A Clean Year, Finally Measurable On Its Own Terms
MercadoLibre's first Form 10-K of the recovery reports full-year 2009 net revenue of $172.8 million, up 26.1% from $137.0 million in 2008 - measured in local currencies, growth was 42.6%, continuing the narrowing-gap story the Q3 2009 post first flagged. Operating margin expanded again, from 27.4% to 32.4%, and net income grew 76.6% to $33.2 million. On the surface, this reads as simple continuation of the recovery story that's been building all year.
It isn't quite that simple in the fourth quarter specifically. Q4 2009 net revenue of $49.0 million actually came in below Q3 2009's $50.6 million - the second time in three years the company's own stated seasonal pattern (Q4 is normally its strongest quarter, driven by Christmas-season transaction volume) broke, following the FY2008 post's first instance of this. This year the company names the exact cause, and it's a real one: starting in Q4 2009, MercadoLibre stopped translating its Venezuelan subsidiaries' results at the official exchange rate (2.15 Bolivares Fuertes per dollar) it had used until then, and switched to the parallel rate (5.67 average for the quarter) - a rate roughly 2.6x weaker. That single change cut Q4 revenue by $7.0 million and net income by $2.3 million, on the company's own disclosure. It's also the resolution of a thread running since Q1 2009: the $11.2-to-$12.3 million contingent asset built on the official-rate assumption has now fully reversed. See Beyond the Usual for the mechanics.
The more consequential fact in this filing, though, is about time, not currency: this is the first annual report where trailing-twelve-month free cash flow contains zero contribution from Q4 2008's one-time receivables-sale accounting shift (see the FY2008 post for what that boost was). Until now a clean free-cash-flow multiple wasn't possible because the trailing base was contaminated. That excuse is gone. See Target Valuation Range for what the multiples show now.
The Prescription
MercadoLibre should make Adjusted EBITDA and a genuine standalone-quarter cash-flow statement a first-quarter-2010 disclosure priority, not defer it again. This is now the eleventh consecutive filing without Adjusted EBITDA, and the company has now shown, twice in three years (2008 and 2009), that its full-year cash-flow number can swing meaningfully for reasons that have nothing to do with the underlying business - a $35 million one-off funding-model boost in 2008, and this year a genuine, organic $45.9 million free cash flow figure that a reader still has to reconstruct from a five-year selected-data table and two separate cash-flow statements to trust. A pre-tax operating metric and a real quarterly cash-flow disclosure would let this get stated directly instead of derived.
What it should stop doing: re-measuring its Venezuelan operations' functional currency and translation basis reactively, mid-quarter, in response to a regulator (CADIVI) slowing dividend approvals, rather than adopting a currency-translation policy up front that anticipates this kind of shift. The company has now used three different bases for Venezuela in three years - official rate through Q3 2009, parallel rate starting Q4 2009, and (per its own subsequent-events disclosure) full U.S.-dollar functional-currency treatment starting January 1, 2010, once Venezuela crossed the SEC's three-year cumulative inflation threshold for "highly inflationary" status. Each switch has been legitimate under the accounting standard in effect at the time, but three basis changes in three years makes it genuinely hard for a reader to build a like-for-like Venezuela trend line across those years, and the next switch (full dollarization) is now locked in before it's even reported.
Key Financial Metrics
Year ended December 31, 2009 vs. year ended December 31, 2008 - consolidated, reported in USD (MercadoLibre reports natively in dollars; no FX conversion is needed)
| Metric | FY2009 | FY2008 | YoY |
|---|---|---|---|
| Net revenues | $172.84M | $137.02M | +26.1% (≈+42.6% at constant currency, see above) |
| Cost of net revenues | $(35.96)M | $(27.54)M | +30.6% |
| Gross profit (79.2% margin) | $136.89M | $109.49M (79.9% margin) | +25.0%, margin -0.7pp |
| Income from operations» (32.4% margin) | $56.03M | $37.52M (27.4% margin) | +49.3%, margin +5.0pp |
| Adjusted EBITDA | not disclosed | not disclosed | n/a - eleventh straight filing undisclosed |
| Blended tax rate | 22.3% | 36.1% | -13.8pp (mostly a non-cash valuation-allowance reversal, see below) |
| Net income» | $33.21M | $18.81M | +76.6% |
| Diluted EPS | $0.75 | $0.42 | +78.6% |
| Operating cash flow | $49.70M | $55.78M | -10.9% (2008 included a ~$35M one-off funding-model boost; 2009's figure is fully organic) |
| Free cash flow» (OCF less capex) | ~$45.90M | ~$49.64M | -7.5%, but a genuinely clean, unboosted full-year FCF figure |
| Cash, ST & LT investments (period end) | $91.01M | $58.33M | +56.0% |
| Loans payable (period end) | $3.21M | $18.01M | -82.2% |
The apparent FCF decline is entirely an artifact of 2008's one-off comparison base, not a deterioration - the quarterly run-rate underneath it has been climbing every single quarter this year (Q1: ~$2.8M, Q2: ~$7.7M, Q3: ~$13.1M, Q4: ~$22.3M, all derived by subtracting each quarter's already-reported cumulative cash-flow figures), a genuinely strong and consistent trend that the full-year comparison to 2008 obscures. Q4 2009 standalone: net revenue $49.02 million (+46.6% YoY, though down 3.1% sequentially from Q3 for the currency reason above), operating income $17.87 million (36.5% margin, +60.2% YoY), and net income $11.29 million (+42.5% YoY) - all still comfortably ahead of the prior year despite the sequential dip. Loans payable fell to just $3.21 million, almost entirely the last DeRemate seller-note installment maturing March 5, 2010 (see Beyond the Usual) - this debt is effectively retired.
Full-year growth and margin expansion both look like continuation of the recovery story - but the fourth quarter broke the company's own seasonal pattern for the second time in three years, this time on a currency-accounting switch rather than the 2008 crisis, and the reason that switch happened (a Venezuelan financial-market squeeze) is a bigger structural story than one quarter's revenue miss.
Key Operational Metrics
Year ended December 31, 2009 vs. year ended December 31, 2008
| Metric | FY2009 | FY2008 | YoY |
|---|---|---|---|
| Gross merchandise volume» (GMV) | $2,750.7M | $2,078.9M | +32.3% |
| Total payment volume» (TPV) | $382.5M | $255.9M | +49.5% |
| Confirmed registered users (cumulative, period end) | 42.6M | 33.7M | +26.4% |
| New confirmed registered users (in period) | 8.9M | 8.8M | +1.1% |
| Successful items sold | 29.5M | 21.1M | +39.8% |
| Marketplace take rate (marketplace revenue / GMV) | 4.7% | 5.3% | -0.6pp |
| MercadoPago take rate (payments revenue / TPV) | 11.7% | 10.7% | +1.0pp |
New registered-user growth essentially flattened this year (+1.1%, versus +31.3% growth in the metric itself from 2007 to 2008) even as every dollar-denominated metric kept accelerating - a sign the marketplace is now growing more from existing users transacting more (GMV/user, take-rate mix, repeat usage) than from pure user-base expansion, which is a maturing-platform dynamic worth watching rather than a red flag on its own. The marketplace take rate keeps drifting down for a fourth straight year while MercadoPago's keeps climbing - the same divergence The Prescription in the Q3 2009 post flagged, now confirmed at the full-year level: Payments revenue grew 62.6% for the year on TPV growth of "only" 49.5%, a real take-rate expansion story, while Marketplaces grew 17.0% on GMV growth of 32.3%, a take-rate compression story.
Six Segments, Full Year - Every Segment Grew and Margin Expanded, Argentina and Other Countries Leading
MercadoLibre reports the same six segments covered in the FY2008 post: five country-level marketplace segments (Brazil, Argentina, Mexico, Venezuela, Other Countries) plus Payments (MercadoPago).
| Segment | FY2009 Revenue | YoY Revenue | Direct contribution» margin, FY2009 | Direct contribution margin, FY2008 | Margin change |
|---|---|---|---|---|---|
| Brazil | $54.62M | +8.1% | 39.7% | 35.9% | +3.8pp |
| Argentina | $23.46M | +28.5% | 58.9% | 52.3% | +6.7pp |
| Mexico | $13.70M | +9.8% | 42.2% | 36.6% | +5.6pp |
| Venezuela | $26.22M | +19.3% | 50.4% | 47.9% | +2.6pp |
| Other Countries | $10.22M | +60.4% | 43.3% | 34.3% | +9.0pp |
| Total Marketplaces | $128.22M | +17.0% | 46.0% | 41.0% | +5.0pp |
| Payments (MercadoPago) | $44.62M | +62.6% | 48.9% | 41.2% | +7.6pp |
Every marketplace segment grew revenue and expanded margin this year - a turnaround from FY2008, when Venezuela dragged segment margin down on the newly-acquired CMG business (see the FY2008 post). Brazil, the largest segment, is no longer the flattest performer: after a flat FY2008 (35.9% in both FY2007 and FY2008), direct contribution margin expanded 3.8 points to 39.7% - a real improvement in the business every other segment is scaled against. Argentina posted both the third-fastest revenue growth (+28.5%, behind Payments +62.6% and Other Countries +60.4%) and the highest margin of any segment (58.9%), extending a pattern visible since the Q3 2009 post flagged it as a standout quarter; this is now a full-year characteristic, not a one-quarter blip. Venezuela's revenue growth (+19.3%) looks modest next to Other Countries' (+60.4%), but that's the direct effect of the Q4 currency-translation switch discussed above cutting roughly $7 million off what the segment would otherwise have reported - on a constant-basis view, Venezuela's underlying local-currency growth was considerably stronger. Payments posted the second-largest margin gain of any segment (+7.6pp, behind Other Countries' +9.0pp) to a 48.9% margin from 41.2%.
Target Valuation Range
Too early to call against peers; against its own history, richer on every multiple. EV/Sales rose from 10.4x to 12.7x, P/E from ~58x to ~69x and EV/FCF from 26.7x to ~48x, the last on the first clean trailing free cash flow figure ($45.90M), so removing the fog made the multiple look worse, not better. The rally has outrun the cash flow behind it.
MELI closed December 31, 2009 at $51.87, up 34.9% from the September 30, 2009 close of $38.46 - a fourth straight quarter of double-digit gains, following Q2's 44.9% and Q3's 43.1% rallies.
| Market cap → enterprise value | FY2009 (Dec 31, 2009 close) |
|---|---|
| Share price (period-end) | $51.87 |
| Shares outstanding | 44,120,269 |
| Market capitalization | ~$2,288.6M |
| Total liabilities (loans payable) | $3.21M |
| Less: cash, ST & LT investments | $91.01M |
| Enterprise value | ~$2,200.8M |
| Peer-multiple sanity check | Q3 2009 (LTM) | FY2009 | Change |
|---|---|---|---|
| Revenue (trailing/full-year) | $157.3M | $172.84M | - |
| Enterprise value | ~$1,628.5M | ~$2,200.8M | up |
| EV/Sales | 10.4x | 12.7x | up, continuing an unbroken climb from 5.5x at the start of the year |
| Diluted EPS | ~$0.66 | $0.75 | up |
| P/E | ~58x | ~69x | up |
| Free cash flow | $60.9M (contaminated LTM) | $45.90M (first clean LTM figure) | - |
| EV/FCF | 26.7x (contaminated) | ~48x (clean) | up - removing the fog made the multiple look worse, not better |
Beyond the Usual
Venezuela's tracked dual-rate contingent asset has now fully reversed - and the switch cost real revenue and profit this quarter
A Venezuela-related contingent asset has run since Q1 2009: a foreign-currency effect on Venezuelan U.S.-dollar-denominated balances, re-measured at the official exchange rate (2.15 Bolivares Fuertes per dollar) rather than the much weaker parallel rate, that grew from $11.2 million to $12.3 million before shrinking back to $11.2 million by Q3 2009. This filing resolves the thread: CADIVI (Venezuela's currency-control regulator) approvals of official-rate dividend remittances fell roughly 50% year-over-year by mid-2009, and starting in Q4 2009 MercadoLibre switched its Venezuelan subsidiaries' entire translation basis - assets, liabilities, income, and expenses - from the official rate to the parallel rate (5.67 average for the quarter, 6.05 at quarter-end). The $11.2 million contingent asset was fully reversed into other comprehensive income rather than earnings, and the total currency-translation-adjustment effect of the switch reached $17.0 million by year-end. Directly on the income statement, the switch cut Q4 2009 net revenues by $7.0 million and net income by $2.3 million - the exact reversal risk flagged as a possibility for a year, now realized as an actual reported number rather than a balance-sheet footnote.
The São Paulo platform-liability ruling was suspended pending appeal - but a nearly identical claim is pending in a second Brazilian state
The Q2 2009 and Q3 2009 posts tracked a São Paulo state-prosecutor ruling holding MercadoLibre's Brazilian subsidiary jointly liable for seller fraud and ordering it to strip liability-limiting language from its own Terms of Service, with the company's September 2009 appeal still pending as of the last filing. This filing brings real news: in December 2009, the effect of that ruling was formally suspended pending the appeal's outcome at the State Court of Appeals - the practical threat is paused, not just legally contested, while the case works through appellate review. That's a genuine improvement over the "still live, no update" status flagged last quarter. But the underlying legal question hasn't gone away: this filing's risk factors add the sentence "a similar claim is pending in Uberlândia, State of Minas Gerais, Brazil" - the same platform-liability theory pursued in a second Brazilian jurisdiction (the Minas Gerais claim itself has been in the legal-proceedings note since the Q2 2008 10-Q). One courtroom threat eased; the underlying exposure sits in a second venue too.
Nearly all of this year's 13.8-point tax-rate improvement came from a non-cash valuation-allowance reversal, not a lower real tax burden
The Q3 2009 post flagged a one-time $1.2 million Mexican valuation-allowance reversal as a meaningful, non-repeating driver of that quarter's tax-rate improvement. This filing shows the full-year picture was considerably larger: MercadoLibre reversed $4.1 million of foreign and domestic valuation allowances during 2009, driven by tax-planning strategies designed to more efficiently use accumulated tax-loss carryforwards from acquired companies, and states it "is still evaluating other tax planning strategies" that could produce further reversals. The company's own two disclosed tax-rate measures make the gap explicit: the blended tax rate (what actually flows through net income, including these non-cash deferred-tax effects) fell 13.8 points to 22.3% from 36.1%, while the effective tax rate (excluding those effects) fell only 0.8 points, to 26.9% from 27.7%. Almost the entire headline tax-rate improvement driving this year's 76.6% net-income growth is a one-time accounting benefit from valuation-allowance reversals, not a structural reduction in what MercadoLibre actually owes.
The Buenos Aires real estate trust update continued: the Argentine subsidiary had invested $7.2 million of its commitment as of December 31, 2009 (up from $5.68 million at Q3), with another $2.2 million expected over the following six months, and still expects to relocate into the completed building in the third quarter of 2010. Certain officers and former officers again separately invested in a different floor of the same building the company doesn't intend to occupy - the same related-party fact pattern disclosed in every quarter since Q2 2009, unchanged again this quarter. Separately, the CEO's-family-linked related-party lease disclosed in the FY2008 post grew only 3.9% this year, to $903,094 from $868,803 - a real deceleration from 2008's 55.7% jump, though the arrangement itself is unchanged and still undisclosed as to how the rate was set.
The last of the DeRemate acquisition seller notes - $18.0 million issued in September 2008, tracked through several restructurings - is now down to $3.0 million outstanding, maturing March 5, 2010. Once that payment clears, this financing thread closes out entirely. The written-put-option exposure seen since the FY2008 post stayed at zero through year-end - the fair-value table shows no Level 1 put-option liability at December 31, 2009, versus $185,000 at December 31, 2008, confirming no new round was sold in any quarter this year. Brazilian litigation volume kept its recent easing trend: 296 lawsuits pending in ordinary courts and more than 1,691 in consumer courts at year-end, both down from Q3 2009's disclosed 2,014 consumer-court cases, with $1.1 million reserved across 299 actions where a loss is deemed probable. Separately, a new FASB accounting standard tightening the criteria for transfers of financial assets to qualify as a sale takes effect January 1, 2010 - directly relevant to the credit-card-receivables sale structure scrutinized since the FY2008 post, where moving MercadoPago receivables to an outright-sale structure generated $42.1 million of that year's operating-cash-flow improvement. The company states the new standard "will not have significant effect" on its financial statements; whether that holds is worth checking again once Q1 2010 actually reports under it.
Coverage Table
| Theme | FY2009 | FY2008 | YoY | Why it matters |
|---|---|---|---|---|
| Net revenue (reported / local-currency) | $172.8M / local +42.6% | $137.0M | +26.1% reported | First full year of the post-crisis recovery confirmed at the annual level |
| Income from operations | $56.03M | $37.52M | +49.3%, margin +5.0pp | Full-year operating-leverage expansion |
| Free cash flow (clean) | ~$45.90M | ~$49.64M (contaminated) | -7.5% headline, but comparable now that FY2008's one-time receivables-sale boost is stripped out | Enables a clean cash-flow multiple |
| EV/FCF | ~48x | n/a (contaminated base) | - | Higher than last quarter's contaminated 26.7x - the stock got more expensive, not less, once the fog cleared |
| Venezuela translation basis | Parallel rate (Q4 on) | Official rate | - | Cut Q4 revenue/net income by $7.0M/$2.3M; contingent asset tracked since Q1 2009 fully reversed |
| São Paulo litigation | Effect suspended pending appeal | Live, appealed | Positive | Real de-risking, but a similar claim now pending in a second state |
MercadoLibre, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 2009, filed with the U.S. Securities and Exchange Commission and signed February 26, 2010 by CEO Marcos Galperín, CFO Hernán Kazah, and the Company's independent registered public accounting firm. Historical MELI share price data covers month-end closes from December 2007 through December 2009; no stock split falls within the two-year price window used here, so no split adjustment applies to these figures.