It
em 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward-Looking Statements
Any statements
made or implied
in this report that are not statements of historical fact, including statements about our beliefs and expectations, are forward-looking statements within the meaning of Section 27
A of the Securities Exchange Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended, and should be evaluated as such.
The words “anticipate,” “believe,” “expect,” “intend,” “plan,” “estimate,” “target,” “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:
|
·
|
|
our expectations regarding the continued growth of online commerce and Internet usage in Latin America;
|
|
·
|
|
our ability to expand our operations and adapt to rapidly changing technologies;
|
|
·
|
|
government
and central bank regulations;
|
|
·
|
|
litigation
and legal liability;
|
|
·
|
|
systems
interruptions or failures;
|
|
·
|
|
our
ability to attract and retain qualified personnel;
|
|
·
|
|
security
breaches and illegal uses of our services;
|
|
·
|
|
reliance
on third-party service providers;
|
|
·
|
|
enforcement
of intellectual property rights;
|
|
·
|
|
our ability to attract new customers, retain existing customers and increase revenues;
|
|
·
|
|
seasonal
fluctuations; and
|
|
·
|
|
political, social and economic conditions in Latin America in general, and Venezuela in particular, and possible future currency devaluation and other changes to its exchange rate systems.
|
Many of these risks are beyond our ability to control or predict. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on our company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements
.
These statements are based on currently available information and our current assumptions, expectations and projections about future events. While we believe that our assumptions, expectations and projections are reasonable in view of the currently available information, you are cautioned not to place undue reliance on our forward-looking statements. These statements are not guarantees of future performance. They are subject to future events, risks and uncertainties–many of which are beyond our control-as well as potentially inaccurate assumptions that could cause actual results to differ materially from our expectations and projections.
Some of the material risks and uncertainties that could cause actual results to differ materially from our expectations and projections are described in “Item 1A — Risk Factors” in Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016
filed with the Securities and Exchange Commission
(“SEC”)
on
February 24
, 2017, as updated by those described in “Item 1A — Risk Factors” in Part II of this report and in other reports we file from time to time with the SEC.
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, 2016. 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:
|
·
|
|
a brief overview of our company;
|
|
·
|
|
a discussion of our principal trends and results of operations for
the six and the three-month periods ended June 30, 2017 and 2016
;
|
|
·
|
|
a
review
of our financial presentation and accounting policies, including our critical accounting policies;
|
|
·
|
|
a
discussion
of the principal factors that influence our results of operations, financial condition and liquidity;
|
|
·
|
|
a
discussion
of our liquidity and capital resources and a discussion of our capital expenditures;
|
|
·
|
|
a description of our non-GAAP financial measures; and
|
|
·
|
|
a
discussion
of the market risks that we face.
|
Business Overview
MercadoLibre, Inc. (together with its subsidiaries “us”, “we”, “our” or the “Company”) is one of the largest online commerce ecosystems in Latin America. Our platform is designed to provide users with a complete portfolio of services to facilitate commercial transactions. We are a market leader in e-commerce in each of Argentina, Brazil, Chile, Colombia, Costa Rica, Ecuador, Mexico, Peru, Uruguay and Venezuela, based on number of unique visitors and page views. We also operate online commerce platforms in the Dominican Republic, Honduras, Nicaragua, Salvador, Panama, Bolivia, Guatemala, Paraguay and Portugal.
Through our platform, we provide buyers and sellers with a robust environment that fosters the development of a large e-commerce community in Latin America, a region with a population of over 610 million people and one of the fastest-growing Internet penetration rates in the world. We believe that we offer technological and commercial solutions that address the distinctive cultural and geographic challenges of operating an online commerce platform in Latin America.
We offer our users an ecosystem of six integrated e-commerce services: the MercadoLibre Marketplace, the MercadoLibre Classifieds Service, the MercadoPago payments solution, the MercadoEnvios shipping service, the MercadoLibre advertising program and the MercadoShops online webstores solution.
The MercadoLibre Marketplace, which we sometimes refer to as our marketplace, is a fully-automated, topically-arranged and user-friendly online commerce service. This service permits both businesses and individuals to list merchandise and conduct sales and purchases online in either a fixed-price or auction-based format.
To complement the MercadoLibre Marketplace, we developed MercadoPago, an integrated online payments solution. MercadoPago is designed to facilitate transactions both on and off our marketplace by providing a mechanism that allows our users to securely, easily and promptly send and receive payments online.
Mercado Pago is currently available in: Argentina, Brazil, Mexico, Colombia, Venezuela, Uruguay, Perú and Chile.
MercadoPago allows merchants to facilitate checkout and payment processes on their websites and also enables users to simply transfer money to each other either through the website or using the MercadoPago App, available on iOS and Android. Additionally, during 2016, we launched MercadoCredito, which is designed to extend loans to specific merchants and consumers. Our MercadoCredito solution allows us to deepen our engagement with our merchants and consumers by offering them additional services and is currently available in Argentina and Brazil.
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 our sellers a cost-efficient way to utilize our existing distribution chain to fulfill their sales. Sellers opting into the program are able to offer a uniform and seamlessly integrated shipping experience to their buyers at competitive prices.
Through MercadoLibre Classifieds Service, our online classified listing service, our users can also list and purchase motor vehicles, vessels, aircraft, real estate and services in all countries where we operate. Classifieds listings differ from Marketplace listings as they only charge optional placement fees and never final value fees. Our classifieds pages are also a major source of traffic to our website, benefitting both the Marketplace and non-marketplace businesses.
To enhance the MercadoLibre Marketplace, we developed our MercadoLibre advertising program, to enable businesses to promote their products and services on the Internet. Through our advertising program, MercadoLibre’s sellers and large advertisers are able to display product ads on our webpages and our associated vertical sites in the region.
Additionally, through MercadoShops, our online store solution, users can set-up, manage and promote their own online store. These stores are hosted by MercadoLibre and offer integration with the other marketplace, payment and advertising services we offer. Users can choose from a basic, free store or pay monthly subscriptions for enhanced functionality and value added services on their store.
MercadoLibre also began developing and selling enterprise software solutions to e-commerce business clients in Brazil during the second quarter of 2015.
Reporting Segments and Geographic Information
Our segment reporting is based on geography, which is the current criterion we are using to evaluate our segment performance. Our geographic segments include Brazil, Argentina, Mexico, Venezuela and other countries (including Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Panama, Peru, Portugal, Bolivia, Honduras, Nicaragua, Salvador, Guatemala, Paraguay, Uruguay and the United States of America (real estate classifieds in the State of Florida only)).
Although we discuss long-term trends in our business, it is our policy to not provide earnings guidance in the traditional sense. We believe that uncertain conditions make the forecasting of near-term results difficult. Further, we seek to make decisions focused primarily on the long-term welfare of our company and believe focusing on short term earnings does not best serve the interests of our stockholders. We believe that execution of key strategic initiatives as well as our expectations for long-term growth in our markets will best create stockholder value. We, therefore, encourage potential investors to consider this strategy before 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 six and the three-month periods ended June 30, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-months Periods Ended
|
|
Three-month
s
Periods Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
(% of total consolidated net revenues) (*)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Brazil
|
|
57.6
|
%
|
|
50.5
|
%
|
|
56.9
|
%
|
|
51.5
|
%
|
|
Argentina
|
|
27.0
|
|
|
32.4
|
|
|
27.8
|
|
|
33.9
|
|
|
Mexico
|
|
6.0
|
|
|
6.3
|
|
|
6.4
|
|
|
5.7
|
|
|
Venezuela
|
|
4.8
|
|
|
5.5
|
|
|
4.5
|
|
|
3.7
|
|
|
Other Countries
|
|
4.6
|
|
|
5.3
|
|
|
4.5
|
|
|
5.1
|
|
|
(*) 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 following table summarizes the changes in our net revenues by segment for the six and three-month periods ended June 30, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-months Periods Ended
|
|
Change from 2016
|
|
Three-month
s
Periods Ended
|
|
Change from 2016
|
|
|
June 30,
|
to 2017 (*)
|
|
June 30,
|
|
to 2017 (*)
|
|
|
2017
|
|
2016
|
|
in Dollars
|
|
in %
|
|
2017
|
|
2016
|
|
in Dollars
|
|
in %
|
|
|
|
(in millions, except percentages)
|
|
|
(in millions, except percentages)
|
|
Net Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brazil
|
|
$ 339.8
|
|
$ 180.4
|
|
$ 159.4
|
|
88.4
|
%
|
|
$ 180.1
|
|
$ 102.9
|
|
$ 77.2
|
|
75.0
|
%
|
Argentina
|
|
159.4
|
|
115.9
|
|
43.5
|
|
37.5
|
|
|
88.0
|
|
67.7
|
|
20.3
|
|
30.0
|
|
Mexico
|
|
35.7
|
|
22.6
|
|
13.2
|
|
58.3
|
|
|
20.2
|
|
11.5
|
|
8.7
|
|
76.3
|
|
Venezuela
|
|
28.6
|
|
19.6
|
|
9.0
|
|
46.1
|
|
|
14.2
|
|
7.5
|
|
6.7
|
|
90.1
|
|
Other Countries
|
|
26.9
|
|
18.8
|
|
8.1
|
|
43.1
|
|
|
14.1
|
|
10.1
|
|
4.0
|
|
39.1
|
|
Total Net Revenues
|
|
$ 590.5
|
|
$ 357.3
|
|
$ 233.2
|
|
65.3
|
%
|
|
$ 316.5
|
|
$ 199.6
|
|
$ 116.9
|
|
58.5
|
%
|
(*)
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.
Recent Developments
Venezuela Foreign Currency Status
On May 19, 2017, the BCV issued the Exchange Agreement No.38, which established a new foreign exchange mechanism under DICOM, replacing SIMADI. The new mechanism consists of auctions, administered by an auction committee, where sellers and buyers from the private sector may offer foreign currency under certain limits determined by the BCV.
In light of the disappearance of SIMADI
(which closed at 728.0 per U.S. dollar)
, and our inability to gain access to U.S. dollars under SIMADI, we started the administrative proceedings to request U.S. dollars through DICOM. As a result, we expect to settle its transactions through DICOM going forward and concluded that the DICOM exchange rate should be used as from June 1, 2017 to measure our bolivar-denominated monetary assets and liabilities and to measure the revenues and expenses of our Venezuelan subsidiaries.
Therefore, a
s of June 30, 2017, monetary assets and liabilities in Bolivares Fuertes (“BsF”) were re-measured to the U.S. dollar using the DICOM closing exchange rate of
2640.0
BsF per U.S. dollar.
In connection with this re-measurement, we recorded a foreign exchange loss of $22.0 million during the second quarter of 2017.
Considering this change in facts and circumstances and the lower U.S.
dollar-equivalent cash flows the
n expected from the Venezuelan business, we reviewed our long-lived assets (including non-current other assets), goodwill and intangible assets with indefinite useful life for impairment and concluded that the carrying value of certain real estate investments in Venezuela as of June 30, 2017 would not be fully recoverable. As a result, on June 30, 2017, we recorded an impairment of offices and commercial property under construction included within non-current other assets of $2.8 million. The carrying amount of offices and commercial property under construction was adjusted to its estimated fair value of approximately $9.7 million as of June 30, 2017, by using the market approach and considering prices for similar assets.
Description of Line Items
Net revenues
We recognize revenues in each of our five geographical reporting segments.
Within each of our segments, the services we provide generally fall into two distinct revenue streams, “Marketplace” which includes our core business and “Non-Marketplace” which includes ad sales,
classified
fees
, payment fees, shipping fees and other ancillary businesses.
The following table summarizes our consolidated net revenues by revenue stream for the six and the three-month periods ended June 30, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-month
s
Periods Ended
|
|
|
Three-month
s
Periods Ended
|
|
|
June 30, (*)
|
|
|
June 30, (*)
|
Consolidated net revenues by revenue stream
|
|
2017
|
|
2016
|
|
|
2017
|
|
2016
|
|
|
(in millions)
|
|
|
(in millions)
|
Marketplace
|
|
$
|
355.2
|
|
$
|
207.4
|
|
$
|
196.7
|
|
$
|
113.3
|
Non-Marketplace (**) (***)
|
|
|
235.2
|
|
|
149.9
|
|
|
119.8
|
|
|
86.4
|
Total
|
|
$
|
590.5
|
|
$
|
357.3
|
|
$
|
316.5
|
|
$
|
199.6
|
(*) The table above may not total due to rounding.
(**) Includes, among other things, Ad Sales
, Classified Fees
, Payment Fees, Shipping Fees and other ancillary services.
(***)
Includes an amount of $140.2 and $87.2 of Payment Fees for the six-month periods ended June 30, 2017 and 2016, respectively. Includes an amount of $75.0 and $50.6 of Payment Fees for the three-month periods ended June 30, 2017 and 2016, respectively.
Revenues from Marketplace transactions are generated from:
For Marketplace services, final value fees representing a percentage of the sale value that are charged to the seller once the item is successfully sold. Up-front fees are charged to the seller in exchange for improved exposure of the listings throughout our platform and are not subject to the successful sale of the items listed.
Revenues for Non-Marketplace services are generated from:
|
·
|
|
ad
sales
up-front fees;
|
|
·
|
|
fees
from other ancillary businesses.
|
With respect to our MercadoPago service, we generate payment fees attributable to:
|
·
|
|
commissions representing a percentage of the payment volume processed that are charged to sellers in connection with off Marketplace-platform transactions;
|
|
·
|
|
commissions from additional fees we charge when a buyer elects to pay in installments through our MercadoPago platform, for transactions that occur either on or off our Marketplace platform;
|
|
·
|
|
commissions from additional fees we charge when our sellers elect to
withdraw
cash;
|
|
·
|
|
interest, cash advances and fees from customers and merchant credits granted under our MercadoCredito solution; and
|
|
·
|
|
revenues from the sale of mobile points of sale products.
|
Although we also process payments on the Marketplace, we do not charge sellers an added commission for this service, as it is already included in the Marketplace final value fee we charge.
Through
our classifieds offerings in motor vehicles, real estate and services, we generate revenues from up-front fees. These fees are charged to sellers who opt to give their listings greater exposure throughout our websites
.
Our Advertising revenues are generated by selling either display product and/or text link ads throughout our websites to interested advertisers.
Finally, our shipping revenues are generated when a buyer elects to receive the item through our shipping service.
When more than one service is included in one single arrangement with the customer, we recognize revenue according to multiple element arrangements accounting, distinguishing between each of the services provided and allocating revenues based on their respective estimated selling prices.
We have a highly fragmented customer revenue base given the large numbers of sellers and buyers who use our platforms. For the six month period ended June 30, 2017 and 2016, no single customer accounted for more than 5.0% of our net revenues.
Our MercadoLibre Marketplace is available in 19 countries (Argentina, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Mexico, Panama, Peru, Portugal, Uruguay, Venezuela, Bolivia, Honduras, Nicaragua, Salvador, Guatemala and Paraguay), 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 is the U.S. dollar due to Venezuela’s status as a highly inflationary economy. See—“Critical accounting policies and estimates—Foreign Currency Translation” included below. Therefore, our net revenues are generated in multiple foreign currencies and then translated into U.S. dollars at the average monthly exchange rate.
Our subsidiaries in Brazil, Argentina, Venezuela and Colombia are subject to certain taxes on revenues which are classified as a cost of net revenues. T
hese taxes represented
8.2
% of net revenues for the three-month period ended
June 30, 2017, as compared to 9.1%
for the same period in 2016.
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, free shipping costs, 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 and asset taxes incurred in these jurisdictions. We account for income taxes following the liability method of accounting. A valuation allowance is recorded when, based on the available evidence, it is more likely than not that all or a portion of our deferred tax assets will not be realized.
Therefore, our income tax expense consists of taxes currently payable, if any (given that in certain jurisdictions we still have net operating loss carry-forwards), plus the change in our deferred tax assets and liabilities during each period.
Critical 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, 2016 and disclosed in the Form 10-K. See Item – “Critical Accounting Policies”.
Foreign Currency Translation
All of our foreign operations (other than Venezuela since January 1, 2010, as described below) use the local currency as their functional currency. Accordingly, these operating foreign subsidiaries translate assets and liabilities from their local currencies to U.S. dollars using period-end exchange rates while income and expense accounts are translated at the average exchange rates in effect during the period
, unless exchange rates fluctuate significantly during the period, in which case the exchange rates at the date of the transaction are used.
The resulting translation adjustment is recorded as part of other comprehensive income (loss), a component of equity. Gains and losses resulting from transactions denominated in non-functional currencies are recognized in earnings. Net foreign currency exchange losses or gains are included in the consolidated statements of income under the caption “Foreign currency (losses) gains”.
Venezuelan Currency Status
Pursuant to
U.S. GAAP, we have
classified our
Venezuelan operations as highly inflationary since January 1, 2010, using the U.S. dollar as the functional currency for
purposes of reporting our financial statements. Therefore, no translation effect has been accounted for in other comprehensive income related to our Venezuelan operations.
On March 9, 2016 the Central Bank of Venezuela (“BCV”) issued the Exchange Agreement No.35, which is effective since March 10, 2016. The agreement established a “protected” exchange rate (“DIPRO”) for certain transactions, such as but not limited to: imports of goods of the food and health sectors, as well as supplies associated with the production of said sectors; expenses relating to health treatments, sports, culture, scientific research, and other urgent matters defined by the exchange regulations. All foreign currency transactions not expressly provided in Exchange Agreement No.35 will be processed on the alternate foreign currency markets governed by the exchange regulations, at the floating supplementary market exchange rate (“DICOM”).
Considering the significant devaluation and the lower U.S.
dollar-equivalent cash flows the
n expected from the Venezuelan business, the Company reviewed its long-lived assets (including non-current other assets), goodwill and intangible assets with indefinite useful life for impairment and concluded that the carrying value of certain real estate investments in Venezuela as of June 30, 2016 would not be fully recoverable. As a result, on June 30, 2016, the Company recorded an impairment of offices and commercial property under construction included within non-current other assets of $13.7 million. The carrying amount of offices and commercial property under construction was adjusted to its estimated fair value of approximately $12.5 million as of June 30, 2016, by using the market approach, and considering prices for similar assets.
On May 19, 2017, the BCV issued the Exchange Agreement No.38, which established a new foreign exchange mechanism under DICOM, replacing previous SIMADI. The new mechanism consists of auctions, administered by an auction committee, where sellers and buyers from the private sector may offer foreign currency under certain limits determined by the BCV.
In light of the disappearance of SIMADI
(which closed at
728.0 per U.S. dollar
)
, and the Company’s inability to gain access to U.S. dollars under SIMADI, it started
the administrative proceedings to request
U.S. dollars through DICOM. As a result, the Company expects to settle its transactions through DICOM going forward and concluded that the DICOM exchange rate should be used as from June 1, 2017 to measure its bolivar-denominated monetary assets and liabilities and to measure the revenues and expenses of the Venezuelan subsidiaries.
Therefore, a
s of June 30, 2017, monetary assets and liabilities in Bolivares Fuertes (“BsF”) were re-measured to the U.S. dollar using the DICOM closing exchange rate of
2640.0
BsF per U.S. dollar.
A
s a consequence of the local currency devaluation, the Company recorded a foreign exchange loss of $22.0 million during the second quarter of 2017.
Considering the significant devaluation and the lower U.S. dollar-equ
ivalent cash flows the
n expected from the Venezuelan business, the Company reviewed its long-lived assets (including non-current other assets), goodwill and intangible assets with indefinite useful life for impairment and concluded that the carrying value of certain real estate investments in Venezuela as of June 30, 2017 would not be fully recoverable. As a result, on June 30, 2017, the Company recorded an impairment of offices and commercial property under construction included within non-current other assets of $2.8 million. The carrying amount of offices and commercial property under construction was adjusted to its estimated fair value of approximately $9.7 million as of June 30, 2017, by using the market approach, and considering prices for similar assets.
Until 2010 we were able to obtain U.S. dollars for any purpose, including dividend distributions, using alternative mechanisms other than through the Commission for the Administration of Foreign Exchange Control (CADIVI). Those U.S. dollars, obtained at a
higher
exchange rate than the one offered by CADIVI and held in balance at U.S. bank accounts of our Venezuelan subsidiaries, were used for dividend distributions from our Venezuelan subsidiaries. We have not distributed dividends from our Venezuelan subsidiaries since 2011
.
The
following table sets forth the assets, liabilities and net assets of our Venezuelan subsidiaries, before intercompany eliminations of a net liability of $25.1 million and $15.8 million, as of June 30, 2017 and December 31, 2016 and net revenues for the six-month periods ended June 30, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
Six-month
s
Periods Ended June 30,
|
|
|
2017
|
|
2016
|
Venezuelan operations
|
|
(In millions)
|
Net Revenues
|
|
$ 28.6
|
|
$ 19.6
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
June 31,
|
|
|
2017
|
|
2016
|
|
|
(In millions)
|
Assets
|
|
56.0
|
|
66.2
|
Liabilities
|
|
(30.2)
|
|
(23.0)
|
Net Assets
|
|
$ 25.8
|
|
$ 43.2
|
As of June 30, 2017, the net assets (before intercompany eliminations) of our Venezuelan subsidiaries amounted to approximately 5.6% of our consolidated net assets, and cash and investments of our Venezuelan subsidiaries held in local currency in Venezuela amounted to approximately 1.5% of our consolidated cash and investments.
Our ability to obtain U.S. dollars in Venezuela is negatively affected by the exchange restrictions in Venezuela that are described above. If
our
access to U.S. dollars becomes widely available at a more unfavorable rate than the current DICOM exchange rate (or if DICOM exchange rate experiences significant devaluation in the future), and we decided to use that alternative mechanism considering that exchange rate as the one applicable for re-measurement, our results of operations, earnings and value of our net assets in Venezuela would be negatively impacted, and we cannot assure that the impact would not be material. In addition, our business and ability to obtain U.S. dollars in Venezuela would be negatively affected by any additional material devaluations or the imposition of significant
additional
and more stringent controls on foreign currency exchange by the Venezuelan government in the future.
Despite the current difficult macroeconomic environment in Venezuela, we continue managing, through our Venezuelan
subsidiaries
, our investment in Venezuela. Despite the current operating, political and economic conditions and certain other factors in Venezuela, we currently plan to continue supporting our business in Venezuela in the long run
.
In November 2013 the Venezuelan Congress approved an “enabling law” granting the president of Venezuela the authority to enact laws and regulations in certain policy areas by decree. This authority includes the ability to restrict profit margins and impose greater
controls
on foreign exchange and the production, import, and distribution of certain goods. Among other actions, the president has used this decree power to pass the Law of Costs, Earnings, and Fair Profits, which became effective in January 2014 and, among other provisions, authorizes the Venezuelan government to set “fair prices” and maximum profit margins in the private sector. On October 26, 2015, the decree number 2,074 was published in the Official Gazette of Venezuela, establishing certain definitions related to the determination of prices in that country.
Despite we do not expect that this law together with the decree issued by the Venezuelan Government will have a material adverse
impact
on our financial condition or results of operations, considering the current difficult macroeconomic environment in Venezuela, the final potential effects remains uncertain. The effects of such potential effects, if any, would be recognized in our financial statements once the mentioned uncertainty is resolved.
Allowances for doubtful accounts and for chargebacks
We are exposed to losses due to uncollectible accounts and credits to sellers. Allowances for these items represent our estimate of future losses based on our historical experience. The allowances for doubtful accounts and for chargebacks are recorded as charges to sales and marketing expenses. Historically, our actual losses have been consistent with our charges. However, future adverse changes to our historical experience for doubtful accounts and chargebacks could have a material impact on our future consolidated statements of income and cash flows
.
We believe that the accounting estimate related to allowances for doubtful accounts and for chargebacks is a critical accounting estimate
because
it requires management to make assumptions about future collections and credit analysis. Our management’s assumptions about future collections require significant judgment
.
Legal contingencies
In
connection
with certain pending litigation and other claims, we have estimated the range of probable loss and provided for such losses through charges to our interim condensed consolidated statement of income. These estimates are based on our assessment of the facts and circumstances and historical information related to actions filed against us at each balance sheet date and are subject to change based upon new information and future events
.
Convertible Senior Notes
On June 30, 2014, we issued $330 million of 2.25% convertible senior notes due 2019 (the “Notes”). The Notes may be converted, under
specific
conditions, based on an initial conversion rate of 7.9353 shares of common stock per $1,000 principal amount of Notes, subject to adjustment as described in the indenture governing the Notes. The convertible debt instrument within the scope of the cash conversion subsection, was separated into debt and equity components at issuance and a fair value was assigned. The value assigned to the debt component was the estimated fair value, as of the issuance date, of a similar debt without the conversion feature. As of June 30, 2014, we determined the fair value of the liability component of the Notes by reviewing market data that was available for senior, unsecured nonconvertible corporate bonds issued by comparable companies. The difference between the cash proceeds and this estimated fair value, represents the value assigned to the equity component and was recorded as a debt discount. The debt discount is amortized using the effective interest method from the origination date through its stated contractual maturity date.
In connection with the issuance of the Notes, we paid $19.7 million to enter into capped call transactions with respect to shares of our
common
stock (the “Capped Call Transactions”), with certain financial institutions. The Capped Call Transactions are expected generally to reduce the potential dilution upon conversion of the Convertible Notes in the event that the market price of our common stock is greater than the strike price of the Capped Call Transactions. The $19.7 million cost of the capped call transactions, which net of deferred income tax effect amounts to $12.8 million, is included as a net reduction to additional paid-in capital in the stockholders’ equity section of our consolidated balance sheets.
For
more
detailed information in relation to the Notes and the Capped Call transactions, see
“—Results of operations for the six-month period ended June 30, 2017 compared to the six-month period ended June 30, 2016 and the three-month period ended June 30, 2017 compared to the three month period ended June 30, 2016 — Debt” and Note 9 to our unaudited interim condensed consolidated financial statements.
Impairment of long-lived assets, goodwill and intangible assets with indefinite useful life
We review long-lived assets for impairments whenever events or changes in circumstances indicate that the carrying value of an asset may not be
recoverable
. Furthermore, goodwill and certain indefinite life trademarks are reviewed for impairment at each year-end or more frequently when events or changes in circumstances indicate that their carrying value may not be recoverable.
We believe that the accounting estimate related to impairment of long lived assets and goodwill is critical since it is highly susceptible to
change
from period to period because: (i) it requires management to make assumptions about gross merchandise volume growth, total payment volume, total payment transactions, future interest rates, sales and costs; and (ii) the impact that recognizing an impairment would have on the assets reported on our balance sheet as well as our net income would be material. Management’s assumptions about future sales and future costs require significant judgment.
For
additional
information, see “
Critical
Accounting Policies” section
in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.
Income taxes
We are required to recognize a provision for income taxes based upon taxable income and temporary differences between the book and tax bases of our assets and liabilities for each of the tax jurisdictions in which we operate. This process requires a calculation of taxes payable under currently enacted tax laws in each jurisdiction and an analysis of temporary differences between the book and tax bases of our assets and liabilities, including various accruals, allowances, depreciation and amortization. The tax effect of these temporary differences and the estimated tax benefit from our tax net operating losses are reported as deferred tax assets and liabilities in our consolidated
balance
sheet. We also assess the likelihood that our net deferred tax assets will be realized from future taxable income. To the extent we believe that it is more likely than not that some portion or all of our deferred tax assets will not be realized, we establish a valuation allowance. As of June 30, 2017, we had a valuation allowance on certain foreign net operating losses based on our assessment that it is more likely than not that the deferred tax asset will not be realized. To the extent we establish a valuation allowance or change the allowance in a period, we reflect the change with a corresponding increase or decrease in our “Income/asset tax expense” line in our consolidated statement of income.
Stock-based compensation
Our board of directors adopted long-term retention plans (“LTRP
s
”), under which certain eligible employees receive awards. See “Item 3. Quantitative and Qualitative Disclosures About Market Risk —Equity Price Risk” for details on the LTRPs. The variable LTRP awards are calculated based on the fair value of our common stock on NASDAQ Global Market.
Results of operations for the six-month period ended June 30, 2017 compared to the six-month period ended June 30, 2016 and three-month period ended June 30, 2017 compared to the three-month period ended June 30, 2016
The selected financial data for the six and three-month periods ended June 30, 2017 and 2016 discussed herein is derived from our unaudited interim condensed consolidated financial statements included in Item 1 of Part I of this report. These statements include all normal
recurring
adjustments that management believes are necessary to fairly state our financial position, results of operations and cash flows. The results of operations for the six and three-month period ended June 30, 2017 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2017 or for any other period.
Statement of income data
|
|
|
|
|
|
|
|
|
|
Six-months Periods Ended
June 30,
|
|
Three-months Periods Ended
June 30,
|
(In millions)
|
2017 (*)
|
|
2016 (*)
|
|
2017 (*)
|
|
2016 (*)
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
Net revenues
|
$ 590.5
|
|
$ 357.3
|
|
$ 316.5
|
|
$ 199.6
|
|
Cost of net revenues
|
(250.0)
|
|
(128.8)
|
|
(145.0)
|
|
(73.3)
|
|
Gross profit
|
340.4
|
|
228.5
|
|
171.6
|
|
126.3
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product and technology development
|
(60.6)
|
|
(46.2)
|
|
(30.3)
|
|
(24.2)
|
|
Sales and marketing
|
(123.8)
|
|
(68.0)
|
|
(76.9)
|
|
(35.3)
|
|
General and administrative
|
(59.8)
|
|
(37.9)
|
|
(31.5)
|
|
(20.8)
|
|
Impairment of Long-Lived Assets
|
(2.8)
|
|
(13.7)
|
|
(2.8)
|
|
(13.7)
|
|
Total operating expenses
|
(247.1)
|
|
(165.8)
|
|
(141.5)
|
|
(94.1)
|
|
Income from operations
|
93.3
|
|
62.7
|
|
30.0
|
|
32.2
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
Interest income and other financial gains
|
22.8
|
|
15.3
|
|
10.7
|
|
8.0
|
|
Interest expense and other financial charges
|
(13.0)
|
|
(12.3)
|
|
(6.5)
|
|
(6.6)
|
|
Foreign currency loss
|
(21.1)
|
|
(0.2)
|
|
(21.8)
|
|
(5.4)
|
|
Net income before income / asset tax expense
|
82.1
|
|
65.4
|
|
12.4
|
|
28.2
|
|
|
|
|
|
|
|
|
|
|
Income / asset tax expense
|
(28.3)
|
|
(19.3)
|
|
(7.1)
|
|
(12.4)
|
|
Net income
|
$ 53.8
|
|
$ 46.1
|
|
$ 5.3
|
|
$ 15.9
|
|
(*) The table above may not total due to rounding.
Principal trends in results of operations
Growth in net revenues
Since our inception, we have consistently generated revenue growth from our Marketplace and Non-Marketplace revenue streams, driven by the strong growth of our key operational metrics. Our net revenues grew 65.3% in the six-month period ended June 30, 2017 as compared to the same period in 2016. Our successful items sold and total payment volume increased 39.9% and 79.2%, respectively, in the six-month period ended June 30, 2017 as compared to the same period in 2016. Additionally, our number of
confirmed
registered users was 20.6% higher as of June 30, 2017 as compared to the number of confirmed registered users as of June 30, 2016. Furthermore, our gross merchandise volume (“GMV”) increased 33.6% in the six-month period ended June 30, 2017 as compared to the same period in 2016. Finally, our shipped items increased 61.4% in the six-month period ended June 30, 2017 as compared to the same period in 2016.
Our net revenues grew 58.5% in the three-month period ended June 30, 2017 as compared to the same period in 2016. Our successful items sold and total payment volume increased 40.7% and 73.5%, respectively, in the three-month period ended June 30, 2017 as compared to the same period in 2016. Additionally, our number of confirmed registered users was a 20.6% higher as of June 30, 2017 as compared to the number of confirmed registered users as of June 30, 2016. Furthermore, our GMV increased 35.8% in the three-month period ended June 30, 2017 as compared to the same period in 2016. Finally, our shipped items increased 63.7% in the three-month period ended June 30, 2017 as compared to the same period in 2016.
We believe that the growth in net revenues should continue in the future. However, despite this positive historical trend,
the
current
weak
global macro-economic environment, coupled with devaluations of certain local currencies in Latin America versus the U.S. dollar, the effects of Venezuelan translations of local currencies into
the
U.S. dollar, Venezuelan Government limits
on
prices and high interest rates in
Latin America
, could cause a decline
year-over-year
of our net revenues, particularly as measured in U.S. dollars.
Gross profit margins
During the past years, our business has experienced decreasing gross profit margins, as defined by total net revenues minus total cost of net
revenues
, as a percentage of net revenues.
Our
gross
profit margins were 57.7% and 64.0% for the six-month periods ended June 30, 2017 and 2016, respectively. For the three-month periods ended June 30, 2017 and 2016, our gross profit margins were 54.2% and 63.3%, respectively. The decrease in our gross profit margins resulted primarily from:
(i) Higher penetration of our payments and shipping solution into our Argentine, Brazilian and Mexican marketplaces. For the six and three-month period ended June 30, 2017, total volume of payments on our marketplace represented 79.7% and 80.9% of our total GMV (excluding motor vehicles, vessels, aircraft and real estate), respectively; as compared to 62.0% and 66.6% for the six and three-month period ended June 30, 2016. Additionally, for the six and three-month period ended June 30, 2017, the total number of items shipped through our shipping solution represented 52.9% and 54.3% of our total number of successful items sold, respectively; as compared to 45.8% and 46.6% for the six and three-month period ended June 30, 2016. Transactions that include such services intrinsically incur incremental costs such as collection fees, which result in lower gross profit margins. In addition, our financing and shipping revenues are disclosed net of third party provider costs while sales taxes are paid on the gross amount of revenues, thus, decreasing our gross profit margins in terms of revenues. For the six-month period ended June 30, 2017, collection fees and sales taxes increased $40.5 million and $19.2 million, respectively, as compared to the same period in 2016. For the three-month period ended June 30, 2017, collection fees and sales taxes increased $19.1 million and $7.8 million, respectively, as compared to the same period in 2016.
(ii) Increased customer support costs of $10.5 million and $5.0 for the six and three-month periods ended June 30, 2017, as compared with the same period in 2016; mainly as a consequence of an increase in salaries and wages. The number of employees related to customer support was 1,957 as of June 30, 2017 as compared with 1,557 as of June 30, 2016.
(iii)
Increased
hosting costs of $6.4 million and $4.0 million for the six and three-month period ended June 30, 2017, as compared with the same period in 2016.
(iv) Increased costs of providing free shipping in Mexico and Brazil of $36.9 million and $32.6 million for the six and three-month period ended June 30, 2017, as compared with the same period in 2016.
In the
future
, gross profit margins could decline if the penetration of our payment solution and shipping grows faster than our marketplace or if free shipping volume increase.
Operating income margins
For the six-month period ended June 30, 2017 as compared to the same period in 2016, our operating income margin decreased from 17.5% to 15.8%, mainly as a consequence of increases in costs of net revenues, as described in Gross profit margins section above, and increases in sales and marketing expenses (driven mainly by on and off portal deals, salaries and chargebacks from credit cards). For the three-month period ended June 30, 2017 as compared to the same period in 2016, our operating income margin decreased from 16.1% to 9.5%, mainly as a consequence of increases in costs of net revenues, as described in Gross profit margins section above, and increases in sales and marketing expenses (driven mainly by portal deals 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 income margins and we could continue experiencing decreases in operating income margins.
Other Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-months Periods Ended
June 30,
|
|
|
Three-month
s
Periods Ended
June 30,
|
(in millions)
|
|
|
2017 (*)
|
|
|
2016 (*)
|
|
|
2017 (*)
|
2016 (*)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of confirmed registered users at end of period
(1)
|
|
|
191.2
|
|
|
158.6
|
|
|
191.2
|
|
|
158.6
|
Number of confirmed new registered users during period
(2)
|
|
|
17.0
|
|
|
13.9
|
|
|
9.0
|
|
|
7.0
|
Gross merchandise volume
(3)
|
|
$
|
5,056.3
|
|
$
|
3,785.7
|
|
$
|
2,722.4
|
|
$
|
2,004.7
|
Number of successful items sold
(4)
|
|
|
114.7
|
|
|
82.0
|
|
|
61.5
|
|
|
43.7
|
Number of successful items shipped
(5)
|
|
|
60.7
|
|
|
37.6
|
|
|
33.4
|
|
|
20.4
|
Total payment volume
(6)
|
|
$
|
5,721.8
|
|
$
|
3,193.0
|
|
$
|
3,152.0
|
|
$
|
1,816.9
|
Total volume of payments on marketplace
(7)
|
|
$
|
4,027.4
|
|
$
|
2,347.8
|
|
$
|
2,201.6
|
|
$
|
1,335.4
|
Total payment transactions
(8)
|
|
|
96.4
|
|
|
59.5
|
|
|
52.1
|
|
|
31.9
|
Unique buyers
(9)
|
|
|
22.2
|
|
|
17.6
|
|
|
14.6
|
|
|
11.9
|
Unique sellers
(10)
|
|
|
6.5
|
|
|
5.7
|
|
|
4.2
|
|
|
3.7
|
Capital expenditures
|
|
$
|
34.6
|
|
$
|
44.9
|
|
$
|
21.8
|
|
$
|
27.6
|
Depreciation and amortization
|
|
$
|
19.1
|
|
$
|
13.2
|
|
$
|
10.1
|
|
$
|
6.9
|
|
(1)
|
|
Measure of the cumulative number of users who have registered on the MercadoLibre Marketplace and confirmed their registration.
|
|
(2)
|
|
Measure of the number of new users who have registered on the MercadoLibre Marketplace and confirmed their registration.
|
|
(3)
|
|
Measure of the total U.S. dollar sum of all transactions completed through the MercadoLibre Marketplace, excluding motor vehicles, vessels, aircraft and real estate.
|
|
(4)
|
|
Measure of the number of items that were sold/purchased through the MercadoLibre Marketplace.
|
|
(5)
|
|
Measure of the number of items that were shipped through our shipping service.
|
|
(6)
|
|
Measure of the total U.S. dollar sum of all transactions paid for using MercadoPago, including marketplace and non-marketplace transactions.
|
|
(7)
|
|
Measure of the total U.S. dollar sum of all marketplace transactions paid for using MercadoPago, excluding shipping and financing fees.
|
|
(8)
|
|
Measure of the number of all transactions paid for using MercadoPago.
|
|
(9)
|
|
New or existing users with at least one purchase made in the period.
|
|
(10)
|
|
New or existing users with at least one sale made in the period.
|
Net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-month Periods Ended
|
|
Change from 2016
|
|
Three-month Periods Ended
|
|
Change from 2016
|
|
June 30,
|
|
to 2017 (*)
|
|
June 30,
|
|
to 2017 (*)
|
|
2017
|
|
2016
|
|
in Dollars
|
|
in %
|
|
2017
|
|
2016
|
|
in Dollars
|
|
in %
|
|
(in millions, except percentages)
|
(in millions, except percentages)
|
Total Net Revenues
|
$ 590.5
|
|
$ 357.3
|
|
$ 233.2
|
|
65.3%
|
|
$ 316.5
|
|
$ 199.6
|
|
$ 116.9
|
|
58.5%
|
As a percentage of net revenues (*)
|
100.0%
|
|
100.0%
|
|
|
|
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-month Periods Ended
|
|
|
Change from 2016
|
|
Three-month Periods Ended
|
|
Change from 2016
|
|
|
June 30,
|
|
|
to 2017 (**)
|
|
June 30,
|
|
to 2017 (**)
|
Consolidated Net Revenues by revenue stream
|
|
2017
|
|
2016
|
|
|
in Dollars
|
|
in %
|
|
2017
|
|
2016
|
|
in Dollars
|
|
in %
|
|
|
(in millions, except percentages)
|
|
(in millions, except percentages)
|
Brazil
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketplace
|
|
$ 201.0
|
|
$ 97.9
|
|
|
$ 103.1
|
|
105.3%
|
|
$ 111.4
|
|
$ 54.2
|
|
$ 57.2
|
|
105.5%
|
Non-Marketplace
|
|
138.8
|
|
82.5
|
|
|
56.3
|
|
68.3%
|
|
68.7
|
|
48.7
|
|
20.0
|
|
41.0%
|
|
|
339.8
|
|
180.4
|
|
|
159.4
|
|
88.4%
|
|
180.1
|
|
102.9
|
|
77.2
|
|
75.0%
|
Argentina
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketplace
|
|
$ 91.7
|
|
$ 71.6
|
|
|
$ 20.2
|
|
28.2%
|
|
$ 51.9
|
|
$ 41.7
|
|
$ 10.2
|
|
24.3%
|
Non-Marketplace
|
|
67.7
|
|
44.3
|
|
|
23.3
|
|
52.7%
|
|
36.1
|
|
26.0
|
|
10.1
|
|
39.0%
|
|
|
159.4
|
|
115.9
|
|
|
43.5
|
|
37.5%
|
|
88.0
|
|
67.7
|
|
20.3
|
|
30.0%
|
Mexico
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketplace
|
|
$ 25.0
|
|
$ 12.4
|
|
|
$ 12.6
|
|
101.7%
|
|
$ 14.3
|
|
$ 6.6
|
|
$ 7.8
|
|
118.6%
|
Non-Marketplace
|
|
10.7
|
|
10.2
|
|
|
0.5
|
|
5.3%
|
|
5.8
|
|
4.9
|
|
0.9
|
|
19.4%
|
|
|
35.7
|
|
22.6
|
|
|
13.2
|
|
58.3%
|
|
20.2
|
|
11.5
|
|
8.7
|
|
76.3%
|
Venezuela
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketplace
|
|
$ 26.2
|
|
$ 17.9
|
|
|
$ 8.3
|
|
46.5%
|
|
$ 13.1
|
|
$ 6.7
|
|
$ 6.3
|
|
93.7%
|
Non-Marketplace
|
|
2.3
|
|
1.7
|
|
|
0.7
|
|
41.0%
|
|
1.1
|
|
0.7
|
|
0.4
|
|
55.8%
|
|
|
28.6
|
|
19.6
|
|
|
9.0
|
|
46.1%
|
|
14.2
|
|
7.5
|
|
6.7
|
|
90.1%
|
Other countries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketplace
|
|
$ 11.2
|
|
$ 7.6
|
|
|
$ 3.6
|
|
48.1%
|
|
$ 6.0
|
|
$ 4.0
|
|
$ 2.0
|
|
50.6%
|
Non-Marketplace
|
|
15.7
|
|
11.2
|
|
|
4.5
|
|
39.8%
|
|
8.1
|
|
6.1
|
|
1.9
|
|
31.6%
|
|
|
26.9
|
|
18.8
|
|
|
8.1
|
|
43.1%
|
|
14.1
|
|
10.1
|
|
4.0
|
|
39.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketplace
|
|
355.2
|
|
207.4
|
|
|
147.8
|
|
71.3%
|
|
196.7
|
|
113.3
|
|
83.5
|
|
73.7%
|
Non-Marketplace (*)
|
|
235.2
|
|
149.9
|
|
|
85.4
|
|
56.9%
|
|
119.8
|
|
86.4
|
|
33.4
|
|
38.7%
|
Total
|
|
$ 590.5
|
|
$ 357.3
|
|
|
$ 233.2
|
|
65.3%
|
|
$ 316.5
|
|
$ 199.6
|
|
$ 116.9
|
|
58.5%
|
(*) Includes, among other things, ad sales,
classified fees
, payment fees, shipping fees and other ancillary services.
(**) Percentages have been calculated using whole-dollar amounts rather than rounded amounts that appear in the table. The table above may not total due to rounding.
Net revenues for the six and three-month period ended June 30, 2017 increased in all of our geographic segments
.
Brazil
Marketplace revenue in Brazil increased 105.3% in the first half of 2017 as compared to the same period in 2016.
The increase was primarily a consequence of a 44.5% increase in local currency volume, a 21.8% increase in our take rate
(which we define as net revenues as a percentage of gross merchandise volume)
and a 16.7% average appreciation of local currency.
Non-Marketplace revenues grew 68.3%, a $56.3 million increase, during the same period, mainly driven by: i) a 70.7% increase in the volume of payments transactions; ii) a 57.4% increase in the volume of shipped items; and iii) a 59.6% increase in ad sales
volume
.
Marketplace revenues in Brazil increased 105.5% in the three-month period ended June 30, 2017 as compared to the same period in 2016. The increase was primarily a consequence of a 48.8% increase in local currency volume, a 26.4% increase in our take rate and a 9.2% average appreciation of local currency. Non-Marketplace revenues grew 41.0%, a $20.0 million increase, during the same period, mainly driven by: i) a 74.4% increase in the volume of payments transactions; and ii) a 50.6% increase in ad sales
volume
.
Argentina
Marketplace revenues of our Argentine segment increased 28.2% in the first half of 2017 as compared to the same period in 2016.
The increase was primarily a consequence of a 15.1% increase in local currency volume and an increase of 21.2% in our take rate
, partially offset by a 8.1
% average devaluation of local currency.
Non-Marketplace revenues grew 52.7%, a $23.3 million increase, during the same period, mainly driven by: i) a 47.9% increase in the volume of payments transactions; ii) a 22.5% increase in the volume of shipped items; and iii) a 48.1% increase in classified
s
volume.
Marketplace revenues of our Argentine segment increased 24.3% in the three-month period ended June 30, 2017 as compared to the same period in 2016.
The increase was primarily a consequence of a 14.7% increase in local currency volume and a 19.9% increase in our take rate
, partially offset by a 9.5
% average devaluation of the local currency.
Non-Marketplace revenues grew 39.0% in the three-month period ended June 30, 2017, a $10.1 million increase, during the same period, mainly driven by: i) a 37.0% increase in the volume of payments transactions; ii) a 20.1% increase in the volume of shipped items; and iii) a 24.7% increase in classified
s
volume.
Mexico
Marketplace revenues of our Mexican segment increased by approximately 101.7% in the first half of 2017, as compared to the same period in 2016,
mainly due to a 43.3% increase in local currency volume and a 51.3% increase in our take rate, partially offset by an average local currency devaluation of 7.0%.
Non-Marketplace revenues increased 5.3% or $0.5 million during the same period, mainly driven
by increases in the volume of payment transactions
and ad sales, partially offset by a decrease in our classified fees.
Marketplace revenues of our Mexican segment increased by approximately 118.6% in the three-month period ended June 30, 2017, as compared to the same period in 2016,
mainly due to a 52.7% increase in local currency volume and a 46.8% increase in our take rate, partially offset by an average local currency devaluation of 2.5%.
N
on-Marketplace revenues increased 19.4% in the three-month period ended June 30, 2017, or $0.9 million during the same period, mainly driven by increases in the volume of
payment
transactions and shipped items, partially offset by a decrease in our classified fees.
Venezuela
Marketplace revenues of our Venezuelan segment increased by approximately 46.5% during the first half of 2017, as compared to the same period in 2016,
mainly due to a 269.3% increase in local currency volume and a 15.7% increase in our take rate, partially offset by an average local currency devaluation of 65.7%.
Non-Marketplace revenues increased 41.0%, or $0.7 million during the same period, mainly by an increase in the volume of payment transactions and classified fees.
Marketplace revenues of our Venezuelan segment increased by approximately 93.7% in the three-month period ended June 30, 2017, when compared to the same period in 2016,
mainly due to a 302.9% increase in local currency volume and a 31.6% increase in our take rate
, partially offset
by an average local currency devaluation of 63.5
.
Non-Marketplace revenues increased 55.8%, or $0.4 million during the same period, mainly due to an increase in the volume of payment transactions and classified fees.
The following table sets forth our total net revenues and the sequential quarterly growth of these net revenues for the periods described below:
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
March 31,
|
June 30,
|
September 30,
|
December 31,
|
|
(in millions, except percentages)
|
|
(*)
|
2017
|
|
|
|
|
Net revenues
|
$ 273.9
|
$ 316.5
|
n/a
|
n/a
|
Percent change from prior quarter
|
7%
|
16%
|
|
|
2016
|
|
|
|
|
Net revenues
|
$ 157.6
|
$ 199.6
|
$ 230.8
|
$ 256.3
|
Percent change from prior quarter
|
-13%
|
27%
|
16%
|
11%
|
|
|
|
|
|
(*) Percentages have been calculated using whole-dollar amounts rather than rounded amounts that appear in the table.
The following table sets forth the growth in net revenues in local currencies for the six and three-month period ended June 30, 2017 as compared to the same period in 2016:
|
|
|
|
|
|
|
|
|
|
|
|
Changes from 2016 to 2017 (*)
|
(% of revenue growth in Local Currency)
|
|
Six-months
|
|
Three-months
|
Brazil
|
|
63.2%
|
|
60.5%
|
Argentina
|
|
50.1%
|
|
43.9%
|
Mexico
|
|
68.0%
|
|
80.4%
|
Venezuela
|
|
325.9%
|
|
353.2%
|
Other Countries
|
|
35.0%
|
|
34.1%
|
Total Consolidated
|
|
71.0%
|
|
64.7%
|
(*) The local currency revenue growth was calculated by using the average monthly exchange rates for each month during 2016 and applying them to the corresponding months in 2017, so as to calculate what our financial results would have been had exchange rates remained stable from one year to the next. See also “Non-GAAP Financial Measures” section below for details on FX neutral measures.
In Venezuela, the increase in our net revenues is mainly due to higher average selling prices posted by sellers during the six and three-month period ended June 30, 2017, which we do not control. The increase in average selling prices in Venezuela is a consequence of: (i) the high inflation rate; (ii) a shortage of products and (iii) changes in the mix of categories of the items sold in our Marketplace.
In Brazil, the increase in local currency growth is mainly a consequence of an increase of our Brazilian Marketplace volume, increases in
our
MercadoPago transactions and our shipped
items
volume.
In the case of Argentina, the increase in
our net revenues is due to an increase in the Argentine successful items volume,
shipped items
volume and increases in
our
MercadoPago
transactions.
In Mexico, the increase in local currency growth is a consequence of an increase of our Mexican Marketplace volume and increases in
our
MercadoPago transactions.
Cost of net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-month Period
s
Ended
|
|
Change from 2016
|
|
Three-month Periods Ended
|
|
Change from 2016
|
|
June 30,
|
|
to 2017 (*)
|
|
September 30,
|
|
to 2017 (*)
|
|
2017
|
|
2016
|
|
in Dollars
|
|
in %
|
|
2017
|
|
2016
|
|
in Dollars
|
|
in %
|
|
(in millions, except percentages)
|
|
(in millions, except percentages)
|
Total cost of net revenues
|
$ 250.0
|
|
$ 128.8
|
|
$ 121.3
|
|
94.1%
|
|
$ 145.0
|
|
$ 73.3
|
|
$ 71.6
|
|
97.7%
|
As a percentage of net revenues (*)
|
42.3%
|
|
36.0%
|
|
|
|
|
|
45.8%
|
|
36.7%
|
|
|
|
|
(*) Percentages have been calculated using whole-dollar amounts rather than rounded amounts that appear in the table. The table above may not total due to rounding.
For the six-month period ended June 30, 2017 as compared to the same period of 2016, the increase of $121.3 million in cost of net revenues was primarily attributable to: i) an increase in collection fees of $40.5 million, or 63.3%, which was mainly attributable to our Argentine and Brazilian operations as a result of the higher penetration of
MercadoPago in those countries
; ii) an increase in shipping costs amounting to $36.9 million, mainly related to our Brazilian and Mexican free shipping initiative; iii) an increase in sales taxes amounting to $19.2 million, mainly related to the growth of our Argentine and Brazilian operations; iv) a $10.5 million increase in customer support costs mainly as a consequence of salaries and wages, and v) $6.4 million in hosting costs due to higher traffic in our web-site.
For the three-month period ended June 30, 2017 as compared to the same period of 2016, the increase of $71.6 million in cost of net revenues was primarily attributable to: i) a increase in shipping costs amounting to $32.6 million, mainly in our Mexican and Brazilian free shipping initiative; ii) an increase in collection fees amounting to $19.1 million, or 51.9%, which was mainly attributable to our Argentine and Brazilian operations as a result of the higher penetration of MercadoPago in those countries and higher off-platform transactions; iii) an increase in sales taxes amounting to $7.8 million, mainly related to the growth of our Argentine and Brazilian operations; iv) a $5.0 million increase in customer support costs mainly as a consequence of salaries and wages; and v) $4.0 million in hosting costs.
Product and technology development expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-month Periods Ended
|
|
Change from 2016
|
|
Three-month Periods Ended
|
|
Change from 2016
|
|
June 30,
|
|
to 2017 (*)
|
|
June 30,
|
|
to 2017 (*)
|
|
2017
|
|
2016
|
|
in Dollars
|
|
in %
|
|
2017
|
|
2016
|
|
in Dollars
|
in %
|
|
(in millions, except percentages)
|
|
(in millions, except percentages)
|
Product and technology development
|
$ 60.6
|
|
$ 46.2
|
|
$ 14.5
|
|
31.4%
|
|
$ 30.3
|
|
$ 24.2
|
|
$ 6.1
|
25.3%
|
As a percentage of net revenues (*)
|
10.3%
|
|
12.9%
|
|
|
|
|
|
9.6%
|
|
12.1%
|
|
|
|
(*) 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
six and
three-month period
ended
June 30, 2017, the increase in product and technology development expenses as compared to the same periods in 2016 amounted to $14.5 million and $6.1 million, respectively. These increase were primarily attributable to: i) an increase of $6.9 million and $2.8 million in salaries and wages, respectively; ii) an increase in
depreciation
and amortization expenses of $3.8 million and $2.2 million, respectively; iii) an increase in other product and technology development expenses of $3.0 million and $1.1 million, respectively.
We
believe
development is one of our key competitive advantages and intend to continue to invest in hiring engineers to meet the increasingly sophisticated product expectations of our customer base.
Sales and marketing expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-month Periods Ended
|
|
Change from 2016
|
|
Three-month Periods Ended
|
|
Change from 2016
|
|
June 30,
|
|
to 2017 (*)
|
|
June 30,
|
|
to 2017 (*)
|
|
2017
|
|
2016
|
|
in Dollars
|
|
in %
|
|
2017
|
|
2016
|
|
in Dollars
|
in %
|
|
(in millions, except percentages)
|
|
(in millions, except percentages)
|
Sales and marketing
|
$ 123.8
|
|
$ 68.0
|
|
$ 55.8
|
|
82.0%
|
|
$ 76.9
|
|
$ 35.3
|
|
$ 41.5
|
117.5%
|
As a percentage of net revenues (*)
|
21.0%
|
|
19.0%
|
|
|
|
|
|
24.3%
|
|
17.7%
|
|
|
|
(*) Percentages have been calculated using whole-dollar amounts rather than rounded amounts that appear in the table. The table above may not total due to rounding.
For the six and
three-
month periods ended June 30, 2017, the $55.8 and $41.5 million increase in sales and marketing expenses when compared to the same periods in 2016 was primarily attributable to: i) an increase of $22.8 million and $17.4 million in on line portal deals expenses mainly in Brazil and Mexico, respectively; ii) a $9.7 million and $8.5 million increase in our offline advertising expenses, respectively; iii) a $8.7 million and $5.3 million increase in chargebacks from credit cards due to the increase in our MercadoPago volume, respectively; iv) a $8.3 million and $4.7 million increase in salaries and wages, respectively; and v) a $3.6 million and $2.9 million increase in our buyer protection program expenses, respectively.
General and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six -month Periods Ended
|
|
Change from 2016
|
|
Three-month Periods Ended
|
|
Change from 2016
|
|
June 30,
|
|
to 2017 (*)
|
|
June 30,
|
|
to 2017 (*)
|
|
2017
|
|
2016
|
|
in Dollars
|
|
in %
|
|
2017
|
|
2016
|
|
in Dollars
|
|
in %
|
|
(in millions, except percentages)
|
|
(in millions, except percentages)
|
General and administrative
|
$ 59.8
|
|
$ 37.9
|
|
$ 21.9
|
|
57.8%
|
|
$ 31.5
|
|
$ 20.8
|
|
$ 10.7
|
|
51.1%
|
As a percentage of net revenues (*)
|
10.1%
|
|
10.6%
|
|
|
|
|
|
10.0%
|
|
10.4%
|
|
|
|
|
(*) 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 six-month period ended June 30, 2017, the $21.9 million increase in general and administrative expenses when compared to the same period in 2016 was primarily attributable to: i) a $17.7 million increase in salaries and wages ii) a $1.3 million increase in other general and administrative expenses; and iii) a $1.4 million increase in tax, audit and legal fees.
For the three-month period June 30, 2017, the $10.7 million increase in general and administrative expenses when compared to the same period in 2016 was primarily attributable to: i) a $8.5 million increase in salaries and wages; ii) a $1.0 million increase in other general and administrative expenses; and iii) a $0.5 million increase in tax, audit and legal fees.
Impairment of Long-Lived assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-month Periods Ended
|
|
Change from 2016
|
|
Three-month Periods Ended
|
|
Change from 2016
|
|
|
|
June 30,
|
|
to 2017 (*)
|
|
June 30,
|
|
to 2017 (*)
|
|
|
|
2017
|
|
2016
|
|
in Dollars
|
|
in %
|
|
2017
|
|
2016
|
|
in Dollars
|
|
in %
|
|
|
|
(in millions, except percentages)
|
|
(in millions, except percentages)
|
Impairment of Long-Lived Assets
|
|
|
$ 2.8
|
|
$ 13.7
|
|
$ (10.9)
|
|
(79.3%)
|
|
$ 2.8
|
|
$ 13.7
|
|
$ (10.9)
|
|
(79.3%)
|
As a percentage of net revenues (*)
|
|
|
0.5%
|
|
3.8%
|
|
|
|
|
|
0.9%
|
|
6.9%
|
|
|
|
|
(*) Percentages have been calculated using whole-dollar amounts rather than rounded amounts that appear in the table. The table above may not total due to rounding.
We recorded an impairment of certain real estate investments owned by our Venezuelan subsidiaries of $2.8 million and $13.7 million during the second quarter of 2017 and 2016, respectively. For further information, see section “Foreign Currency
Translation—
Venezuelan currency status.
”
Other (expenses) income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-month Periods Ended
|
|
Change from 2016
|
|
Three-month Periods Ended
|
|
Change from 2016
|
|
June 30,
|
|
to 2017 (*)
|
|
June 30,
|
|
to 2017 (*)
|
|
2017
|
|
2016
|
|
in Dollars
|
|
in %
|
|
2017
|
|
2016
|
|
in Dollars
|
in %
|
|
(in millions, except percentages)
|
|
(in millions, except percentages)
|
Other (expenses) income, net
|
$ (11.3)
|
|
$ 2.7
|
|
$ (14.0)
|
|
-510.0%
|
|
$ (17.6)
|
|
$ (4.0)
|
|
$ (13.6)
|
343.5%
|
As a percentage of net revenues (*)
|
-1.9%
|
|
0.8%
|
|
|
|
|
|
-5.6%
|
|
-2.0%
|
|
|
|
(*) Percentages have been calculated using whole-dollar amounts rather than rounded amounts that appear in the table. The table above may not total due to rounding.
For the
six-month period ended June 30, 2017, the $14.0
million
increase in other expenses when compared to the same period in 2016 was
primarily attributable to: i) an increase in foreign exchange loss of $20.9 million, from $0.2 million in 2016 to $21.1 million in 2017; and ii) an increase in financial expenses amounting to $0.7 million, from $12.3 million in 2016 to $13.0 million in 2017, due mainly to our convertible notes and other financial charges in Brazil. This increase was partially offset by $7.5 million increase in interest income arising from our financial investments in Brazil and Argentina. The 2016 foreign exchange loss was a consequence of a $7.2 million loss arising from the U.S. Dollar revaluation over our Bolivares Fuertes net asset position in Venezuela, partially offset by a $5.6 million gain arising from the Argentine Peso devaluation over our U.S. Dollar net asset position in Argentina and a $1.3 million gain arising from the Reais revaluation over our U.S. Dollar net liability position in Brazil. The 2017 foreign exchange loss was mainly a consequence of a $22.9 million loss arising from the U.S. Dollar revaluation over our Bolivares Fuertes net asset position in Venezuela, partially offset by a $4.4 million gain arising from the Mexican Peso revaluation over our U.S. Dollar net liability position in México.
For the
three-month period ended June 30, 2017, the $13.6
million
increase in other expenses when compared to the same period in
2016
was
primarily attributable to an increase in foreign exchange loss of $16.4 million, from $5.4 million in 2016 to $21.8 million in 2017. This
increase was partially offset by a $2.6 million increase in interest income arising from our financial investments in Brazil and Argentina.
The 2017 and 2016 foreign exchange loss was mainly as a consequence of a $22.0 million and $4.9 million loss, respectively, arising from the U.S. Dollar revaluation over our Bolivares Fuertes net asset position in Venezuela
.
Income tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-month Periods Ended
|
|
Change from 2016
|
|
Three-month Periods Ended
|
|
Change from 2016
|
|
June 30,
|
|
to 2017 (*)
|
|
June 30,
|
|
to 2017 (*)
|
|
2017
|
|
2016
|
|
in Dollars
|
|
in %
|
|
2017
|
|
2016
|
|
in Dollars
|
|
in %
|
|
(in millions, except percentages)
|
|
(in millions, except percentages)
|
Income and asset tax
|
$ 28.3
|
|
$ 19.3
|
|
$ 8.9
|
|
46.3%
|
|
$ 7.1
|
|
$ 12.4
|
|
$ (5.3)
|
|
-42.5%
|
As a percentage of net revenues (*)
|
4.8%
|
|
5.4%
|
|
|
|
|
|
2.2%
|
|
6.2%
|
|
|
|
|
(*) 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.
During the six-month period ended June 30, 2017 as compared to the same period in 2016, income tax increased by $8.9 million
mainly
as a consequence of: i) an increase in our pre-tax gains mainly in our Brazilian subsidiaries,
partially offset by higher pre-tax losses recorded in Mexico during 2017 (as a result mainly of an increase in our operating costs)
; and ii) the
loss carryforwards generated in our Venezuelan subsidiaries mainly by the devaluation of the local currency, which was not considered recoverable for tax purposes in 2017
.
During the three-month period ended June 30, 2017 as compared to the same period in 2016, income tax decreased by $5.3 million
mainly
as a consequence of
higher pre-tax losses recorded in Mexico during 2017, as a result mainly of an increase in our operating costs; partially offset by
increases in our pre-tax gains in our Brazilian and Argentine subsidiaries.
Our blended tax rate is defined as income tax expense as a percentage of income before income tax. Our effective income tax rate is defined as the provision for income taxes (net of charges related to dividend distributions from foreign subsidiaries that are offset with domestic foreign tax credits) as a percentage of income before income tax. The effective income tax rate excludes the effects of the deferred income tax, and complementary income tax.
The following table summarizes our blended and effective tax rates for the six and three-month periods ended June 30, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-month Periods Ended
|
|
Three-month Periods Ended
|
|
June 30,
|
|
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Blended tax rate
|
34.4%
|
|
29.5%
|
|
57.2%
|
|
43.8%
|
Effective tax rate
|
47.1%
|
|
35.1%
|
|
118.5%
|
|
46.0%
|
Our blended tax rate for the six and three-month periods ended June 30, 2017 increased as compared to the same period in 2016 mainly due to: i) the devaluation loss recorded in our Venezuelan subsidiaries as described above; ii) a higher increase in our pre-tax gains in our Brazilian subsidiaries as compared with other locations, which are taxable at a higher tax rate; and iii) a higher increase in our pre-tax losses in our Mexican subsidiaries as compared with other locations, which are taxable at a lower tax rate.
Our effective tax rate for the six and three-month periods ended June 30, 2017 increased as compared to the same period in 2016 mainly due to: i) an increase in our pre-tax losses in our Mexican subsidiaries, which reduce our consolidated pre-tax gain without any corresponding recognition of provision for income taxes; and ii) a higher increase in our pre-tax gains in our Brazilian subsidiaries as compared with other locations, which are taxable at a higher tax rate.
The following table sets forth our effective income tax rate on a segment basis for the six and three-month periods ended June 30, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-month Periods Ended
|
Three-month Periods Ended
|
|
|
|
June 30,
|
June 30,
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Effective tax rate by country
|
|
|
|
|
|
|
|
|
|
|
Argentina
|
|
|
22.4%
|
|
19.9%
|
|
21.3%
|
|
16.5%
|
|
Brazil
|
|
|
31.0%
|
|
28.4%
|
|
28.2%
|
|
28.8%
|
|
Venezuela
|
|
|
-0.7%
|
|
-0.1%
|
|
5.9%
|
|
0.1%
|
|
Mexico
|
|
|
-0.6%
|
|
-11.3%
|
|
1.9%
|
|
-7.7%
|
|
The increase in the effective income tax rate in our Argentine subsidiaries during the six and three-month periods ended June 30, 2017 as compared to the same periods in 2016, 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, which established the new requirements to become a beneficiary of the new software development law. The new decree establishes compliance requirements with annual incremental ratios related to exports of services and research and development expenses that must be achieved to remain within the tax holiday. Our Argentine subsidiary will have to achieve certain required ratios annually under the new software development law to remain eligible for the benefits.
On September 17, 2015, the Argentine Industry Secretary approved the Company’s application for eligibility under the new software
development
law for the Company’s Argentinean subsidiary, Mercadolibre S.R.L. Furthermore, on September 18, 2016, the Argentine Industry Secretary approved the Company’s application for eligibility under the new software development law for the Company’s Argentinean subsidiaries, Neosur S.RL. and Business Vision S.A. As a result, the Company’s Argentinean subsidiaries have been granted a tax holiday retroactive from September 18, 2014. A portion of the benefits obtained as beneficiaries of the new law is a relief of 60% of total income tax related to software development activities and a 70% relief in payroll taxes related to software development activities.
As a result of the Company’s eligibility under the new law, it recorded an income tax benefit of $11.3 million and $6.2 million during the six and three-month periods ended June 30, 2017, respectively. Furthermore, the Company recorded a labor cost benefit of $3.5 million and $1.5 million during the six and three-month periods ended June 30, 2017, respectively. Additionally, $1.0 million and $0.5 million were accrued to pay software development law audit fees during the six and three-month periods ended June 30, 2017, respectively. During the first half of 2016, the Company recorded an income tax benefit of $9.2 million, a labor cost benefit of $2.0 million and $0.8 million were accrued to pay software development law audit fees. Additionally, during the second quarter of 2016, the Company recorded an income tax benefit of $4.9 million, a labor cost benefit of $1.0 million and $0.4 million were accrued to pay software development law audit fees. Aggregate per share effect of the Argentine tax holiday amounted to $0.26 and $0.14 for the six and three-month periods ended June 30, 2017, respectively.
The increase in our Brazilian effective income tax rate for the six-month period ended June 30, 2017 as compared to the same period in 2016, was mainly related to higher temporary differences in the current period. The effective income tax rate for our Brazilian segment remained stable during the three-month period ended June 30, 2017 as compared to the same period in 2016.
For the six and three-month period ended June 30, 2017 and 2016, our Venezuelan effective income tax rate was driven mainly by losses recorded in our Venezuelan subsidiaries related to impairment of long-lived assets and foreign exchange losses, which generated net loss before income tax. The loss carryforward generated in Venezuela was considered not recoverable for tax purposes.
The increase in our Mexican negative
effective income tax rate for
the six and three-month period ended June 30, 2017 as compared with the same period in 2016, is due to the higher pre-tax losses recorded during 2017 (as a result mainly of an increase in our operating costs) 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)
|
Six-month Period Ended June 30, 2017
|
|
|
|
|
|
Brazil
|
|
Argentina
|
|
Mexico
|
|
Venezuela
|
|
Other Countries
|
|
Total
|
Net revenues
|
$ 339.8
|
|
$ 159.4
|
|
$ 35.7
|
|
$ 28.6
|
|
$ 26.9
|
|
$ 590.5
|
Direct costs
|
$ (207.2)
|
|
$ (94.8)
|
|
$ (59.6)
|
|
$ (12.3)
|
|
$ (22.6)
|
|
$ (396.5)
|
Impairment of Long-lived Assets
|
—
|
|
—
|
|
—
|
|
(2.8)
|
|
—
|
|
(2.8)
|
Direct contribution
|
132.7
|
|
64.6
|
|
(23.9)
|
|
13.5
|
|
4.3
|
|
191.2
|
Margin
|
39.0%
|
|
40.5%
|
|
-67.0%
|
|
47.2%
|
|
15.9%
|
|
32.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-month Period Ended June 30, 2016
|
|
|
|
|
|
Brazil
|
|
Argentina
|
|
Mexico
|
|
Venezuela
|
|
Other Countries
|
|
Total
|
Net revenues
|
$ 180.4
|
|
$ 115.9
|
|
$ 22.6
|
|
$ 19.6
|
|
$ 18.8
|
|
$ 357.3
|
Direct costs
|
(111.8)
|
|
(66.2)
|
|
(18.7)
|
|
(9.2)
|
|
(13.3)
|
|
(219.2)
|
Impairment of Long-lived Assets
|
—
|
|
—
|
|
—
|
|
(13.7)
|
|
—
|
|
(13.7)
|
Direct contribution
|
68.7
|
|
49.7
|
|
3.9
|
|
(3.4)
|
|
5.5
|
|
124.4
|
Margin
|
38.1%
|
|
42.9%
|
|
17.4%
|
|
-17.3%
|
|
29.1%
|
|
34.8%
|
|
Change from the Six-month Period Ended June 30, 2016 to June 30, 2017 (*)
|
|
|
|
|
|
Brazil
|
|
Argentina
|
|
Mexico
|
|
Venezuela
|
|
Other Countries
|
|
Total
|
Net revenues
|
|
|
|
|
|
|
|
|
|
|
|
in Dollars
|
$ 159.4
|
|
$ 43.5
|
|
$ 13.2
|
|
$ 9.0
|
|
$ 8.1
|
|
$ 233.2
|
in %
|
88.4%
|
|
37.5%
|
|
58.3%
|
|
46.1%
|
|
43.1%
|
|
65.3%
|
Direct costs
|
|
|
|
|
|
|
|
|
|
|
|
in Dollars
|
$ (95.4)
|
|
$ (28.6)
|
|
$ (41.0)
|
|
$ (3.0)
|
|
$ (9.3)
|
|
$ (177.3)
|
in %
|
85.4%
|
|
43.2%
|
|
219.8%
|
|
32.8%
|
|
69.8%
|
|
80.9%
|
Impairment of Long-Lived Assets
|
|
|
|
|
|
|
|
|
|
|
|
in Dollars
|
$ —
|
|
$ —
|
|
$ —
|
|
$ 10.9
|
|
$ —
|
|
$ 10.9
|
in %
|
0.0%
|
|
0.0%
|
|
0.0%
|
|
-79.3%
|
|
0.0%
|
|
-79.3%
|
Direct contribution
|
|
|
|
|
|
|
|
|
|
|
|
in Dollars
|
$ 64.0
|
|
$ 14.9
|
|
$ (27.8)
|
|
$ 16.9
|
|
$ (1.2)
|
|
$ 66.8
|
in %
|
93.2%
|
|
30.0%
|
|
-710.7%
|
|
-499.0%
|
|
-21.8%
|
|
53.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except for percentages)
|
Three-month Period Ended June 30, 2017
|
|
|
|
|
|
Brazil
|
|
Argentina
|
|
Mexico
|
|
Venezuela
|
|
Other Countries
|
|
Total
|
Net revenues
|
$ 180.1
|
|
$ 88.0
|
|
$ 20.2
|
|
$ 14.2
|
|
$ 14.1
|
|
$ 316.5
|
Direct costs
|
(120.1)
|
|
(49.7)
|
|
(42.8)
|
|
(5.7)
|
|
(12.9)
|
|
(231.2)
|
Impairment of Long-lived Assets
|
—
|
|
—
|
|
—
|
|
(2.8)
|
|
—
|
|
(2.8)
|
Direct contribution
|
60.0
|
|
38.3
|
|
(22.6)
|
|
5.6
|
|
1.2
|
|
82.5
|
Margin
|
33.3%
|
|
43.5%
|
|
-112.0%
|
|
39.7%
|
|
8.5%
|
|
26.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-month Period Ended June 30, 2016
|
|
|
|
|
|
|
Brazil
|
|
Argentina
|
|
Mexico
|
|
Venezuela
|
|
|
Other Countries
|
|
Total
|
Net revenues
|
$ 102.9
|
|
$ 67.7
|
|
$ 11.5
|
|
$ 7.5
|
|
|
$ 10.1
|
|
$ 199.6
|
Direct costs
|
(61.5)
|
|
(38.4)
|
|
(9.2)
|
|
(4.1)
|
|
|
(7.1)
|
|
(120.3)
|
Impairment of Long-lived Assets
|
—
|
|
—
|
|
—
|
|
(13.7)
|
|
|
—
|
|
(13.7)
|
Direct contribution
|
41.4
|
|
29.3
|
|
2.3
|
|
(10.3)
|
|
|
3.0
|
|
65.6
|
Margin
|
40.3%
|
|
43.2%
|
|
19.7%
|
|
-138.7%
|
|
|
29.6%
|
|
32.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change from the Three-month Period Ended June 30, 2016 to June 30, 2017 (*)
|
|
|
|
|
|
Brazil
|
|
Argentina
|
|
Mexico
|
|
Venezuela
|
|
Other Countries
|
|
Total
|
Net revenues
|
|
|
|
|
|
|
|
|
|
|
|
in Dollars
|
$ 77.2
|
|
$ 20.3
|
|
$ 8.7
|
|
$ 6.7
|
|
$ 4.0
|
|
$ 116.9
|
in %
|
75.0%
|
|
30.0%
|
|
76.3%
|
|
90.1%
|
|
39.1%
|
|
58.5%
|
Direct costs
|
|
|
|
|
|
|
|
|
|
|
|
in Dollars
|
$ (58.7)
|
|
$ (11.3)
|
|
$ (33.6)
|
|
$ (1.6)
|
|
$ (5.8)
|
|
$ (110.8)
|
in %
|
95.4%
|
|
29.3%
|
|
365.2%
|
|
39.4%
|
|
80.8%
|
|
92.1%
|
Impairment of Long-Lived Assets
|
|
|
|
|
|
|
|
|
|
|
|
in Dollars
|
$ —
|
|
$ —
|
|
$ —
|
|
$ 10.9
|
|
$ —
|
|
$ 10.9
|
in %
|
0.0%
|
|
0.0%
|
|
0.0%
|
|
-79.3%
|
|
0.0%
|
|
-79.3%
|
Direct contribution
|
|
|
|
|
|
|
|
|
|
|
|
in Dollars
|
$ 18.5
|
|
$ 9.0
|
|
$ (24.9)
|
|
$ 16.0
|
|
$ (1.8)
|
|
$ 16.9
|
in %
|
44.7%
|
|
30.9%
|
|
-1104.3%
|
|
-154.5%
|
|
-60.1%
|
|
25.7%
|
(*) Percentages have been calculated using whole-dollar amounts rather than rounded amounts that appear in the table. The table above may not total due to rounding.
Net revenues
Net revenues for the six and three-month period ended June 30, 2017 as compared to the same period in 2016, 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 six-month period ended June 30, 2017 as compared to the same period in 2016, direct costs increased by 85.4%, mainly driven by: i) a 113.0% increase in cost of net revenues, mainly attributable to an increase in collection fees as a consequence of higher penetration of
our
MercadoPago
business, sales tax costs, shipping costs and salaries and wages; ii) a 58.2% increase in sales and marketing expenses, mainly due to an increase in online marketing expenses, salaries and wages and chargebacks
from credit cards due to the increase in our MercadoPago volume
; iii) a 45.2% increase in general and administrative expenses, mainly attributable to an increase in salary and wages and legal fees and; iv) a 41.6% increase in
product and technology development expenses, mainly due to an increase in depreciation and amortization expenses and other product development expenses
.
For the three-month period ended June 30, 2017 as compared to the same period in 2016, direct costs increased by 95.4%, mainly driven by: i) a 128.9% increase in cost of net revenues, mainly attributable to an increase in collection fees as a consequence of higher penetration of our MercadoPago business, sales tax costs, shipping costs and salaries and wages related to customer service; ii)
a 74.5% increase in sales and marketing expenses, mainly due to an increase in online marketing expenses, chargebacks from credit cards due to increase in our MercadoPago volume and salaries and wages; iii)
a 36.1% 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 6.2%
increase in general and administrative expenses, mainly attributable to an increase in
depreciation and amortization expenses and other general administrative expenses.
Argentina
For the six-month period ended June 30, 2017 as compared to the same period in 2016, direct costs increased by 43.2%, mainly driven by: i) a 73.7%
increase in product and technology development expenses, mainly due to an increase in depreciation and amortization expenses;
ii) a 55.9% increase in sales and marketing expenses, mainly due to an increase in online marketing expenses,
buyer protection program expenses and
chargebacks
from credit cards due to increase in our MercadoPago volume
; iii) a 42.1% increase in cost of net revenues, mainly attributable to an increase in collection fees as a consequence of a higher penetration of MercadoPago business, customer support costs and sales taxes. This increase was partially offset by a 24.9% decrease in general and administrative expenses.
For the three-month period ended June 30, 2017 as compared to the same period in 2016, direct costs increased by 29.3%, mainly driven by: i) a 92.9%
increase in product and technology development expenses, mainly due to an increase in depreciation and amortization expenses;
ii) a 56.7% increase in sales and marketing expenses, mainly due to an increase in online marketing expenses,
buyer protection program expenses and
chargebacks
from credit cards due to increase in our MercadoPago volume
; iii) a 24.5% increase in cost of net revenues, mainly attributable to an increase in collection fees as a consequence of a higher penetration of MercadoPago business, customer support costs and sales taxes. This increase was partially offset by a 43.6% decrease in general and administrative expenses.
Mexico
For the six-month period ended June 30, 2017 as compared to the same period in 2016, direct costs increased by 219.8%, mainly driven by: i) a 319.6% increase in cost of net revenues, mainly attributable to an increase
in
collection fees as a consequence of higher penetration of our
MercadoPago business, customer support costs and shipping costs
; ii) a 254.6% increase in sales and marketing expenses, mainly due to increases in online and offline marketing expenses
;
and iii) a 16.0% increase in general and administrative expenses. This increase was partially offset by a 23.2% decrease in
product and technology development expenses, mainly attributable to a decrease in salaries and wages
.
For the three-month period ended June 30, 2017 as compared to the same period in 2016, direct costs increased by 365.2%, mainly driven by: i) a 489.4% increase in sales and marketing expenses, mainly due to increases in online and offline marketing expenses and chargebacks
from credit cards due to increase in our MercadoPago volume
; ii) a 414.2% increase in cost of net revenues, mainly attributable to an increase in collection fees due to higher MercadoPago penetration, customer support costs and shipping costs; and iii) a 60.2% increase
in general and administrative expenses
. These increases were partially offset by a 0.6% decrease
in product and technology development expenses, mainly attributable to depreciation and amortization and salaries and wages.
Venezuela
During second quarter of 2016 and the second quarter of 2017, we have recorded an impairment of long-lived assets of $13.7 million and $2.8 million respectively in our Venezuelan subsidiaries.
For the six-month period ended June 30, 2017 as compared to the same period in 2016, direct costs increased by 32.8%, mainly driven by: i) a 52.5% increase in cost of net revenues that was mainly attributable to an increase in customer support costs, collection fees due to higher MercadoPago penetration and certain new taxes on payment business; ii) a 21.9% increase in general and administrative expenses; iii) a 14.1% increase in product and technology development expenses attributable to an increase in depreciation and amortization expenses; and iv) a 4.8% increase in sales and marketing expenses, mainly due to an increase in the buyer protection program and bad debt expenses
For the three-month period ended June 30, 2017 as compared to the same period in 2016, direct costs increased by 39.4%, mainly driven by: i) a 61.5% in sales and marketing expenses, mainly due to increases in the buyer protection program, bad debt expenses and chargebacks form credit cards due to increase in our Mercado Pago volume; ii) a 42.5% increase in cost of revenues, mainly attributable to an increase in collection fees and sales taxes; iii) a 11.2% increase in product and technology development expenses, mainly attributable to an increase in depreciation and amortization expenses and iv) a 7.1% increase in general and administrative expenses.
Liquidity and Capital Resources
Our main cash requirement historically has been working capital to fund MercadoPago financing operations in Brazil. We also require cash for capital expenditures relating to technology infrastructure, software applications, office space, business acquisitions, to fund the payment of quarterly cash dividends on shares of our common stock and to fund the interest payments on our Convertible Notes.
Since our inception, we have funded our operations primarily through contributions received from our stockholders during the first two years of operations, from funds raised during our initial public offering, and from cash generated from our operations. We issued on June 30, 2014, $330 million principal balance of Convertible Notes for net proceeds to us of approximately $321.7 million. We have funded MercadoPago mainly by discounting credit card receivables and through cash advances derived from our business.
As of June 30, 2017, our main source of liquidity, amounting to $589.0 million of cash and cash equivalents and short-term investments and $186.3 million of long-term investments, was provided by cash generated from operations and from the issuance of the Convertible Notes. We consider our long-term investments as part of our liquidity because long-term investments are comprised of available-for-sale securities classified as long-term as a consequence of their contractual maturities.
The significant components of our working capital are cash and cash equivalents, short-term investments, accounts receivable, loans receivable, accounts payable and accrued expenses, funds receivable from and payable to MercadoPago users, and short-term debt. As long as we continue transferring credit card receivables to financial institutions in return for cash, we will continue generating cash from those receivables.
As of June 30, 2017, cash and investments of our foreign subsidiaries amounted to $513.2 million, or 66.2% of our consolidated cash and investments, and approximately 58.0% of our consolidated cash and investments were held outside the U.S., mostly in Brazil and Argentina. Our strategy is to reinvest the undistributed earnings of our foreign operations in those operations and to distribute dividends when they can be offset with available tax credits. We do not expect a material impact in any repatriation of undistributed earnings of foreign subsidiaries on our operations since the taxable domestic gains generated by any dividend distributions will be mostly offset with foreign tax credits that arise from income tax paid in our foreign operations, which we are allowed to compute for domestic income tax purposes.
In the event we change the way we manage our business, our working capital needs could be funded, as we did in the past, through a combination of the sale of credit card coupons to financial institutions and cash advances from our business.
The following table presents our cash flows from operating activities, investing activities and financing activities for the six-month periods ended June 30, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
Six-month Periods Ended
|
|
|
|
|
June 30, (*)
|
(In millions)
|
|
|
|
2017
|
|
2016
|
Net cash provided by (used in):
|
|
|
|
|
|
|
Operating activities
|
|
|
|
$ 226.3
|
|
$ 44.9
|
Investing activities
|
|
|
|
(41.1)
|
|
(38.6)
|
Financing activities
|
|
|
|
(8.4)
|
|
(17.5)
|
Effect of exchange rates on cash and cash equivalents
|
|
|
|
(28.2)
|
|
(11.6)
|
Net in
crease
(decrease)
in cash and cash equivalents
|
|
|
|
$ 148.7
|
|
$ (22.9)
|
(*) The table above may not total due to rounding.
Net cash 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-month Periods Ended
|
|
Change from 2016
|
|
|
|
|
June 30,
|
|
to 2017 (*)
|
|
|
2017
|
|
2016
|
|
in Dollars
|
|
in %
|
|
|
(in millions, except percentages)
|
Net Cash provided by:
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$ 226.3
|
|
$ 44.9
|
|
$ 181.5
|
|
404.5%
|
(*) 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.
The $181.5 million increase in net cash provided by operating activities during the six-month period ended June 30, 2017, as compared to the same period in 2016, was primarily driven by a $112.5 million increase in credit card receivables and a $48.8 million increase in accounts payable and accrued expenses.
Net cash used in investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-month Periods Ended
|
|
Change from 2016
|
|
|
June 30,
|
|
to 2017 (*)
|
|
|
2017
|
|
2016
|
|
in Dollars
|
|
in %
|
|
|
(in millions, except percentages)
|
Net Cash used in:
|
|
|
|
|
|
|
|
|
Investing activities
|
|
$ (41.1)
|
|
$ (38.6)
|
|
$ (2.4)
|
|
6.3%
|
(*) Percentages have been calculated using whole-dollar amounts rather than rounded amounts that appear in the table. The table above may not total due to rounding.
Net cash used in investing activities in the six-month period ended June 30, 2017 resulted mainly from purchases of investments of $2,186.5 million, which was offset by proceeds from the sale and maturity of investments of $2,200.2 million, as part of our financial strategy. We used $26.1 million in the purchase of property plant and equipment (mainly in information technology in Argentina, Brazil and United States),
$20.1 million in principal of loans receivable granted to merchants and consumers under our MercadoCredito solution
and $8.4 million in advances for property and equipment.
Net cash used in financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-month Periods Ended
|
|
Change from 2016
|
|
|
June 30,
|
|
to 2017 (*)
|
|
|
2017
|
|
2016
|
|
in Dollars
|
|
in %
|
|
|
(in millions, except percentages)
|
Net Cash used in:
|
|
|
|
|
|
|
|
|
Financing activities
|
|
$ (8.4)
|
|
$ (17.5)
|
|
$ 9.1
|
|
-51.8%
|
(*) Percentages have been calculated using whole-dollar amounts rather than rounded amounts that appear in the table. The table above may not total due to rounding.
For the six-month period ended June 30, 2017, our primary use of cash was to fund $13.2 million in cash dividends and $3.0 million for the payments on loans payable and other financing. In addition, we generated $7.8 million proceeds from the issuance of loans.
In the event that we decide to pursue strategic acquisitions in the future, we may fund them with available cash, third-party debt financing, or by raising equity capital, as market conditions allow.
Debt
On June 30, 2014, we issued $330 million of 2.25% Convertible Senior Notes due 2019 (the “Notes”). The Notes are unsecured, unsubordinated obligations of our Company, which pay interest in cash semi-annually, on January 1 and July 1, at a rate of 2.25% per annum. The Notes will mature on July 1, 2019 unless earlier repurchased or converted in accordance with their terms prior to such date. The Notes may be converted, under the conditions specified below, based on an initial conversion rate of 7.9353 shares of common stock per $1,000 principal amount of Notes (equivalent to an initial conversion price of approximately $126.02 per share of common stock), subject to adjustment as described in the indenture governing the Notes.
Holders may convert their notes at their option at any time prior to January 1, 2019 only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on September 30, 2014 (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events. On or after January 1, 2019 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their notes at any time, regardless of the foregoing circumstances.
As of June 30, 2017, the conversion threshold had been met and the Notes became convertible at the holders’ option beginning on July 1, 2017 and ending on September 30, 2017. The determination of whether or not the Notes are convertible must continue to be performed on a quarterly basis. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election. The intention of the Company is to share-
settle the amount due upon conversion of the Notes.
From July 1 to the date of issuance of this form, none of the holders had requested additional conversion of the Notes.
The
total
estimated fair value of the Notes was
$715.2 million
and
$
458.8
million
as of June 30, 2017 and December 31, 2016, respectively. The fair value was determined based on the closing trading price per $100
of the Notes as of the last day of trading for the period.
Based on the $250.9 closing price of the Company’s common stock on June 30, 2017, the if-converted value of the Notes exceeded their principal amount by approximately $327.0 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 to enter into capped call transactions with respect to its common stock (the “Capped Call Transactions”), with certain financial institutions. The Capped Call Transactions are expected generally to reduce the potential dilution upon conversion of the Convertible Notes in the event that the market price of our common stock is greater than the strike price of the Capped Call Transactions, initially set at $126.02 per common share, which corresponds to the initial conversion price of the Notes and is subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of the Notes, and have a cap price of approximately $155.78 per common share. Therefore, as a result of executing the Capped Call Transactions, we will reduce our exposure to potential dilution once the market price of its common shares exceeds the strike price of $126.02 and up to a cap price of approximately $155.78 per common share. The Capped Call Transactions allow us to receive shares of our common stock and/or cash related to the excess conversion value that we would pay to the holders of the Notes upon conversion, up to the above mentioned cap price.
Cash Dividends
In each of February, May, August and November of 2016, the Board of Directors approved a quarterly cash dividend of
$6,624
thousands (or
$0.150
per share) on the Company’s
outstanding
shares of common stock. The dividends were paid on
April 15, July 15,
October 14, 2016
and
January 16, 2017
to stockholders of record as of the close of business on
March 31, June 30, September 30, and
December 31, 2016.
On March 2, 2017, the Board of Directors approved a change to the Company’s dividend policy for providing for a fixed quarterly dividend payment in 2017 of $0.15 per share ($0.60 per share annually). The new dividend policy took effect following the payment of the $0.15 per share dividend declared by the Board of Directors of the Company, which was paid on April 17, 2017 to shareholders of record as of the close of business on March 31, 2017.
On May 2, 2017, the Board of Directors approved a quarterly cash dividend of $6,624 thousands (or $0.150 per share) on the Company´s outstanding shares of common stock. The second quarterly dividend was paid on July 14, 2017 to stockholders
of record as of the close of business on June 30, 2017.
On July 31, 2017, the Board of Directors approved a quarterly cash dividend of
$6,624
thousands (or
$0.150
per share) on our
outstanding
shares of common stock. This quarterly dividend is payable on
October
16, 2017
to stockholders of record as of the close of business on
September 30, 2017.
We currently expect to continue paying comparable cash dividends on a quarterly basis. However, any future determination as to the declaration of dividends on our common stock will be made at the discretion of our board of directors and will depend on our earnings, operating and financial condition, capital requirements and other factors deemed relevant by our board of directors, including the applicable requirements of the Delaware General Corporation Law
.
Capital expenditures
Our capital expenditures (composed of our payments for property and equipment, intangible assets and acquired business) for the six-month periods ended June 30, 2017 and 2016 amounted to $34.6 million and $44.9 million, respectively.
During the six-month period ended June 30, 2017 we invested $21.1 million in Information Technology mainly in Brazil, Argentina and United States, and $1.5 million in our Brazilian and Argentinean offices.
On February 12, 2016, through our subsidiaries Meli Participaciones S.L. and Marketplace Investment LLC,
we acquired 100% of
the
issued and outstanding shares of capital stock
of Monits S.A., a software development company located and organized under the laws of Buenos Aires, Argentina, for the purchase price of $3.1 million, measured at its fair value.
In April 2016, our Venezuelan subsidiary acquired commercial properties still in the construction process and totaling 135.81 square meters in Caracas, Venezuela for a total purchase price of approximately BF$1,359 million, or $3.7 million, for investment purposes and included in non-current other assets. The Venezuelan subsidiary paid the purchase price in Bolivares Fuertes. According to the purchase agreements, the commercial properties will be delivered in December 2018.
On June 1, 2016, through our subsidiary Ebazar.com.br Ltda., we acquired 100% of the issued and outstanding shares of capital stock of Axado, a company that develops logistic software for the e-commerce industry in Brazil, for the purchase price of $5.5 million, measured at its fair value.
We believe this acquisition will allow us to enhance our software development capabilities on Transportation Management System and will contribute to our shipping business performance.
We are permanently increasing the level of investment on hardware and software licenses necessary to improve and update the technology of our platform and cost of computer software developed internally. We anticipate continued investments in capital expenditures related to information technology in the future as we strive to maintain our position in the Latin American e-commerce market.
We believe that our existing cash and cash equivalents, including the sale of credit card receivables and cash generated from operations will be sufficient to fund our operating activities, property and equipment expenditures and to pay or repay obligations going forward.
Off-balance sheet arrangements
As of June 30, 2017, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources.
Recently issued accounting pronouncements
See
Item
1 of Part I, “Unaudited Interim Condensed Consolidated Financial Statements-Note
2-Summary of significant accounting policies-Recently issued accounting pronouncements.”
Non-GAAP Financial Measures
To supplement our consolidated financial statements presented in accordance with
U.S.
GAAP, we use free cash flows and foreign exchange (“FX”) neutral measures as non-GAAP measures.
These non-GAAP measures should not be considered in isolation or as a substitute for measures of performance prepared in accordance with
U.S.
GAAP and may be different from non-GAAP measures used by other companies. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. Non-GAAP measures have limitations in that they do not reflect all of the amounts associated with our results of operations as determined in accordance with
U.S.
GAAP. These non-GAAP financial measures should only be used to evaluate our results of operations in conjunction with the most comparable
U.S.
GAAP financial measures.
Reconciliation of these non-GAAP financial measures to the most comparable
U.S.
GAAP financial measures can be found in the tables included in this quarterly report.
Non-GAAP financial measures are provided to enhance investors’ overall understanding of our current financial performance. Specifically, we believe that free cash flow provides useful information to both management and investors by excluding payments for the acquisition of property and equipment net of financial liabilities, of intangible assets and of acquired businesses net of cash acquired, that may not be indicative of our core operating results. In addition, we report free cash flows to investors because we believe that the inclusion of this measure provides consistency in our financial reporting.
Free cash flow represents cash from operating activities less payment and advances for the acquisition of property and equipment, intangible assets and acquired businesses net of cash acquired. We consider free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by our operations after the purchases of property and equipment, of intangible assets and of acquired businesses net of cash acquired. A limitation of the utility of free cash flow as a measure of financial performance is that it does not represent the total increase or decrease in our cash balance for the period.
The following table shows a reconciliation of Operating Cash Flows to Free Cash Flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-month Periods Ended
|
|
Three-month Periods Ended
|
|
|
|
|
June 30,
|
|
June 30,
|
(In millions)
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash provided by Operating Activities
|
|
|
|
$ 226.3
|
|
$ 44.9
|
|
$ 121.6
|
|
$ 56.7
|
Payment for acquired business, net of cash acquired
|
|
|
|
-
|
|
(7.3)
|
|
-
|
|
(5.5)
|
Advance for property and equipment
|
|
|
|
(8.4)
|
|
(5.0)
|
|
(5.8)
|
|
(4.1)
|
Purchase of intangible assets
|
|
|
|
(0.1)
|
|
(0.0)
|
|
(0.1)
|
|
(0.0)
|
Purchase of property and equipment
|
|
|
|
(26.1)
|
|
(32.6)
|
|
(15.9)
|
|
(18.0)
|
Free cash flow
|
|
|
|
191.7
|
|
(0.0)
|
|
99.8
|
|
29.1
|
(*) The table above may not total due to rounding.
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 these non-GAAP measures provide useful information to both management and investors by excluding the foreign currency exchange rate impact that may not be
indicative
of our core operating results and business outlook.
The FX neutral measures were calculated by using the average monthly exchange rates for each month during 2016 and applying them to the corresponding months in 2017, so as to calculate what our results would have been had exchange rates remained stable from one year to the next. The table below excludes intercompany allocation FX effects. Finally, these measures do not include any other macroeconomic effect such as local currency inflation effects, the impact on impairment calculations or any price adjustment to compensate local currency inflation or devaluations.
The following table sets forth the FX neutral measures related to our reported results of the operations for the six and three-month periods ended June 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-months Periods Ended
June 30, (*)
|
|
|
As reported
|
|
FX Neutral Measures
|
(In millions, except percentages)
|
|
2017
|
|
2016
|
|
Percentage
Change
|
|
2017
|
|
2016
|
|
Percentage
Change
|
|
|
(Unaudited)
|
|
|
|
(Unaudited)
|
|
|
Net revenues
|
|
$ 590.5
|
|
$ 357.3
|
|
65.3%
|
|
$ 610.8
|
|
$ 357.3
|
|
71.0%
|
Cost of net revenues
|
|
(250.0)
|
|
(128.8)
|
|
94.1%
|
|
(247.6)
|
|
(128.8)
|
|
92.2%
|
Gross profit
|
|
340.4
|
|
228.5
|
|
49.0%
|
|
363.2
|
|
228.5
|
|
59.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
(244.2)
|
|
(152.1)
|
|
60.6%
|
|
(252.2)
|
|
(152.1)
|
|
65.8%
|
Impairment of Long-Lived Assets
|
|
(2.8)
|
|
(13.7)
|
|
-79.3%
|
|
(2.8)
|
|
(13.7)
|
|
-79.3%
|
Total operating expenses
|
|
(247.1)
|
|
(165.8)
|
|
49.0%
|
|
(255.0)
|
|
(165.8)
|
|
53.8%
|
Income from operations
|
|
93.3
|
|
62.7
|
|
48.9%
|
|
108.2
|
|
62.7
|
|
72.7%
|
(*) The table above may not total due to rounding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-months Periods Ended
June 30, (*)
|
|
|
As reported
|
|
FX Neutral Measures
|
(In millions, except percentages)
|
|
2017
|
|
2016
|
|
Percentage
Change
|
|
2017
|
|
2016
|
|
Percentage
Change
|
|
|
(Unaudited)
|
|
|
|
(Unaudited)
|
|
|
Net revenues
|
|
$ 316.5
|
|
$ 199.6
|
|
58.5%
|
|
$ 328.8
|
|
$ 199.6
|
|
64.7%
|
Cost of net revenues
|
|
(145.0)
|
|
(73.3)
|
|
97.7%
|
|
(145.2)
|
|
(73.3)
|
|
98.0%
|
Gross profit
|
|
171.6
|
|
126.3
|
|
35.8%
|
|
183.6
|
|
126.3
|
|
45.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
(138.7)
|
|
(80.4)
|
|
72.5%
|
|
(144.4)
|
|
(80.4)
|
|
79.6%
|
Impairment of Long-Lived Assets
|
|
(2.8)
|
|
(13.7)
|
|
-79.3%
|
|
(2.8)
|
|
(13.7)
|
|
-79.3%
|
Total operating expenses
|
|
(141.5)
|
|
(94.1)
|
|
50.4%
|
|
(147.2)
|
|
(94.1)
|
|
56.4%
|
Income from operations
|
|
30.0
|
|
32.2
|
|
-6.7%
|
|
36.4
|
|
32.2
|
|
13.1%
|
(*) The table above may not total due to rounding.
Moreover, we present adjusted net income before income tax, adjusted income tax, adjusted net income, adjusted blended tax rate and adjusted earnings per share (the “Venezuela adjusted measures”) because we believe they provide useful information to both management and investors by excluding the foreign exchange loss attributable to the devaluation in Venezuela and the corresponding impairment of long-lived assets. We believe that investors may use these non-GAAP Venezuela adjusted measures to analyze our financial performance without the impact of factors that may not be indicative of the ordinary course of our business. We report Venezuela adjusted measures to investors because they provide consistency in the Company’s financial reporting and because they provide useful information to management and investors about what our corresponding GAAP measures would have been if the foreign exchange loss in Venezuela and the corresponding impairment of long-lived assets had not occurred. A limitation of the utility of Venezuela adjusted measures as measures of financial performance is that these measures do not represent the total foreign exchange effect in our Income Statement for the six and three-month periods ended June 30, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-months periods ended (*)
|
|
Three-months periods ended (*)
|
|
June 30, 2017
|
June 30, 2016
|
|
June 30, 2017
|
|
June 30, 2016
|
Net income before income tax expense
|
$
|
82.1
|
$
|
65.4
|
|
$
|
12.4
|
|
$
|
28.2
|
|
Devaluation loss in Venezuela
|
|
22.9
|
|
7.2
|
|
|
22.0
|
|
|
4.9
|
|
Impairment of long-lived assets in Venezuela
|
|
2.8
|
|
13.7
|
|
|
2.8
|
|
|
13.7
|
|
Adjusted Net income before income tax expense
|
$
|
107.8
|
$
|
86.3
|
|
$
|
37.2
|
|
$
|
46.8
|
|
Income tax expense
|
$
|
(28.3)
|
$
|
(19.3)
|
|
$
|
(7.1)
|
|
$
|
(12.4)
|
|
Income tax effect on devaluation loss in Venezuela
|
|
(3.5)
|
|
(4.8)
|
|
|
(3.2)
|
|
|
(1.7)
|
(1)
|
Adjusted Income tax
|
$
|
(31.8)
|
$
|
(24.1)
|
|
$
|
(10.3)
|
|
$
|
(14.1)
|
|
Net Income
|
$
|
53.8
|
$
|
46.1
|
|
$
|
5.3
|
|
$
|
15.9
|
|
Devaluation loss in Venezuela
|
|
22.9
|
|
7.2
|
|
|
22.0
|
|
|
4.9
|
|
Impairment of long-lived assets in Venezuela
|
|
2.8
|
|
13.7
|
|
|
2.8
|
|
|
13.7
|
|
Income tax effect on devaluation loss in Venezuela
|
|
(3.5)
|
|
(4.8)
|
|
|
(3.2)
|
|
|
(1.7)
|
(1)
|
Adjusted Net Income
|
$
|
76.1
|
$
|
62.2
|
|
$
|
26.9
|
|
$
|
32.7
|
|
Weighted average of outstanding common shares
|
|
44,157,364
|
|
44,157,151
|
|
|
44,157,364
|
|
|
44,157,341
|
|
Adjusted Earnings per share
|
$
|
1.72
|
$
|
1.41
|
|
$
|
0.61
|
|
$
|
0.74
|
|
Adjusted Blended Tax Rate (2)
|
|
29.4%
|
|
27.9%
|
|
|
27.6%
|
|
|
30.1%
|
|
(*)
Stated in millions of U.S. dollars, except for share data. The table above may not total due to rounding.
|
|
|
|
|
(1)
|
|
Deferred income tax charge related to the Venezuela devaluation under local tax norms.
|
|
(2)
|
|
Adjusted Income and asset tax over Adjusted Net income before income tax expense.
|
It
em 3 — Qualitative and Quantitative Disclosure About Market Risk
We are exposed to market risks arising from our business operations. These market risks arise mainly from the possibility that changes in interest rates and the U.S. dollar exchange rate with local currencies, particularly the Brazilian real and Argentine peso due to Brazil’s and Argentine’s respective share of our revenues, may affect the value of our financial assets and liabilities.
Foreign currencies
As of June 30, 2017, we hold cash and cash equivalents in local currencies in our subsidiaries, and have receivables denominated in local currencies in all of our operations. Our subsidiaries generate revenues and incur most of their expenses in
the respective
local currencies
of the countries in which they operate
. As a result, our subsidiaries use their local currency as their functional currency, except for our Venezuelan subsidiaries, which use the U.S. dollar as if it is the functional currency due to Venezuela being a highly inflationary environment. As of June 30, 2017, the total cash and cash equivalents denominated in foreign currencies totaled $302.0 million, short-term investments denominated in foreign currencies totaled $139.0 million and accounts receivable, credit cards receivable and loans receivable in foreign currencies totaled $315.1 million. As of June 30, 2017, we had no long-term investments denominated in foreign currencies. To manage exchange rate risk, our treasury policy is to transfer most cash and cash equivalents in excess of working capital requirements into U.S. dollar-denominated accounts in the United States. As of June 30, 2017, our U.S. dollar-denominated cash and cash equivalents and short-term investments totaled $147.9 million and our U.S. dollar-denominated long-term investments totaled $186.3 million.
For the six-month period ended June 30, 2017,
we had a consolidated loss on foreign currency of $21.1
million
primarily
as a result of a $22.9 million loss arising from the U.S. Dollar revaluation over our Bolivares Fuertes net asset position in Venezuela, partially offset by a $4.4 million gain arising from the Mexican Peso revaluation over our U.S. Dollar net liability position in México.
If the U.S. dollar weakens against foreign currencies, the translation of these foreign-currency-denominated transactions will result in increased net revenues, operating expenses, and net income while the re-measurement of our net asset position in U.S. dollars will have a negative impact in our Statement of Income. Similarly, our net revenues, operating expenses and net income will decrease if the U.S. dollar strengthens against foreign currencies, while the re-measurement of our net asset position in U.S. dollars will have a positive impact in our Statement of Income.
The following table sets forth the percentage of consolidated net revenues by segment for the six and three-month periods ended June 30, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-months Periods Ended
|
|
Three-month Periods Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
(% of total consolidated net revenues) (*)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Brazil
|
|
57.6
|
%
|
|
50.5
|
%
|
|
56.9
|
%
|
|
51.5
|
%
|
|
Argentina
|
|
27.0
|
|
|
32.4
|
|
|
27.8
|
|
|
33.9
|
|
|
Mexico
|
|
6.0
|
|
|
6.3
|
|
|
6.4
|
|
|
5.7
|
|
|
Venezuela
|
|
4.8
|
|
|
5.5
|
|
|
4.5
|
|
|
3.7
|
|
|
Other Countries
|
|
4.6
|
|
|
5.3
|
|
|
4.5
|
|
|
5.1
|
|
|
(*) Percentages have been calculated using whole-dollar amounts.
Foreign Currency Sensitivity Analysis
The table below shows the impact on our net revenues, expenses, other expenses and income tax, net income and equity for a positive and a negative 10% fluctuation on all the foreign currencies to which we are exposed to for the six-month period ended June 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Sensitivity Analysis (*)
|
(In millions)
|
|
|
-10%
|
Actual
|
+10%
|
|
|
|
(1)
|
|
(2)
|
Net revenues
|
|
|
$ 656.0
|
$ 590.5
|
$ 536.8
|
Expenses
|
|
|
(552.4)
|
(497.1)
|
(451.9)
|
Income from operations
|
|
|
103.6
|
93.3
|
84.9
|
|
|
|
|
|
|
Other expenses and income tax related to P&L items
|
|
|
(19.7)
|
(18.4)
|
(17.3)
|
|
|
|
|
|
|
Foreign Currency impact related to the remeasurement of our Net Asset position
|
|
|
(23.4)
|
(21.1)
|
(19.2)
|
Net income
|
|
|
60.6
|
53.8
|
48.3
|
|
|
|
|
|
|
Total Shareholders' Equity
|
|
|
$ 506.1
|
$ 459.0
|
$ 421.7
|
|
(1)
|
|
Appreciation of the subsidiaries local currency against U.S. Dollar
|
|
(2)
|
|
Depreciation of the subsidiaries local currency against U.S. Dollar
|
(*) The table above may not total due to rounding.
The table above shows an increase in our net income when the U.S. dollar weakens against foreign currencies because the re-measurement of our net asset position in U.S. dollars has a lesser impact than the increase in our net revenues, operating expenses, and other expenses,
net
and income tax lines related to the translation effect. Similarly, the table above shows a decrease in our net income when the U.S. dollar strengthens against foreign currencies because the re-measurement of our net asset position in U.S. dollars has a lesser impact than the decrease in our net revenues, operating expenses, and other expenses, net and income tax lines related to the translation effect.
During the six and three-month period ended June 30, 2017, we did not enter into any such hedging transaction.
Venezuelan Segment
In accordance with U.S. GAAP, we have classified our Venezuelan operations as highly inflationary since January 1, 2010, using the U.S. dollar as the functional currency for purposes of reporting our financial statements. Therefore, no translation effect has been accounted for in other comprehensive income related to our Venezuelan operations. As of June 30, 2017, monetary assets and liabilities in BsF were re-measured to the U.S. dollar using the DICOM closing exchange rate of 2640.0 BsF per U.S. dollar.
See Item 2 of Part I, “Management’s discussion and analysis of financial condition and results of operations—Critical accounting policies and estimates—Foreign Currency Translation” for details on the currency status of our Venezuelan segment.
Although the current mechanisms available to obtain U.S. dollars for dividend distributions to shareholders outside of Venezuela imply
increased
restrictions, we do not expect that the current restrictions to purchase U.S. dollars will have a significant adverse effect on our business
strategy
with regard to the investment in Venezuela.
In order to assist investors in their overall understanding of the impact on our Venezuelan segment reporting, we developed a sce
nario that considers a 53
0
% additional devaluation over the DICOM rate as of the date of this report, applied for the period starting on
January 1, 2017 to June 30, 2017. These disclosures may help investors to project sensitivities, on segment information captions, to devaluations of whatever order of magnitude they choose by simple arithmetic calculations. The information is just a scenario and does not represent a forward-looking statement about our expectations or projections related to future events in Venezuela. The investors and other readers or users of the financial information presented in this caption are cautioned not to place undue reliance on this scenario. This information is not a guarantee of future events.
The information disclosed below does not include any inflation effect, nor the devaluation impact related to the assumed devaluation or any other effect derived from the assumed devaluation, such as further impairments of long-lived assets. The information below should not be considered in isolation or as a substitute for measures of performance prepared in accordance with U.S. GAAP. In addition, this information is not based on any comprehensive set of accounting rules or principles.
The evolution of the Venezuelan economy and any future governmental interventions in the Venezuelan economy are beyond our ability to control or predict. New events could happen in the future in Venezuela and it is not possible for management to predict all such events, nor can it assess the impact of all such events on our Venezuelan business.
The table below provides specific sensitivity information of our Venezuelan segment reporting for the period indicated assuming
approximately a 53
0% additional devaluation over the DICOM rate as of the date of this report, applied for the period starting on
January 1, 2017 to June 30, 2017:
|
|
|
|
|
|
|
|
|
|
Six-month period ended
June 30, 2017
|
|
Three-month period ended
June 30, 2017
|
|
|
Actual (*)
|
|
Sensitivity (**)
|
|
Actual (*)
|
|
Sensitivity (**)
|
|
|
(In million)
|
|
(In million)
|
|
Net revenues
|
$ 28.6
|
|
$ 1.8
|
|
$ 14.2
|
|
$ 1.0
|
|
Direct costs
|
(12.3)
|
|
(4.0)
|
|
(5.7)
|
|
(1.9)
|
|
Direct contribution before impairment of Long-lived assets
|
$ 16.3
|
|
$ (2.3)
|
|
$ 8.5
|
|
$ (0.8)
|
|
Direct Contribution Margin before impairment %
|
57.1%
|
|
-130.2%
|
|
59.7%
|
|
-81.3%
|
|
Non-current other assets impairment
|
(2.8)
|
|
(2.8)
|
|
(2.8)
|
|
(2.8)
|
|
Direct Contribution after impairment
|
$ 13.5
|
|
$ (5.1)
|
|
$ 5.6
|
|
$ (3.7)
|
|
Direct Contribution Margin after impairment %
|
47.2%
|
|
-291.5%
|
|
39.7%
|
|
-353.3%
|
|
(*) As reported.
(**) Computing a hypothetical devaluation of the Venezuelan segment from January 1 to June 30, 2017 assuming an exchange rate of
13,992.00 BsF per U.S. dollar (53
0% of the exchange rate as of June 30, 2017).
Despite the continued uncertainty and restrictions relating to foreign currency exchange in Venezuela as described above, we believe that our underlying business in that country is competitively well-positioned and continues to exhibit solid growth, in terms of units sold, even while economic conditions in the Venezuelan economy remain difficult. As economic conditions in that country improve, we expect that our business in Venezuela will benefit accordingly. Although during the first half of 2017, we experienced a strong devaluation of
our
business in Venezuela, we cannot assure you that the BsF will not experience further devaluations or that the Venezuelan government will not default on its obligations to creditors in the future, which may be significant and could have a material negative impact on our future financial results of our Venezuela segment and value of our bolivar denominated net assets. However, for the reasons stated at the beginning of this paragraph, we remain strongly committed to our business and investment in Venezuela.
Argentine Segment
As of June 30, 2017, the Argentine Peso exchange rate against the U.S. dollar was 16.6.
Had a
hypothetical
devaluation of 10% of the Argentine peso against the U.S. dollar occurred on June 30, 2017, the reported net assets in our Argentine subsidiaries would have decreased by approximately $19.2 million with a related impact on Other Comprehensive Income. Additionally, we would have recorded a foreign exchange gain amounting to approximately $0.1 million in our Argentine subsidiaries.
Brazilian Segment
As of June 30, 2017, the Brazilian Reais exchange rate against the U.S. dollar was 3.3.
Had a hypothetical devaluation of 10% of the Brazilian Reais against the U.S. dollar occurred on
June 30
, 2017, the reported net assets in our Brazilian subsidiaries would have decreased by approximately $9.3 million with the related impact in Other Comprehensive Income. Additionally, we would have recorded a foreign exchange loss amounting to approximately $1.2 million in our Brazilian subsidiaries.
Interest
Our earnings and cash flows are also affected by changes in interest rates. These changes could have an impact on the interest rates that financial institutions charge us prior to the time we sell our MercadoPago receivables. As of June 30, 2017, MercadoPago’s receivables totaled $265.2 million.
Interest rate fluctuations could also impact interest earned through our MercadoCredito solution. As of June 30, 2017, loans granted under our MercadoCredito solution totaled $25.3 million.
Interest rate fluctuations could also negatively affect certain of our fixed rate and floating rate investments comprised primarily of time deposits, money market funds, investment grade corporate debt securities and sovereign debt securities. Investments in both fixed rate and floating rate interest earning products carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than predicted if interest rates fall.
Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes. As of June 30, 2017, the average duration of our available for sale securities, defined as the approximate percentage change in price for a 100-basis-point change in yield, was 1.53%. If interest rates were to instantaneously increase (decrease) by 100 basis points, the fair market value of our available for sale securities as of June 30, 2017 could decrease (increase) by approximately $4.0 million.
As of June 30, 2017, our short-term investments amounted to $205.5 million and our long-term investments amounted to $186.3 million. These investments can be readily converted at any time into cash or into securities with a shorter remaining time to maturity. We determine the appropriate classification of our investments at the time of purchase and re-evaluate such designations as of each balance sheet date.
Equity Price Risk
Our board of directors adopted the 2010, 2011 and 2012 long-term retention plans (the “ 2010, 2011 and 2012 LTRPs”, respectively), under which certain eligible employees receive awards (“LTRP Awards”), which are payable as follows:
|
·
|
|
eligible employees will receive a fixed payment equal to 6.25% of his or her LTRP Award under the 2010, 2011, and/or 2012 LTRP, respectively, once a year for a period of eight years. The 2010 LTRP awards began paying out starting in 2011, the 2011 LTRP Awards starting in 2012 and the 2012 LTRP Awards starting in 2013(the “2010, 2011 or 2012 Annual Fixed Payment”,
respectively
); and
|
|
·
|
|
on each date we pay the respective Annual Fixed Payment to an eligible employee, he or she will also receive a payment (the “2010, 2011 or 2012 Variable Payment”, respectively) equal to the product of (i) 6.25% of the applicable 2010, 2011 and/or 2012 LTRP Award and (ii) the quotient of (a) divided by (b), where (a), the numerator, equals the Applicable Year Stock Price (as defined below) and (b), the denominator, equals the 2009 (with respect to the 2010 LTRP), 2010 (with respect to the 2011 LTRP) and 2011 (with respect to the 2012 LTRP) Stock Price, ($45.75, $65.41 and $77.77 for the 2010, 2011 and 2012 LTRP, respectively, which was the average closing price of the Company’s common stock on the NASDAQ Global Market during the final 60 trading days of 2009, 2010 and 2011, respectively. The “Applicable Year Stock Price” equals the average closing price of the Company’s common stock on the NASDAQ Global Market during the final 60 trading days of the year preceding the applicable payment date.
|
The 2010, 2011 and 2012 LTRPs are filed as Exhibits 10.02, 10.03 and 10.04, respectively, to
our Quarterly Report on Form 10-Q filed with the SEC on August 5, 2016
, and the above description of such LTRPs is qualified in its entirety by
reference
to such exhibits.
On September 27, 2013, our Board of Directors, upon the recommendation of the compensation committee, approved the 2013 Long Term Retention Plan (the “2013 LTRP”), on March 31, 2014, the Board of Directors, upon the recommendation of the compensation committee, approved the 2014 employee retention plan (the “2014 LTRP”) and on August 4, 2015, the Board of Directors, upon the recommendation of the compensation committee, approved the 2015 employee retention plan (the “2015 LTRP”).
In order to receive an award under the 2013, 2014 and/or 2015 LTRP, each eligible employee must satisfy the performance conditions established by the Board of Directors for such employee. If these conditions are satisfied, the eligible employee will, subject to his or her continued employment as of each applicable payment date, receive the full amount of his or her 2013, 2014 and/or 2015 LTRP award, payable as follows:
|
·
|
|
the eligible
employee
will receive a fixed payment, equal to 8.333% of his or her 2013, 2014 and/or 2015 LTRP bonus once a year for a period of six years starting in March 2014, 2015 and/or 2016 respectively (the “2013, 2014 or 2015 Annual Fixed Payment”, respectively); and
|
|
·
|
|
on each date we pay the Annual Fixed Payment to an eligible employee, he or she will also receive a payment (the “2013, 2014 or 2015 Variable Payment”, respectively)
equal
to the product of (i) 8.333% of the applicable 2013, 2014 and/or 2015 LTRP award and (ii) the quotient of (a) divided by (b), where (a), the numerator, equals the Applicable Year Stock Price (as defined below) and (b), the denominator, equals the 2012 (with respect to the 2013 LTRP), 2013 (with respect to the 2014 LTRP) and 2014 (with respect to the 2015 LTRP) Stock Price,
d
efined as $79.57, $118.48 and
$127.29
for the 2013, 2014 and 2015 LTRP, respectively, which was the average closing price of our common stock on the NASDAQ Global Market during the final 60 trading days of 2012, 2013, 2014 and 2015 respectively. The “Applicable Year Stock Price” shall equal the average closing price of our common stock on the NASDAQ Global Market during the final 60 trading days of the year preceding the applicable payment date.
|
The 2013, 2014 and 2015 LTRPs are filed as Exhibits 10.05, 10.06 and 10.07, respectively, to our Quarterly Report on Form 10-Q filed with the SEC on August 5, 2016, and the above description of such LTRPs is qualified in its entirety by reference to such exhibits.
On August 2, 2016, the Board of Directors, upon the recommendation of the Compensation Committee, adopted the 2016 LTRP which
provides
for the grant to eligible employees of a fixed award (the 2016 LTRP Fixed Award) and a variable award (the 2016 LTRP Variable Award). In order to receive awards under the 2016 LTRP, each eligible employee must satisfy the performance conditions established by the Board of Directors for such employee, which generally are expected to be based on pre-set goals for the Company’s financial and operational performance. If these conditions are satisfied, the eligible employee will, subject to his or her continued employment as of each applicable payment date, receive the full amount of his or her 2016 LTRP Awards, payable as follows:
|
·
|
|
Fixed
award: The eligible employee will receive a fixed payment equal to 16.66% of his or her 2016 LTRP Fixed Award once a year for a period of six years starting in March 2017 (the “Annual Fixed Payment”); and
|
|
·
|
|
Variable award: On each date the Company pays the Annual Fixed Award to the eligible employee, he or she will also receive the
2016
LTRP Variable Award payment equal to the product of (i) 16.66% of the applicable 2016 LTRP Variable Award and (ii) the quotient of (a) divided by (b), where (a), the numerator, equals the Applicable Year Stock Price (as defined below) and (b), the denominator, equals the 2015 Stock Price (as defined below). For purposes of the 2016 LTRP, the “2015 Stock Price” shall equal $111.02 (the average closing price of the Company´s common stock on the NASDAQ Global Market during the final 60 -trading days of 2015) and the “Applicable Year Stock Price” shall equal the average closing price of the Company´s common stock on the NASDAQ Global Market during the final 60-trading days of the year preceding the applicable payment date for so long as the Company´s common stock is listed on the NASDAQ.
|
The 2016 LTRP is filed as Exhibit 10.08 to our Quarterly Report on Form 10-Q filed with the SEC on August 5, 2016, and the description of the 2016 LTRP above is qualified in its entirety by reference to such exhibit.
On
April
3, 2017, the Board of Directors, upon the recommendation of the Compensation Committee, adopted the 2017 LTRP which provides for the grant to eligible employees of a fixed award (the 2017 LTRP Fixed Award) and a variable award (the 2017 LTRP Variable Award). In order to receive awards under the 2017 LTRP, each eligible employee must satisfy the performance conditions established by the Board of Directors for such employee, which generally are expected to be based on pre-set goals for the Company’s financial and operational performance. If these conditions are satisfied, the eligible employee will, subject to his or her continued employment as of each applicable payment date, receive the full amount of his or her 2017 LTRP Awards, payable as follows:
|
·
|
|
Fixed award: The eligible employee will receive a fixed payment equal to 16.66% of his or her 2017 LTRP Fixed Award once a year for a period of six years starting in March 2018 (the “Annual Fixed Payment”); and
|
|
·
|
|
Variable award: On each date the Company pays the Annual Fixed Award to the eligible employee, he or she will also receive the 2017 LTRP Variable Award payment equal to the product of (i) 16.66% of the applicable 2017 LTRP Variable Award and (ii) the quotient of (a) divided by (b), where (a), the numerator, equals the Applicable Year Stock Price (as defined below) and (b), the denominator, equals the 2016 Stock Price (as defined below). For purposes of the 2017 LTRP, the “2016 Stock Price” shall equal $164.17 (the average closing price of the Company´s common stock on the NASDAQ Global Market during the final 60 -trading days of 2016) and the “Applicable Year Stock Price” shall equal the average closing price of the Company´s common stock on the NASDAQ Global Market during the final 60-trading days of the year preceding the applicable payment date for so long as the Company´s common stock is listed on the NASDAQ.
|
At June 30, 2017, the total contractual obligation fair value of our 2010, 2011, 2012, 2013, 2014, 2015, 2016 and 2017
LTRP
Variable
Award
Payment obligation amounted to $66.0 million. As of June 30, 2017, the accrued liability related to the 2010, 2011, 2012,
2013, 2014, 2015, 2016 and 2017
Variable
Award
Payment of the LTRP included in
Salaries and
Social security payable in our condensed consolidated balance sheet amounted to
$33.7
million. The following table shows a sensitivity analysis of the risk associated with our total contractual obligation
fair value
related to the 2010, 2011, 2012, 2013, 2014, 2015, 2016 and 2017
LTRP
Variable
Award
Payment if our common stock price per share
were to increase or decrease by up to 40%:
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2017
|
|
|
MercadoLibre, Inc
|
|
2010, 2011, 2012, 2013, 2014, 2015, 2016 and 2017
|
|
|
Equity Price
|
|
variable LTRP
contractual obligation
|
(In thousands, except equity price)
|
|
|
Change in equity price in percentage
|
|
|
|
|
|
|
|
|
|
40%
|
|
362.59
|
|
92,413
|
30%
|
|
336.69
|
|
85,812
|
20%
|
|
310.79
|
|
79,211
|
10%
|
|
284.89
|
|
72,610
|
Static
|
(*)
|
258.99
|
|
66,009
|
-10%
|
|
233.09
|
|
59,408
|
-20%
|
|
207.19
|
|
52,807
|
-30%
|
|
181.29
|
|
46,206
|
-40%
|
|
155.39
|
|
39,606
|
(*) Average closing stock price for the last 60 trading days of the closing date.
It
em 4 — Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Evaluation of disclosure controls and procedures
Based on the evaluation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) required by Exchange Act Rules 13a-15(b) or 15d-15(b), our chief executive officer and our chief financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.
Changes in Internal Controls Over Financial Reporting
There were no changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the six-month period ended June 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PA
RT II. OTHER INFORMATION
It
em 1 — Legal Proceedings
See Item 1 of Part I, “Financial Statements
—Note 7 Commitments and Contingencies—Litigation and other Legal Matters.”
Item 1A — Risk
Factors
As of
June
30, 2017, there have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.
It
em 6 — Exhibits
The
information
set forth under “Index to Exhibits” below is incorporated herein by reference.
Sign
atures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MERCADOLIBRE, INC.
|
|
|
|
|
Registrant
|
|
|
|
|
Date: August 4, 2017.
|
|
|
|
By:
|
|
/s/ Marcos Galperin
|
|
|
|
|
|
|
Marcos Galperin
|
|
|
|
|
|
|
President and Chief Executive Officer
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Pedro Arnt
|
|
|
|
|
|
|
Pedro Arnt
|
|
|
|
|
|
|
Executive Vice President and Chief Financial Officer
|
Mer
cadoLibre, Inc.
INDEX TO EXHIBITS
|
|
3.1
|
Registrant’s Amended and Restated Certificate of Incorporation.
(1)
|
3.2
|
Registrant’s Amended and Restated Bylaws.
(1)
|
4.1
|
Form of Specimen Certificate for the Registrant’s Common Stock.
(2)
|
4.2
|
Second Amended and Restated Registration Rights Agreement, dated September 24, 2001, by and among the Registrant and the investors named therein.
(1)
|
4.3
|
Indenture with respect to the Registrant’s 2.25% Convertible Senior Notes due 2019, dated as of June 30, 2014, between the Registrant and Wilmington Trust, National Association, as trustee.
(3)
|
10.01
|
2017 Long-Term Retention Plan
(4)
|
31.1
|
Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
|
31.2
|
Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
|
32.1
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
|
32.2
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
|
101.INS
|
XBRL Instance Document
|
101.SCH
|
XBRL Taxonomy Extension Schema Document
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
101.LAB
|
XBRL Taxonomy Extension Label Linkbase Document
|
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase
|
|
|
*
|
Filed or furnished herewith, as applicable.
|
(1)
|
Incorporated by reference to the Registration Statement on Form S-1 filed on May 11, 2007.
|
(2)
|
Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009.
|
(3)
|
Incorporated by reference to the Registrant’s
Current Report on form 8-K filed on June 30, 2014.
|
(4)
|
Incorporated by reference to the Registrant’s
Current Report on form 8-K filed on April 7, 2017.
|