Three-month Periods Ended
March 31, (**)
|
(In millions)
|
2018 (*)
|
|
2017 (*)
|
|
|
(Unaudited)
|
|
Net revenues(***)
|
$ 321.0
|
|
$ 269.7
|
|
Cost of net revenues
|
(158.2)
|
|
(100.8)
|
|
Gross profit
|
162.8
|
|
168.9
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Product and technology development
|
(38.4)
|
|
(30.3)
|
|
Sales and marketing
|
(110.7)
|
|
(46.9)
|
|
General and administrative
|
(43.1)
|
|
(28.3)
|
|
Total operating expenses
|
(192.2)
|
|
(105.5)
|
|
(Loss)/Income from operations
|
(29.4)
|
|
63.3
|
|
|
|
|
|
|
Other income (expenses):
|
|
|
|
|
Interest income and other financial gains
|
9.2
|
|
12.2
|
|
Interest expense and other financial charges
|
(10.7)
|
|
(6.5)
|
|
Foreign currency gain
|
5.6
|
|
0.7
|
|
Net (loss)/income before income tax expense
|
(25.4)
|
|
69.7
|
|
|
|
|
|
|
Income tax gain/(expense)
|
12.4
|
|
(21.1)
|
|
Net (loss)/income
|
$ (12.9)
|
|
$ 48.5
|
|
(*) The table above may not total due to rounding.
(**) Venezuelan result have been deconsolidated since December 1,
2017, therefore, our 2018 results do not include Venezuelan segment results.
(***) The amount incurred in shipping subsidies, which under ASC
606 are netted from revenues, was $112.5 million and $4.3 million for the three-month periods ended March 31, 2018 and 2017, respectively.
Please refer to Note 2 of our unaudited interim condensed consolidated financial statements for additional detail.
Principal trends in results of operations
Growth in net revenues
Since our inception,
we have consistently generated revenue growth from our Enhanced Marketplace and Non-Marketplace revenue streams, driven by the
strong growth of our key operational metrics. Our net revenues grew 19.0% in the three-month period ended March 31, 2018 as compared
to the same period in 2017. Our successful items sold and total payment volume increased 50.6% and 60.5%, respectively, in the
three-month period ended March 31, 2018 as compared to the same period in 2017. Additionally, our number of confirmed registered
users was 22.4% higher as of March 31, 2018 as compared to the number of confirmed registered users as of March 31, 2017. Furthermore,
our gross merchandise volume (“GMV”) and our successful items shipped increased 34.0% and 92.4%, respectively, in the
three-month period ended March 31, 2018 as compared to the same period in 2017. Our growth in net revenues was negatively affected
by our implementation of ASC 606. Our shipping subsidies are netted from net revenues when we subsidize the cost of shipping. The
free shipping subsidies incurred in the three-month periods ended March 31, 2018 and 2017 amounted to $112.5 million and $4.3 million,
respectively. For the three-month period ended March 31, 2017 our revenues include Venezuelan revenues of $14.4 million. As a result
of the deconsolidation, since December 1, 2017, our revenues for the three-month period ended March 31, 2018 exclude the revenues
of our Venezuelan subsidiaries.
We believe that our growth
in net revenues should continue in the future. However, despite this positive historical trend, the current weak macro-economic
environment in certain countries in Latin America, coupled with devaluations of certain local currencies in those countries versus
the U.S. dollar, the effects of Venezuelan deconsolidation and high interest rates in those countries, could cause a decline in
year-over-year net revenues, particularly as measured in U.S. dollars. Moreover, in the future, revenues could decline if we continue
with our free shipping initiatives and our shipping service grows faster than our marketplace and non-marketplace sales.
Gross profit margins
During the past
two years, our business has experienced decreasing gross profit margins, defined as total net revenues minus total cost of net
revenues, as a percentage of net revenues.
Our gross profit
margins were 50.7% and 62.6% for the three-month periods ended March 31, 2018 and 2017, respectively. The decrease in our gross
profit margins resulted primarily from:
(i) Increased costs
of providing free shipping in Brazil, Mexico, Argentina, Chile and Colombia of $108.2 million for the three-month period ended
March 31, 2018, as compared with the same period in 2017, respectively.
(ii) Higher penetration
of our payments and shipping solution into our Argentine, Brazilian and Mexican marketplaces. For the three-month period ended
March 31, 2018, total volume of payments on our marketplace represented 89.9% of our total GMV (excluding motor vehicles, vessels,
aircraft and real estate); as compared to 78.2% for the three-month period ended March 31, 2017. Additionally, for the three-month
period ended March 31, 2018, the total number of items shipped through our shipping solution represented 65.6% of our total number
of successful items sold, as compared to 51.3% for the three-month period ended March 31, 2017. Transactions that include such
services intrinsically incur incremental costs such as collection fees, which result in lower gross profit margins as compared
to other services we offer. 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 in terms of revenues. For the three-month
period ended March 31, 2018, collection fees and sales taxes increased $22.5 million and $5.4 million, respectively, as compared
to the same period in 2017.
(iii) Increased
cost of products sold of $9.9 million for the three-month period ended March 31, 2018, as compared with the same period in 2017,
related to a higher volumes of mobile points of sales devices sold in Brazil, Argentina and Mexico.
(iv) Increased
hosting costs of $6.6 million for the three-month period ended March 31, 2018, as compared with the same period in 2017.
(v) Increased customer
support costs of $6.4 million for the three-month period ended March 31, 2018, as compared with the same period in 2017, mainly
as a consequence of an increase in salaries and wages. The number of customer support employees was 2,651 as of March 31, 2018
as compared with 1,839 as of March 31, 2017.
In the future,
gross profit margins could continue to decline if we continue to offer free shipping and the penetration of our payment solution
and our shipping service grows faster than our marketplace sales.
Operating (loss)/income margins
For the three-month
period ended March 31, 2018 as compared to the same period in 2017, our operating (loss)/income margin decreased from
a positive margin of 23.5% to a negative margin of 9.2%, mainly as a consequence of increases in costs of net revenues (driven
mainly by collection fees), as described under “Gross profit margins” above, and increases in sales and marketing expenses
(driven mainly by online and offline marketing expenses, buyer protection program expenses, bad debt expenses, salaries and chargebacks
from credit cards).
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 margins.
Other Data
|
|
|
|
|
|
|
|
|
|
|
|
Three-month Periods Ended
March 31,
|
(in millions)
|
|
|
|
2018
|
2017 (11)
|
|
|
|
|
|
|
|
|
Number of confirmed registered users at end of period
(1)
|
|
|
|
223.1
|
|
|
182.2
|
Number of confirmed new registered users during period
(2)
|
|
|
|
11.2
|
|
|
8.1
|
Gross merchandise volume
(3)
|
|
|
$
|
3,126.4
|
|
$
|
2,334.0
|
Number of successful items sold
(4)
|
|
|
|
80.1
|
|
|
53.2
|
Number of successful items shipped
(5)
|
|
|
|
52.5
|
|
|
27.3
|
Total payment volume
(6)
|
|
|
$
|
4,175.3
|
|
$
|
2,601.0
|
Total volume of payments on marketplace
(7)
|
|
|
$
|
2,809.5
|
|
$
|
1,825.8
|
Total payment transactions
(8)
|
|
|
|
74.3
|
|
|
44.1
|
Unique buyers
(9)
|
|
|
|
17.0
|
|
|
13.3
|
Unique sellers
(10)
|
|
|
|
5.0
|
|
|
4.1
|
Capital expenditures
|
|
|
$
|
23.0
|
|
$
|
12.8
|
Depreciation and amortization
|
|
|
$
|
11.1
|
|
$
|
9.0
|
|
(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.
|
|
(11)
|
Data for 2017 includes Venezuelan metrics. Please refer to Note 2 of our unaudited interim condensed consolidated financial
statements for additional details.
|
Net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-month Periods Ended
|
|
Change from 2017
|
|
March 31,
|
|
to 2018 (*)
|
|
2018
|
|
2017
|
|
in Dollars
|
|
in %
|
|
(in millions, except percentages)
|
Total Net Revenues (**)
|
$ 321.0
|
|
$ 269.7
|
|
$ 51.3
|
|
19.0%
|
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.
(**) The amount incurred in shipping subsidies,
which under ASC 606 are netted from revenues, was $112.5 million and $ 4.3 million for the three-month periods ended March 31,
2018 and 2017, respectively. Please refer to Note 2 of our unaudited interim condensed consolidated financial statements for additional
detail.
Our net revenues
grew 19.0% in the three-month period ended March 31, 2018 as compared to the same period in 2017. The increase in Net Revenues
was primarily attributable to increases in the enhanced marketplace transactions volume explained by:
|
a)
|
a 34.0% increase in gross merchandise volume (“GMV”),
|
|
b)
|
a 50.6% increase in successful items sold; and
|
|
c)
|
a 92.4% increase in successful items shipped.
|
The enhanced marketplace
revenues increase was partially offset by higher shipping subsidies. For the three-month periods ended March 31, 2018 and 2017,
the amount incurred in shipping subsidies, which under ASC 606 are netted from revenues, was $112.5 million and $4.3 million, respectively.
In addition, the
increase in our net revenues was attributable to a 96.5% increase in our non-marketplace revenues from $91.7 million in the first
quarter of 2017 to $180.3 million in the first quarter of 2018, mainly generated by a 60.5% increase in our total payment volume.
Finally, the increase
in our net revenues was negatively impacted by the Venezuelan deconsolidation in the fourth quarter of 2017. For the three-month
period ended March 31, 2017 our revenues include Venezuelan revenues of $14.4 million. As a result of the deconsolidation, as of
December 1, 2017 our revenues exclude the revenues of our Venezuelan subsidiaries.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change from 2017
|
|
|
|
Three-month Periods Ended
March 31,
|
|
to 2018 (***)
|
Consolidated Net Revenues by revenue stream
|
|
|
2018
|
|
2017
|
|
in Dollars
|
|
in %
|
|
|
|
(in millions, except percentages)
|
Brazil
|
|
|
|
|
|
|
|
|
|
Enhanced Marketplace
|
|
|
$ 71.4
|
|
$ 108.3
|
|
$ (36.9)
|
|
-34.1%
|
Non-Marketplace
|
|
|
112.7
|
|
51.4
|
|
61.3
|
|
119.1%
|
|
|
|
184.2
|
|
159.8
|
|
24.4
|
|
15.3%
|
Argentina
|
|
|
|
|
|
|
|
|
|
Enhanced Marketplace
|
|
|
$ 52.1
|
|
$ 44.3
|
|
$ 7.8
|
|
17.5%
|
Non-Marketplace
|
|
|
49.8
|
|
27.1
|
|
22.8
|
|
84.2%
|
|
|
|
101.9
|
|
71.4
|
|
30.5
|
|
42.8%
|
Mexico
|
|
|
|
|
|
|
|
|
|
Enhanced Marketplace
|
|
|
$ 10.0
|
|
$ 6.7
|
|
$ 3.3
|
|
49.9%
|
Non-Marketplace
|
|
|
7.0
|
|
4.6
|
|
2.4
|
|
51.8%
|
|
|
|
17.1
|
|
11.3
|
|
5.7
|
|
50.7%
|
Venezuela (****)
|
|
|
|
|
|
|
|
|
|
Enhanced Marketplace
|
|
|
$ —
|
|
$ 13.2
|
|
$ (13.2)
|
|
-100.0%
|
Non-Marketplace
|
|
|
—
|
|
1.2
|
|
(1.2)
|
|
-100.0%
|
|
|
|
—
|
|
14.4
|
|
(14.4)
|
|
-100.0%
|
Other countries
|
|
|
|
|
|
|
|
|
|
Enhanced Marketplace
|
|
|
$ 7.1
|
|
$ 5.4
|
|
$ 1.7
|
|
32.4%
|
Non-Marketplace
|
|
|
10.7
|
|
7.4
|
|
3.3
|
|
44.5%
|
|
|
|
17.8
|
|
12.8
|
|
5.0
|
|
39.4%
|
|
|
|
|
|
|
|
|
|
|
Enhanced Marketplace (*)
|
|
|
140.7
|
|
177.9
|
|
(37.2)
|
|
-20.9%
|
Non-Marketplace (**)
|
|
|
180.3
|
|
91.7
|
|
88.5
|
|
96.5%
|
Total
|
|
|
$ 321.0
|
|
$ 269.7
|
|
$ 51.3
|
|
19.0%
|
(*) The amount incurred in shipping subsidies,
which under ASC 606 are netted from revenues, was $112.5 million and 44.3 million for the three-month periods ended March 31, 2018
and 2017, respectively. Please refer to Note 2 of our unaudited interim condensed consolidated financial statements for additional
detail.
(**) Includes, among other things, payment fees,
ad sales, classified 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.
(****) Venezuelan revenues have been deconsolidated since December
1, 2017. Please refer to Note 2 of our unaudited interim condensed consolidated financial statements for additional detail.
Net revenues for the
three-month period ended March 31, 2018 increased in all of our geographic segments, except from Venezuela due to deconsolidation.
Brazil
Enhanced Marketplace
revenues in Brazil decreased 34.1% in the three-month period ended March 31, 2018 as compared to the same period in 2017. The decrease
was primarily a consequence of $92.1 million in shipping subsidies related to our free shipping initiative launched in the second
quarter of 2017, which is presented netted from revenues in accordance with ASC 606, and a 3.1% average devaluation of the local
currency. This decrease was partially offset by a 71.1% increase in local currency gross merchandise volume. Non-Marketplace revenues
grew 119.1%, a $61.3 million increase, during the same period, mainly driven by: i) a 66.0 % increase in the volume of payments
transactions; and ii) a 131.7 % increase in ad sales volume.
Argentina
Enhanced Marketplace
revenues in Argentina increased 17.5% in the three-month period ended March 31, 2018 as compared to the same period in 2017. The
increase was primarily a consequence of a 52.8% increase in local currency gross merchandise volume, partially offset by $4.1 million
in shipping subsidies related to our free shipping initiative launched in the first quarter of 2018, which is presented netted
from revenues in accordance with ASC 606 and a 20.4% average devaluation of the local currency. Non-Marketplace revenues grew 84.2%
in the three-month period ended March 31, 2018, a $22.8 million increase, mainly driven by: i) a 36.8% increase in the volume of
payments transactions; and ii) a 71.8% increase in ad sales volume.
Mexico
Enhanced Marketplace
revenues in Mexico increased by approximately 49.9% in the three-month period ended March 31, 2018, as compared to the same period
in 2017, mainly due to a 76.6% increase in local currency gross merchandise volume and a 8.5% average appreciation of local currency,
partially offset by an increase of $8.1 million in shipping subsidies related to our free shipping initiative, which is presented
netted from revenues in accordance with ASC 606. Non-Marketplace revenues increased 51.8% in the three-month period ended
March 31, 2018, a $2.4 million increase, mainly driven by increases in the volume of payments transactions and shipped items.
Venezuela
Venezuelan revenues
have been deconsolidated since December 1, 2017. Please refer to Note 2 of our unaudited interim condensed consolidated financial
statements for additional detail.
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)
|
|
(*)
|
2018
|
|
|
|
|
Net revenues (**)
|
$ 321.0
|
n/a
|
n/a
|
n/a
|
Percent change from prior quarter
|
-10%
|
|
|
|
2017
|
|
|
|
|
Net revenues (**)(***)
|
$ 269.7
|
$ 283.9
|
$ 304.9
|
$ 358.1
|
Percent change from prior quarter
|
5%
|
5%
|
7%
|
17%
|
(*) Percentages have been calculated using whole-dollar amounts rather
than rounded amounts that appear in the table.
(**) The amount incurred in shipping subsidies,
which under ASC 606 are netted from revenues, was $112.5 million and $4.3 million for the three-month periods ended March 31, 2018
and 2017, respectively. Please refer to Note 2 of our unaudited interim condensed consolidated financial statements for additional
detail.
(***) Venezuelan revenues have been deconsolidated since December
1, 2017. Please refer to Note 2 of our unaudited interim condensed consolidated financial statements for additional detail. For
the three-month period ended March 31, 2017 our revenues include Venezuelan revenues of $14.4 million.
The following table sets
forth the growth in net revenues in local currencies for the three-month period ended March 31, 2018 as compared to the same period
in 2017:
|
|
|
|
|
|
|
|
|
|
|
Changes from 2017 to 2018 (*)
|
(% of revenue growth in Local Currency) (**)
|
|
|
Three-month period
|
Brazil
|
|
|
18.9%
|
Argentina
|
|
|
79.6%
|
Mexico
|
|
|
39.1%
|
Other Countries
|
|
|
34.4%
|
Total Consolidated
|
|
|
30.1%
|
(*) The local currency revenue growth was calculated
by using the average monthly exchange rates for each month during 2017 and applying them to the corresponding months in 2018, 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.
(**) The amount incurred in shipping subsidies,
which under ASC 606 are netted from revenues, was $112.5 million and $4.3 million for the three-month periods ended March 31, 2018
and 2017, respectively. Please refer to Note 2 of our unaudited interim condensed consolidated financial statements for additional
detail.
In Argentina, the
increase in our net revenues is due to an increase of our Argentine transactions volume, and increases in our MercadoPago transactions
partially offset by higher shipping subsidies related to our free shipping initiative.
In Mexico, the
increase in local currency growth is a consequence of an increase of our Mexican Marketplace transactions volumes, and increases
in our MercadoPago transactions and shipped items volumes partially offset by higher shipping subsidies related to our
free shipping initiative.
In Brazil, the
increase in local currency growth is mainly a consequence of an increase of our Brazilian Marketplace transactions volume and increases
in our MercadoPago transactions and our shipped items volume partially offset by higher shipping subsidies related to
our free shipping initiative.
Cost of net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-month Periods Ended
|
|
Change from 2017
|
|
|
March 31,
|
|
to 2018 (*)
|
|
|
2018
|
|
2017
|
|
in Dollars
|
|
in %
|
|
|
(in millions, except percentages)
|
Total cost of net revenues
|
|
$ 158.2
|
|
$ 100.8
|
|
$ 57.4
|
|
56.9%
|
As a percentage of net revenues (*)
|
|
49.3%
|
|
37.4%
|
|
|
|
|
(*) 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.
For
the three-month period ended March 31, 2018 as compared to the same period of 2017, the increase of $57.4 million in cost of net
revenues was primarily attributable to: i) an increase in collection fees of $22.5 million, which was mainly attributable to our
Argentine and Brazilian operations as a result of the higher transactions volume of MercadoPago in those countries and higher off-platform
transactions; ii) an increase in cost of product sold of $9.9 million as a consequence of higher volumes of mobile points of sales
devices sold in Brazil and Argentina; iii) an increase in hosting expenses of $6.6 million; iv) a $6.4 million increase in customer
support costs mainly as a consequence of salaries and wages and; v) an increase in sales taxes of $5.4 million, mainly related
to the growth of our Argentine and Brazilian operations.
Product and technology development expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-month Periods Ended
|
|
Change from 2017
|
|
|
March 31,
|
|
to 2018 (*)
|
|
|
2018
|
|
2017
|
|
in Dollars
|
in %
|
|
|
(in millions, except percentages)
|
Product and technology development
|
|
$ 38.4
|
|
$ 30.3
|
|
$ 8.1
|
26.8%
|
As a percentage of net revenues (*)
|
|
12.0%
|
|
11.2%
|
|
|
|
(*) 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, 2018, the increase in product and technology development expenses as compared to the same period
in 2017 amounted to $8.1 million. This increase was primarily attributable to: i) an increase of $4.9 million in salaries and wages;
ii) an increase in other product and technology development expenses of $1.5 million; and iii) an increase in depreciation and
amortization expenses of $1.3 million.
We believe product
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 2017
|
|
|
March 31,
|
|
to 2018 (*)
|
|
|
2018
|
|
2017
|
|
in Dollars
|
in %
|
|
|
(in millions, except percentages)
|
Sales and marketing
|
|
$ 110.7
|
|
$ 46.9
|
|
$ 63.8
|
135.8%
|
As a percentage of net revenues (*)
|
|
34.5%
|
|
17.4%
|
|
|
|
(*) 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.
For the three-month
period ended March 31, 2018, the $63.8 million increase in sales and marketing expenses as compared to the same period in 2017
was primarily attributable to: i) an increase of $30.3 million in on-line and offline marketing expenses mainly in Brazil, Mexico
and Argentina; ii) a $17.6 million increase in our buyer protection program expenses; iii) a $5.7 million increase in our bad debt
expenses, mainly related to our credit business; iv) a $4.7 million increase in salaries and wages; and v) a $4.6 million increase
in chargebacks from credit cards due to the increase in our MercadoPago volume.
General and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-month Periods Ended
|
|
Change from 2017
|
|
|
March 31,
|
|
to 2018 (*)
|
|
|
2018
|
|
2017
|
|
in Dollars
|
|
in %
|
|
|
(in millions, except percentages)
|
General and administrative
|
|
$ 43.1
|
|
$ 28.3
|
|
$ 14.7
|
|
52.1%
|
As a percentage of net revenues (*)
|
|
13.4%
|
|
10.5%
|
|
|
|
|
(*) 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.
For the three-month period
March 31, 2018, the $14.7 million increase in general and administrative expenses as compared to the same period in 2017 was primarily
attributable to: i) a $10.2 million increase in salaries and wages; ii) a $2.2 million increase in tax, audit and legal fees; iii)
a $0.8 million increase in temporary services hired, mainly associated to temporary administrative employees; and iv) a $0.7 increase
in depreciation and amortization.
Other income, net
|
|
|
|
|
|
|
|
|
|
Three-month Periods Ended
|
|
Change from 2017
|
|
|
March 31,
|
|
to 2018 (*)
|
|
|
2018
|
|
2017
|
|
in Dollars
|
in %
|
|
|
(in millions, except percentages)
|
Other income, net
|
|
$ 4.1
|
|
$ 6.3
|
|
$ (2.3)
|
-36.0%
|
As a percentage of net revenues (*)
|
|
1.3%
|
|
2.4%
|
|
|
|
(*) 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.
For the three-month
period ended March 31, 2018, the $2.3 million decrease in other income, net as compared to the same period in 2017 was primarily
attributable to: i) an increase of $4.3 million in financial expenses, mainly attributable to financial interest related to financial
loans in Argentina, Uruguay and Chile; and ii) a $3.0 million decrease in interest income from our financial investments as a result
of lower interest rates in Brazil as well as a lower float in Brazil and Argentina. This decrease was partially offset by an increase
in foreign exchange gain of $4.9 million, from $0.7 million in 2017 to $5.6 million in 2018. The 2018 foreign exchange gain was
mainly as a consequence of: i) a $3.1 million and a $0.9 million gain arising from the devaluation of the Argentine Peso and the
Brazilian Reais over our U.S. Dollar net asset position in Argentina and Brazil, respectively and; ii) a $1.7 million gain arising
from the Mexican Peso revaluation over our U.S. Dollar net liability position in Mexico.
Income tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-month Periods Ended
|
|
Change from 2017
|
|
March 31,
|
|
to 2018 (*)
|
|
2018
|
|
2017
|
|
in Dollars
|
|
in %
|
|
(in millions, except percentages)
|
Income tax
|
$ (12.4)
|
|
$ 21.1
|
|
$ (33.6)
|
|
-158.8%
|
As a percentage of net revenues (*)
|
-3.9%
|
|
7.8%
|
|
|
|
|
(*) 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.
During the three-month
period ended March 31, 2018 as compared to the same period in 2017, income tax expense decreased by $33.6 million mainly as
a consequence of higher pre-tax losses recorded in Mexico (mainly attributable to an increase in our operating costs) and pre-tax
losses in Brazil compared to the pre-tax tax gains recorded in Brazil during 2017 (as a result mainly of an increase in our operating
costs discussed above); partially offset by a higher income tax expense in our Argentine subsidiaries during the first quarter
of 2018, as compared to the same period in 2017, due to a higher pre-tax gain in 2018.
On December 27,
2017, the Argentine Senate approved a comprehensive income tax reform effective since January 1, 2018. The Argentine tax reform,
among other things, reduces the prior 35 percent income tax rate to 30 percent for 2018 and 2019, and to 25 percent for 2020 and
thereafter. The new regulation imposes a withholding income tax on dividends paid by Argentine entities of 7 percent for 2018 and
2019, increasing to 13 percent from 2020 forward. The reform also repeals the prior “equalization tax” (the 35 percent
withholding applicable to dividends distributed in excess of the accumulated taxable income) for income accrued from 1 January
2018 forward.
On December 22,
2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax
Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) requiring a one-time
transition tax on certain unrepatriated earnings of foreign subsidiaries that is payable over eight years and (2) bonus depreciation
that will allow for full expensing of qualified property.
The Tax Act also
established new tax laws that came into effect on January 1, 2018, including, but not limited to: (a) elimination of the corporate
alternative minimum tax (AMT); (b) the creation of the base erosion anti-abuse tax (BEAT), a new minimum tax; (c) a general elimination
of U.S. federal income taxes on dividends from foreign subsidiaries; (d) a new provision designed to tax global intangible low-taxed
income (GILTI), which allows for the possibility of using foreign tax credits (FTCs) and a deduction of up to 50 percent to offset
income tax liability (subject to some limitations); (e) a new limitation on deductible interest expense; (f) the repeal of the
domestic production activity deduction; (g) limitations on the deductibility of certain executive compensation; (h) limitations
on the use of FTCs to reduce the U.S. income tax liability; and (i) limitations on net operating losses (NOLs) generated after
December 31, 2017, to 80 percent of taxable income.
The Deemed Repatriation
Transition Tax (Transition Tax) is a tax on previously untaxed accumulated and current earnings and profits (E&P) of certain
of our foreign subsidiaries. To determine the amount of the Transition Tax, we must determine, in addition to other factors, the
amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings.
The company was able to make a reasonable estimate of the Transition Tax and determine that no tax duty related to the Transition
Tax is expected to be due because the estimated tax is expected to be offset with available foreign tax credits as of December
31, 2017. Accordingly, no adjustments have been made to income tax expense. The Transition Tax calculation will not be finalized
until the Mercadolibre Inc. Federal Income Tax return is filed.
We assessed whether
our valuation allowance analysis is affected by various aspects of the Tax Act (including the deemed repatriation of deferred foreign
income, GILTI inclusions and new categories of FTCs). As a consequence of such analysis we recorded an increase in valuation allowance
of $12.1 million and $12.1 million to fully reserve the outstanding foreign tax credits as of December 31, 2017 and March 31, 2018.
The Tax Act created
a new requirement that certain income (i.e., GILTI) earned by controlled foreign corporations (CFCs) must be included currently
in the gross income of the CFCs’ U.S. shareholder. GILTI is the excess of the shareholder’s “net CFC tested income”
over the net deemed tangible income return, which is currently defined as the excess of (1) 10 percent of the aggregate of the
U.S. shareholder’s pro rata share of the qualified business asset investment of each CFC with respect to which it is a U.S.
shareholder over (2) the amount of certain interest expenses taken into account in the determination of net CFC-tested income.
Under U.S. GAAP,
we were allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income
related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts
into a company’s measurement of its deferred taxes (the “deferred method”). We selected the period cost method.
Accordingly, we are not required to record any impact in connection with the potential GILTI tax as of March 31, 2018 and December
31, 2017.
Our management
considers the earnings of our foreign subsidiaries to be indefinitely reinvested, other than certain earnings the distributions
of which do not imply withholdings, exchange rate differences or state income taxes, and for that reason has not recorded a deferred
tax liability.
Our blended tax
rate is defined as income tax gain/(expense) as a percentage of (loss)/income before income tax. Our effective income tax rate
is defined as the provision for income taxes as a percentage of (loss)/income before income tax. The effective income tax rate
excludes the effects of the deferred income tax, and complementary income tax.
The following table
summarizes our blended and effective tax rates for the three-month periods ended March 31, 2018 and 2017:
|
|
|
|
|
Three-month Periods Ended
|
|
March 31,
|
|
2018
|
|
2017
|
Blended tax rate
|
49.1%
|
|
30.4%
|
Effective tax rate
|
-71.6%
|
|
34.4%
|
Our blended tax
rate for the three-month period ended March 31, 2018 increased as compared to the same period in 2017 mainly due to the effect
of the compensation between pre-tax losses – at a higher tax rate - and gains which generated a reduction of our interim
consolidated pre-tax result and a higher blended tax rate also due to the combination of different tax rates. Such compensation
effect did not take place in the three-month period ended March 31, 2017.
Our effective tax
rate for the three-month periods ended March 31, 2018 decreased as compared to the same period in 2017 mainly due to an increase
in our pre-tax losses in our Brazilian and Mexican subsidiaries, which increased our consolidated pre-tax losses without any corresponding
recognition of provision for income taxes.
The following table
sets forth our effective income tax rate on a segment basis for the three-month periods ended March 31, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-month Periods Ended
|
|
|
March 31,
|
|
|
2018
|
|
2017
|
|
Effective tax rate by country
|
|
|
|
|
|
Argentina
|
|
30.5%
|
|
24.0%
|
|
Brazil
|
|
-19.0%
|
|
32.8%
|
|
Venezuela (*)
|
|
-
|
|
37.8%
|
|
Mexico
|
|
-0.9%
|
|
-26.9%
|
|
(*) Venezuelan results have been deconsolidated since December 1,
2017. Please refer to Note 2 of our unaudited interim condensed consolidated financial statements for additional detail.
The increase in
the effective income tax rate in our Argentine subsidiaries during the three-month period ended March 31, 2018 as compared to the
same period in 2017 was mainly related to higher temporary differences in the current period.
On August 17,
2011, the Argentine government issued a new software development law and on September 9, 2013 a regulatory decree was issued
that established new requirements to benefit from the new software development law. The decree establishes requirements to comply
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 has to achieve certain required ratios annually under the software development
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 application for eligibility under the new software
development law for the our Argentine subsidiary, Mercadolibre S.R.L. As a result, our Argentine subsidiary has been granted a
tax holiday retroactive from September 18, 2014. A portion of the benefits obtained is a 60% relief of total income tax related
to software development activities and a 70% relief of 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 $7.3 million and $5.1 million during the three-month periods ended March
31, 2018 and 2017, respectively. Aggregate per share effect of the Argentine tax holiday amounted to $0.17 and $0.12 for the
three-month periods ended March 31, 2018 and 2017, respectively. Furthermore, the Company recorded a labor cost benefit of $2.0
million and $2.0 million during the three-month periods ended March 31, 2018 and 2017, respectively. Additionally, $0.7 million
and $0.5 million were accrued to pay software development law audit fees during the first quarter of 2018 and 2017, respectively.
The decrease in
our Brazilian effective income tax rate, which was negative for the three-month periods ended March 31, 2018 as compared to the
same period in 2017 was mainly related to the pre-tax loss recorded during 2018 (as a result of a decrease in net revenues because
of the increase in our shipping subsidies described above) without any corresponding impact in our provision for income taxes.
The decrease in
our Mexican negative effective income tax rate for the three-month periods ended March 31, 2018 as compared with the same period
in 2017 is due to the higher pre-tax losses recorded during 2018 (as a result of a decrease in net revenues because of the increase
in our shipping subsidies described above) without any corresponding impact in our provision for income taxes.
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, 2018 (*)
|
|
|
|
|
|
Brazil
|
|
Argentina
|
|
Mexico
|
|
Venezuela (**)
|
|
Other Countries
|
|
Total
|
Net revenues
|
$ 184.2
|
|
$ 101.9
|
|
$ 17.1
|
|
$ —
|
|
$ 17.8
|
|
$ 321.0
|
Direct costs
|
(177.0)
|
|
(57.3)
|
|
(26.3)
|
|
—
|
|
(17.3)
|
|
(277.9)
|
Direct contribution
|
7.2
|
|
44.6
|
|
(9.3)
|
|
—
|
|
0.5
|
|
43.1
|
Margin
|
3.9%
|
|
43.8%
|
|
-54.3%
|
|
—
|
|
3.1%
|
|
13.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-month Period Ended March 31, 2017 (*)
|
|
|
|
|
|
Brazil
|
|
Argentina
|
|
Mexico
|
|
Venezuela
|
|
Other Countries
|
|
Total
|
Net revenues
|
$ 159.8
|
|
$ 71.4
|
|
$ 11.3
|
|
$ 14.4
|
|
$ 12.8
|
|
$ 269.7
|
Direct costs
|
(87.0)
|
|
(45.1)
|
|
(12.6)
|
|
(6.6)
|
|
(9.7)
|
|
(161.0)
|
Direct contribution
|
72.7
|
|
26.3
|
|
(1.3)
|
|
7.8
|
|
3.1
|
|
108.7
|
Margin
|
45.5%
|
|
36.9%
|
|
-11.5%
|
|
54.5%
|
|
24.1%
|
|
40.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change from the Three-month Period Ended March 31, 2017 to March 31, 2018 (*)
|
|
|
|
|
|
Brazil
|
|
Argentina
|
|
Mexico
|
|
Venezuela
|
|
Other Countries
|
|
Total
|
Net revenues
|
|
|
|
|
|
|
|
|
|
|
|
in Dollars
|
$ 24.4
|
|
$ 30.5
|
|
$ 5.7
|
|
$ (14.4)
|
|
$ 5.0
|
|
$ 51.3
|
in %
|
15.3%
|
|
42.8%
|
|
50.7%
|
|
-100.0%
|
|
39.4%
|
|
19.0%
|
Direct costs
|
|
|
|
|
|
|
|
|
|
|
|
in Dollars
|
$ (89.9)
|
|
$ (12.2)
|
|
$ (13.7)
|
|
$ 6.6
|
|
$ (7.6)
|
|
$ (116.9)
|
in %
|
103.3%
|
|
27.1%
|
|
108.4%
|
|
-100.0%
|
|
78.1%
|
|
72.6%
|
Direct contribution
|
|
|
|
|
|
|
|
|
|
|
|
in Dollars
|
$ (65.6)
|
|
$ 18.3
|
|
$ (8.0)
|
|
$ (7.8)
|
|
$ (2.5)
|
|
$ (65.6)
|
in %
|
-90.1%
|
|
69.6%
|
|
609.3%
|
|
-100.0%
|
|
-82.3%
|
|
-60.3%
|
(*) 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.
(**) Venezuelan results have been deconsolidated
since December 1, 2017. Please refer to Note 2 of our unaudited interim condensed consolidated financial statements for additional
detail.
Net revenues
Net revenues for
the three-month period ended March 31, 2018 as compared to the same period in 2017, 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, 2018 as compared to the same period in 2017, direct costs increased by 103.3%, mainly driven by: i) a 202.9%
increase in sales and marketing expenses, mainly due to an increase in online and offline marketing expenses, buyer protection
program expenses, chargebacks from credit cards due to the increase in our MercadoPago volume and salaries and wages; ii) a 79.3%
increase in cost of net revenues, mainly attributable to an increase in collection fees as a consequence of higher transactions
volume of our MercadoPago business, cost of products sold as a consequence of higher volumes of mobile points of sales devices,
sales tax and salaries and wages related to customer service; iii) a 53.2% increase in product and technology development expenses,
mainly due to an increase in depreciation and amortization expenses and other product development expenses; and iv) a 26.0% increase
in general and administrative expenses, mainly attributable to an increase in salaries and wages, tax, legal and other fees and
depreciation and amortization expenses.
Argentina
For the three-month
period ended March 31, 2018 as compared to the same period in 2017, direct costs increased by 27.1%, mainly driven by: i) a 128.2%
increase in general and administrative expenses, mainly attributable to an increase in salaries and wages, tax, legal and other
fees and other general and administrative expenses; ii) a 92.2% increase in sales and marketing expenses, mainly due to an increase
in online and offline marketing expenses, bad debt expenses and chargebacks from credit cards due to the increase in our MercadoPago
volume; iii) a 18.7% increase in product and technology development expenses, mainly due to an increase in salaries and wages and
depreciation and amortization expenses and; iv) a 10.5% increase in cost of net revenues, mainly attributable to an increase in
collection fees as a consequence of a higher operation volume of MercadoPago business, cost of products sold as a consequence of
higher volumes of mobile points of sales devices and sales taxes.
Mexico
For the three-month
period ended March 31, 2018 as compared to the same period in 2017, direct costs increased by 108.4%, mainly driven by: i) a 119.8%
increase in sales and marketing expenses, mainly due to increases in online and offline marketing expenses, buyer protection program
expenses, chargebacks from credit cards due to the increase in our MercadoPago volume and salaries and wages; ii) a 104.1% increase
in cost of net revenues, mainly attributable to an increase in collection fees due to higher MercadoPago penetration and customer
support costs; iii) a 65.8% increase in general and administrative expenses and; iv) a 61.3% increase in product and technology
development expenses, mainly attributable to depreciation and amortization.
Venezuela
Venezuelan operations
have been deconsolidated since December 1, 2017. Please refer to Note 2 of our interim condensed consolidated financial statements
for additional detail.
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 our credit business,
to fund the payment of quarterly cash dividends on shares of our common stock and to fund the interest payments on our 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. On June 30, 2014, we issued
$330 million principal balance of 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,
2018, our main source of liquidity, amounting to $509.9 million of cash and cash equivalents and short-term investments and $33.4
million of long-term investments, was provided by cash generated from operations, proceeds from loans and from the issuance of
the 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, we will continue generating cash
from those receivables.
As of March 31,
2018, cash and investments of our
non-U.S. subsidiaries
amounted to 90.6%
of our consolidated cash and investments, or $492.4 million, and our non-U.S. dollar-denominated cash and investments amounted
to approximately 74.8% of our consolidated cash and investments. Our non-U.S. dollar-denominated cash and investments are located
primarily in Brazil and Argentina.
In the event we
change the way we manage our business, our working capital needs could be funded, as it was in the past, through a combination
of the sale of credit card coupons to financial institutions and cash advances from our business.
The following table
presents our cash flows from operating activities, investing activities and financing activities for the three-month periods ended
March 31, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
Three-month Periods Ended
|
|
|
|
|
March 31, (*)
|
(In millions)
|
|
|
|
2018
|
|
2017
|
Net cash provided by (used in):
|
|
|
|
|
|
|
Operating activities
|
|
|
|
$ (37.0)
|
|
$ 104.8
|
Investing activities
|
|
|
|
(24.1)
|
|
(39.1)
|
Financing activities
|
|
|
|
24.0
|
|
(5.2)
|
Effect of exchange rates on cash and cash equivalents
|
|
|
|
(0.8)
|
|
6.8
|
Net (decrease)/increase in cash and cash equivalents
|
|
|
|
$ (37.8)
|
|
$ 67.2
|
(*) The table above may not total due to rounding.
Net cash (used in) provided by operating activities
Cash provided by
operating activities consists of net income adjusted for certain non-cash items, and the effect of changes in working capital and
other activities:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-month Periods Ended
|
|
|
|
|
|
|
March 31,
|
|
Change from 2017
to 2018 (*)
|
|
|
2018
|
|
2017
|
|
in Dollars
|
|
in %
|
|
|
(in millions, except percentages)
|
Net Cash (used in) provided by:
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$ (37.0)
|
|
$ 104.8
|
|
$ (141.8)
|
|
-135.4%
|
(*) 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.
The $141.8 million
decrease in net cash (used in) provided by operating activities during the three-month period ended March 31, 2018, as compared
to the same period in 2017, was primarily driven by a $61.4 million decrease in our net income, a $49.5 million decrease in credit
card receivables, a $16.5 million decrease in prepaid expenses and an $8.5 decrease in other assets.
Net cash used in investing activities
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-month Periods Ended
|
|
Change from 2017
|
|
|
March 31,
|
|
to 2018 (*)
|
|
|
2018
|
|
2017
|
|
in Dollars
|
|
in %
|
|
|
(in millions, except percentages)
|
Net Cash (used in):
|
|
|
|
|
|
|
|
|
Investing activities
|
|
$ (24.1)
|
|
$ (39.1)
|
|
$ 15.0
|
|
38.4%
|
(*) 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.
Net cash used in
investing activities in the three-month period ended March 31, 2018 resulted mainly from purchases of investments of $632.7 million,
which was offset by proceeds from the sale and maturity of investments of $683.9 million, as part of our financial strategy.
We used $52.2 million in principal of loans receivable granted to merchants and consumers under our MercadoCredito solution, $19.5
million in the purchase of property plant and equipment (mainly in information technology in Argentina, Brazil and the United States),
$3.4 million in advances for property and $0.1 million in purchase of intangible assets.
Net cash provided by (used in) financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-month Periods Ended
|
|
Change from 2017
|
|
|
March 31,
|
|
to 2018 (*)
|
|
|
2018
|
|
2017
|
|
in Dollars
|
|
in %
|
|
|
(in millions, except percentages)
|
Net Cash provided by (used in):
|
|
|
|
|
|
|
|
|
Financing activities
|
|
$ 24.0
|
|
$ (5.2)
|
|
$ 29.2
|
|
561.2%
|
(*) 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, 2018, we generated $80.9 million proceeds from the issuance of loans. This increase in cash from financing
activities was partially offset by the cash used to fund $45.7 million for the 2018 Capped Call Transactions, $6.6 million in cash
dividends, and $4.6 million for the payments on loans payable
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 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,
2018, the conversion threshold had been met and the Notes became convertible at the holders’ option beginning on April 1,
2018 and ending on June 30, 2018. 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, no additional conversion request were made.
The
total
estimated fair value of the Notes was $937.1 million and $
829.0
million as of
March
31, 2018 and
December 31, 2017, 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 $356.4 closing price of the Company’s common stock on March
31, 2018, the if-converted value of the Notes exceeded their principal amount by approximately $603.2 million.
Capped
Call Transactions
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 in June 2014 to enter into privately negotiated
capped call transactions with respect to our common stock with certain financial institutions (the “2014 Capped Call Transactions”).
In September 2017 and March 2018, we paid $67.3 million and $45.7 million (including transaction expenses), respectively, to enter
into additional privately negotiated capped call transactions with certain financial institutions (the “2017 Capped Call
Transactions” and the “2018 Capped Call Transactions,” respectively, and together with the 2014 Capped Call Transactions,
the “Capped Call Transactions”). The 2017 and 2018 Capped Call Transactions are in addition to the 2014 Capped Call
Transactions and have a higher strike price and cap price. The 2014 Capped Call Transactions have a cap price of approximately
$155.78 per common share, the 2017 Capped Call Transactions have a cap price of approximately $366.06 per common share and the
2018 Capped Call Transactions have a cap price of approximately $467.38 per common share. The Capped Call Transactions are expected
generally to reduce the potential dilution upon conversion of the Notes in the event that the market price of our common stock
is greater than the strike price of the Capped Call Transactions. The strike price of the 2014 Capped Call Transactions was initially
set at $126.02 per common share, which corresponds to the initial conversion price of the Notes. The strike price of the 2017 Capped
Call Transactions was initially set at $295.67 per common share. The strike price of the 2018 Capped Call Transactions was initially
set at $426.73 per common share. The Capped Call Transactions are subject to anti-dilution adjustments substantially similar to
those applicable to the conversion rate of the Notes. 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 applicable
cap price.
Cash Dividends
In each of March,
May, July and October of 2017, the Board of Directors approved a fixed 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 17, July 14, October 16,
2017 and January 12, 2018 to stockholders of record as of the close of business on March 31, June 30, September 30
and December 31, 2017.
After reviewing
our capital allocation process the Board of Directors has concluded that the Company has multiple investment opportunities that
should generate greater returns to shareholders through investing capital into the business than issuing a dividend. Consequently,
the decision has been made to suspend the payment of dividends to shareholders as of the first quarter of 2018, as it will free
up capital for investment in multiple projects in our various platforms. 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 and intangible assets) for the three-month periods ended March 31, 2018 and
2017 amounted to $23.0 million and $12.8 million, respectively.
During the three-month
period ended March 31, 2018, we invested $9.9 million in information technology in Brazil and Argentina, and $3.9 million in our
Argentine and Uruguayan offices.
We are continually
increasing our level of investment in 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,
2018, 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 foreign exchange (“FX”) neutral
measures as a non-GAAP measure.
This non-GAAP measure
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, this non-GAAP measure is 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. This non-GAAP financial measure should only be used
to evaluate our results of operations in conjunction with the most comparable U.S. GAAP financial measures.
Reconciliation
of this non-GAAP financial measure to the most comparable U.S. GAAP financial measure can be found in the table included in this
quarterly report.
We 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 this FX neutral non-GAAP measure 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 2017 and applying them to the corresponding
months in 2018, 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, this measures does 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
sets forth the FX neutral measures related to our reported results of the operations for the three-month periods ended March 31,
2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-month Periods Ended
March 31, (*)
|
|
|
As reported
|
|
FX Neutral Measures
|
(In millions, except percentages)
|
|
2018
|
|
2017
|
|
Percentage Change
|
|
2018
|
|
2017
|
|
Percentage Change
|
|
|
(Unaudited)
|
|
|
|
(Unaudited)
|
|
|
Net revenues
|
|
$ 321.0
|
|
$ 269.7
|
|
19.0%
|
|
$ 350.8
|
|
$ 269.7
|
|
30.1%
|
Cost of net revenues
|
|
(158.2)
|
|
(100.8)
|
|
56.9%
|
|
(170.2)
|
|
(100.8)
|
|
68.8%
|
Gross profit
|
|
162.8
|
|
168.9
|
|
-3.6%
|
|
180.6
|
|
168.9
|
|
6.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
(192.2)
|
|
(105.5)
|
|
82.1%
|
|
(212.7)
|
|
(105.5)
|
|
101.5%
|
Loss / Income from operations
|
|
(29.4)
|
|
63.3
|
|
-146.5%
|
|
(32.2)
|
|
63.3
|
|
-150.8%
|
(*) The table above may not total due to rounding.