MELI The Currency Gap Finally Narrowed, But the Stock Priced In Even More Than That

Every Segment Grew in Dollars for the First Time Since the Crisis Began

MercadoLibre's third 10-Q of 2009 reports net revenue of $50.6 million for the quarter, up 25.7% from $40.3 million a year earlier - an acceleration from Q2 2009's 18.7%. Measured in local currencies, revenue grew 42.3% - and for the first time in this coverage, the gap between reported and local-currency growth actually narrowed, from roughly 23 points in Q1 and Q2 down to 16.6 points this quarter. Currency devaluation is still costing MercadoLibre real growth, just meaningfully less of it than it was earlier in the year, as Latin American currencies clawed back some of their 2008-2009 losses against the dollar.

The more interesting confirmation sits in the segment table: on a reported dollar basis, every single marketplace segment grew this quarter, Brazil included - the first time that's happened in this coverage. Brazil's marketplace revenue rose 3.7% to $15.5 million, reversing Q1's 16.8% decline and Q2's 7.7% decline outright, not just decelerating them. In local currency, Brazil grew 16.4% - so the segment's underlying business never actually stopped growing through the crisis; only the dollar translation made it look otherwise for two straight quarters.

Income from operations^» grew 62.6%, from $11.68 million to $18.98 million, expanding operating margin by 8.5 points, from 29.0% to 37.5% - a bigger jump than Q2's 6.7-point expansion, and now two consecutive quarters where operating leverage, not a normalizing tax rate, is doing the real work. Net income grew 67.7% to $9.85 million, and diluted EPS grew 69.2% to $0.22. The blended tax rate fell to 20.5% from 28.9% - a real improvement, but a smaller share of this quarter's story than the operating-margin expansion, and a large chunk of even that improvement was a one-time $1.2 million reversal of a Mexican valuation allowance (see Beyond the Usual), not a structural rate change.

The Prescription

MercadoLibre should keep leaning into MercadoPago's take-rate expansion and start treating it explicitly as the company's primary growth engine rather than a complement to the marketplace. Payments revenue grew 58.3% this quarter on total payment volume growth of only 39.8%, because the Payments take rate^» climbed to 11.8% from 10.5% - the fourth straight quarter of take-rate expansion in this segment, and it now carries the highest direct-contribution margin improvement in the business again (+12.2 points, see below). Marketplace GMV growth of 34.0% is real and healthy, but the marketplace take rate is still drifting down (4.7% from 5.4%) as smaller, lower-fee countries and final-value-fee listings take share - Payments is simply the better unit economics story right now.

What it should stop doing: continuing to fund MercadoPago's working capital by selling off credit card receivables as an outright sale rather than disclosing the true, ongoing financing cost of that structure as a headline metric. The mechanic itself is legitimate and the company is transparent that it exists, but interest expense and other financial charges have gone from $1.1 million to $3.9 million this quarter alone (a 242% increase), driven "primarily" by this financing activity per the company's own words - a real, recurring, and growing cost of running the payments business this way, not a one-off. Since the company chose to move this financing off the balance sheet as an asset sale in Q4 2008 rather than keep it as a secured loan, a reader has to go hunting in the interest-expense line and the MD&A prose to find what that choice is actually costing shareholders each quarter. It should be broken out on its own line, not buried inside "other income (expenses)."

Key Financial Metrics

Three months ended September 30, 2009 vs. three months ended September 30, 2008 - consolidated, reported in USD (MercadoLibre reports natively in dollars; no FX conversion is needed)

Metric	Q3 2009	Q3 2008	YoY
Net revenues	$50.60M	$40.26M	✅ +25.7% (≈+42.3% at constant currency, see above)
Cost of net revenues	$(10.39)M	$(8.15)M	⚠️ +27.5%
Gross profit (79.5% margin)	$40.21M	$32.11M (79.7% margin)	✅ +25.2%, margin roughly flat (-0.3pp)
Income from operations» (37.5% margin)	$18.98M	$11.68M (29.0% margin)	✅ +62.6%, margin +8.5pp
Adjusted EBITDA	not disclosed	not disclosed	n/a - tenth straight quarter undisclosed
Blended tax rate	20.5%	28.9%	✅ -8.4pp (partly a one-off Mexican tax-allowance reversal, see below)
Net income»	$9.85M	$5.88M	✅ +67.7%
Diluted EPS	$0.22	$0.13	✅ +69.2%
Operating cash flow (derived, quarter-standalone)	~$13.88M	n/a	vs. ~$8.17M in Q2 2009
Free cash flow» (derived, quarter-standalone)	~$13.09M	n/a	vs. ~$7.73M in Q2 2009
Cash, ST & LT investments (period end)	$77.51M	n/a	up from $70.42M at June 30, 2009
Loans payable (period end)	$9.39M	n/a	down from $15.47M at June 30, 2009

MercadoLibre still reports cash flows only on a cumulative nine-month basis, so quarterly operating cash flow and free cash flow above are derived by subtracting the already-disclosed six-month-to-date figures from this quarter's nine-month cumulative statement - the same method used throughout this coverage. Free cash flow grew again, from ~$7.73 million to ~$13.09 million, a 69% sequential jump that tracks the operating-leverage story rather than a working-capital swing. Gross margin held essentially flat this quarter (-0.3pp) after Q2's 1.0-point compression, since the Venezuela dual-exchange-rate cost pressure eased somewhat as the parallel rate moved in the company's favor (see Beyond the Usual). The drop in loans payable, from $15.47 million to $9.39 million, reflects an $9.47 million DeRemate seller-note payment made August 31, 2009 - one installment ahead of the original February 2009 restructured schedule's final two payments still due (see Q2 2009's coverage of that restructuring).

Operating margin expanded 8.5 points for the second straight quarter of real operating leverage. The currency gap between reported and local-currency growth narrowed for the first time in this coverage. Both are genuinely good news - and both arrived at the same time the stock had already priced in a lot more than that.

Key Operational Metrics

Three months ended September 30, 2009 vs. three months ended September 30, 2008

Metric	Q3 2009	Q3 2008	YoY
Gross merchandise volume» (GMV)	$791.0M	$590.1M	✅ +34.0%
Total payment volume» (TPV)	$114.0M	$81.5M	✅ +39.8%
Confirmed registered users (cumulative, period end)	40.2M	32.0M	✅ +25.6%
New confirmed registered users (in period)	2.4M	3.9M	⚠️ -38.5% (Q3 2008 included a 2.2M one-time boost from the DeRemate integration)
Items sold	8.0M	5.6M	✅ +42.9%
Marketplace take rate (marketplace revenue / GMV)	4.7%	5.4%	⚠️ -0.7pp
MercadoPago take rate (payments revenue / TPV)	11.8%	10.5%	✅ +1.3pp

The new-registered-users decline looks alarming in isolation but isn't real: the company discloses that roughly 2.2 million of Q3 2008's 3.9 million new users came from folding in the DeRemate user base at acquisition, a one-time step-change that this quarter's comparison doesn't have. Strip that out and new organic registrations actually grew year over year. GMV growth (+34.0%) continues to outrun reported revenue growth (+25.7%) by a wide margin, and TPV growth (+39.8%) does the same for Payments (+58.3% revenue growth, since the take-rate expansion adds on top of volume growth rather than diluting it - the opposite of what's happening on the marketplace side).

Five Marketplace Segments Plus Payments - Every Segment Grew, and Margin Expanded Everywhere Except Mexico's Modest Gain

MercadoLibre reports the same six segments covered in the Q2 2009 post: five country-level marketplace segments (Brazil, Argentina, Mexico, Venezuela, Other Countries) plus Payments (MercadoPago).

Segment	Q3 2009 Revenue	YoY Revenue	Direct contribution» margin, Q3 2009	Direct contribution margin, Q3 2008	Margin change
Brazil	$15.48M	✅ +3.7% (+16.4% local currency)	44.3%	30.9%	✅ +13.5pp
Argentina	$6.62M	✅ +22.5%	70.3%	56.1%	✅ +14.3pp
Mexico	$3.68M	✅ +3.3%	45.8%	43.2%	✅ +2.6pp
Venezuela	$8.45M	✅ +38.3%	53.4%	47.6%	✅ +5.8pp
Other Countries	$2.88M	✅ +65.5%	57.4%	27.4%	✅ +30.0pp
Total Marketplaces	$37.11M	✅ +16.9%	52.2%	39.6%	✅ +12.6pp
Payments (MercadoPago)	$13.49M	✅ +58.3%	53.2%	41.1%	✅ +12.1pp

Brazil is the headline reversal. After two straight quarters of shrinking in dollar terms, the segment grew both revenue (+3.7%) and margin (+13.5 points, the largest margin gain of any marketplace segment this quarter) at the same time - the Q2 2009 post called Brazil's steady-margin character "reasserting itself even as the dollar-revenue line stays negative"; this quarter the dollar-revenue line stopped being negative too. Venezuela recovered the margin ground it gave back last quarter (+5.8 points this time, after -5.7 points in Q2) while also posting the second-fastest revenue growth (+38.3%) in the business. Other Countries again showed its now-familiar extreme margin volatility (+30.0 points, on top of Q2's own large swing) - still too small a revenue base ($2.88 million) to read as a stable trend rather than cost-mix noise. Mexico was the one segment without a standout quarter, growing revenue and margin only modestly (+3.3% and +2.6 points) for a second consecutive period. Payments again posted a double-digit margin gain (+12.1 points), the fourth straight quarter of expansion in this segment specifically (see The Prescription).

Beyond the Usual

The São Paulo platform-liability ruling is still live - the company appealed again, and the outcome remains pending

The Q2 2009 post flagged a São Paulo state prosecutor's first-instance win holding MercadoLibre's Brazilian subsidiary jointly liable for seller fraud and ordering the removal of liability-limiting language from its own Terms of Service. That case is not resolved. MercadoLibre's initial recourse to the lower court, filed June 29, didn't change the outcome; on September 29, 2009 the company filed a formal appeal and requested that the sentence's effects be suspended pending the appeal's outcome. As of this filing, the decision is still pending - the core legal question of whether MercadoLibre bears joint liability for seller fraud on its own platform remains unresolved in its single largest market, more than five months after the adverse first-instance ruling. Nothing has been accrued because a loss is still considered "not probable," but this is now a two-quarter-old live threat to the operating model, not a fresh development a reader can assume will resolve quickly.

The Bahia claim - a nearly identical state-prosecutor lawsuit that had produced a preliminary injunction ordering the same Terms-of-Service change - was settled on August 12, 2009 with no financial or legal liability to the Company, homologated five days later. That's one of the two courtroom threats to the platform-liability shield flagged last quarter genuinely gone, not just quiet. The underlying Brazilian litigation docket also shows its first sign of deceleration in this coverage: 154 new ordinary-court suits and 9 new consumer-court summons were filed between quarter-end and the filing date, both meaningfully smaller additions than the 22-and-228 addendum disclosed in the Q2 2009 filing, and the pending consumer-court case count (2,014) actually declined from Q2's disclosed 2,175, the first quarter-over-quarter drop in that number in this coverage. None of this resolves the São Paulo case above, but it's a real, disclosed easing in the volume of new litigation feeding it.

Venezuela's dual-exchange-rate asset shrank for the first time, as the parallel rate the company flagged as a reversal risk moved against it

The Q1 2009 post and Q2 2009 post tracked this contingent asset growing every quarter, from $11.2 million to $12.3 million, built on re-measuring Venezuelan U.S.-dollar balances at the official exchange rate (2.15 Bolivares Fuertes per dollar) rather than the weaker parallel rate the company would actually have to use if CADIVI dividend approval never materializes. This quarter the parallel rate itself moved from roughly 6.6 to 5.42 Bolivares Fuertes per dollar - the Bolivar appreciating in the parallel market - and the disclosed foreign-currency effect on this asset fell to $11.2 million, down from $12.3 million three months earlier. This is exactly the kind of reversal the company's own risk disclosure has warned about since Q1: a partial one this quarter, not a full unwind, but the first quarter where this contingent asset moved the wrong way instead of growing further.

A one-time Mexican tax-valuation-allowance reversal, not a structural rate change, drove roughly a third of this quarter's tax-rate improvement

MercadoLibre's blended tax rate fell 8.4 points this quarter, but $1.2 million of the underlying tax-expense reduction came from reversing a Mexican valuation allowance tied to accumulated tax-loss carryforwards from acquired companies - a one-time benefit from a specific tax-planning strategy executed this quarter, not a permanent improvement in the company's effective rate. The company itself discloses it "is still evaluating other tax planning strategies that could eventually result in reversals of tax valuation allowances in other countries," meaning more one-off tax benefits like this one may recur, but a reader shouldn't extrapolate this quarter's 20.5% blended rate forward as the new normal without knowing how much of it is this specific, non-repeating item.

The written puts stayed at zero exposure for a second straight quarter

The Q2 2009 post flagged that MercadoLibre hadn't sold a new round of written put options for the first time in this coverage, leaving zero exposure at June 30, 2009. That held through September 30, 2009 too - the fair-value table again shows no Level 1 liabilities from written puts. Two consecutive rounds expired unexercised earlier in the year and none has been sold since; what looked like it might be circumstance after one quarter now looks more like an actual change in practice after two.

The Buenos Aires real estate trust update from last quarter continued: the Argentine subsidiary had invested $5.68 million of its commitment as of September 30, 2009 (up from $4.5 million at Q2), with another $3.6 million expected over the following ten months, and expects to relocate into the completed building in the third quarter of 2010. The filing again discloses that certain officers and former officers separately invested in a different floor of the same building, which the company doesn't intend to occupy - the same related-party fact pattern flagged in Q2 2009, disclosed again in identical terms rather than expanded on.

Coverage Table

Theme	Q3 2009	Q3 2008	YoY	Why it matters
Net revenue (reported / local-currency estimate)	$50.6M / local +42.3%	$40.3M	✅ +25.7% reported, ✅ +42.3% local-currency	Currency gap narrowed for the first time in this coverage (16.6pp vs. ~23pp in Q1/Q2)
Income from operations	$18.98M	$11.68M	✅ +62.6%, margin +8.5pp	Second straight quarter of real operating leverage, and a bigger jump than Q2's
Brazil segment revenue	$15.48M	$14.92M	✅ +3.7% (vs. -7.7% in Q2, -16.8% in Q1)	First quarter this segment grew in dollar terms since the crisis began
São Paulo litigation	Appeal filed, decision pending	n/a	⚠️	Still an unresolved, existential-to-the-model legal question after five months
Bahia litigation	Settled, no liability	n/a	✅	One of two flagged Brazilian platform-liability threats is now closed

Target Valuation Range

No numeric fair-value range or target is computable yet - this is the last quarter where trailing-twelve-month free cash flow is still distorted by Q4 2008's one-time receivables-sale accounting shift. The multiple check: at a $1,628.5 million enterprise value (roughly 10.4x EV/Sales, up from 7.7x last quarter), the stock is priced for a story that's ahead of what the numbers have actually delivered yet. Operating performance genuinely improved again this quarter, but EV/Sales, P/E, and EV/FCF all expanded faster than the underlying growth and margin gains justify on their own - this reads as richly valued relative to what's provable today.

MELI closed September 30, 2009 at $38.46, up 43.1% from the June 30, 2009 close of $26.88 - on top of Q2's 44.9% rally, meaning the stock is up more than double since March 2009 while trailing-twelve-month revenue has grown a fraction of that.

Market cap → enterprise value	Q3 2009 (Sep 30, 2009 close)
Share price (period-end)	$38.46
Shares outstanding	44,113,429
Market capitalization	~$1,696.6M
Total liabilities (loans payable)	$9.39M
Less: cash, ST & LT investments	$77.51M
Enterprise value	~$1,628.5M

Peer-multiple sanity check	LTM to Q2 2009	LTM to Q3 2009	Change
Revenue (trailing twelve months)	$146.9M	$157.3M	-
Enterprise value	~$1,130.2M	~$1,628.5M	⚠️ up sharply
EV/Sales	7.7x	10.4x	⚠️ up
Diluted EPS (trailing twelve months)	~$0.59	~$0.66	✅ up
P/E	~45.8x	~58x	⚠️ up
Free cash flow (trailing twelve months)	$56.3M	$60.9M	✅ up
EV/FCF	20.1x	26.7x	⚠️ up

The EV/Sales multiple is up sharply again from Q2 2009's 7.7x, and now more than double where this coverage's Q1 2009 read stood (5.5x) just two quarters ago. The P/E move again shows the stock's rally outpacing trailing earnings growth by a wide margin.

EV/FCF is, for the last time in this coverage, still distorted by Q4 2008's one-time receivables-sale accounting shift - Q4 2009's filing will finally roll that quarter out of the trailing window. Real, organic free cash flow generation kept improving this quarter (~$13.1 million, the strongest single quarter in this coverage), but the trailing base is still inflated by roughly $37.5 million of one-time boost embedded in Q4 2008's numbers (see the FY2008 post), so this multiple's continued climb is a valuation story layered on a still-contaminated denominator, exactly as flagged last quarter - just one quarter closer to being resolved. A real DCF remains out of reach until that Q4 2008 quarter finally exits the trailing window with the next filing.

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