Everything Grew Except the One Rate That Was Supposed to Be Immune
Net revenue for the first quarter of 2010 came in at $45.9 million, up 42.1% from $32.3 million a year earlier (45.0% at constant currency), and income from operations more than doubled to $15.5 million from $6.8 million - a 12.8-point jump in operating margin, to 33.7% from 20.9%, the single largest quarterly margin expansion in this coverage. On the surface this reads as pure acceleration: Q1 2009 was still recovering from the crisis, and this quarter's comparison benefits from that weak base as much as from anything MercadoLibre did differently.
The more interesting number is buried in the take-rate mechanics. Since this coverage began tracking segment take rates, the pattern has been consistent and one-directional: MercadoLibre's core Marketplace take rate (Marketplace revenue divided by gross merchandise volume) has compressed for four straight years as the mix shifts toward lower-fee listings and smaller countries, while MercadoPago's payments take rate has climbed every single quarter as installment-related financial charges grew - the divergence The Prescription in the Q3 2009 post flagged and the FY2009 post confirmed at the full-year level. This quarter, for the first time in this coverage, both take rates fell in the same period: Marketplace take rate slipped to 4.5% from 5.0%, and the Payments take rate - the side of the business that was supposed to be the offset - fell to 10.5% from 12.0%. The company's own explanation is a genuinely external one: a general decline in interest rates cut the installment-related financing charges MercadoPago earns on credit purchases, not a competitive or structural weakening. That's a real mitigating fact, but it also means a meaningful share of MercadoLibre's most reliably expanding revenue line is more exposed to a macro rate cycle it doesn't control than this coverage had previously given it credit for.
The Prescription
MercadoLibre should keep pushing MercadoPago's revenue mix away from installment-financing float income and toward the direct-payments product it just launched broadly in Brazil on March 30, 2010 (after a December 2009 beta) - a fee-based payments rail that doesn't require a MercadoLibre marketplace transaction to generate revenue, and whose take rate isn't a function of local interest rates the company can't influence. This quarter's take-rate reversal is the clearest evidence yet that the payments business, as currently mixed, has a macro sensitivity the marketplace business doesn't.
What it should stop doing: filing governance-adjacent related-party lease amendments as bare, unexplained exhibits. Exhibit 10.1 to this filing is an amendment, dated March 31, 2010, to the same property lease between MercadoLibre's Argentine subsidiary and Curtidos San Luis S.A. that this coverage flagged in the FY2008 post as controlled by the CEO's family - and once again, the filing discloses that an amendment happened without restating the actual rent, term, or what changed, the same disclosure gap flagged since 2008. A company that's comfortable enough to keep renewing this arrangement should be comfortable enough to state its terms plainly in the body of the filing, not just list the amendment's existence in the exhibit index.
Key Financial Metrics
Three months ended March 31, 2010 vs. three months ended March 31, 2009 - consolidated, reported in USD (MercadoLibre reports natively in dollars; no FX conversion is needed)
| Metric | Q1 2010 | Q1 2009 | YoY |
|---|---|---|---|
| Net revenues | $45.94M | $32.32M | ✅ +42.1% (+45.0% at constant currency) |
| Cost of net revenues | $(9.89)M | $(6.63)M | ⚠️ +49.1% |
| Gross profit (78.5% margin) | $36.04M | $25.69M (79.5% margin) | ✅ +40.3%, margin -1.0pp |
| Income from operations» (33.7% margin) | $15.50M | $6.77M (20.9% margin) | ✅ +129.1%, margin +12.8pp |
| Adjusted EBITDA | not disclosed | not disclosed | n/a - twelfth straight filing undisclosed |
| Blended tax rate | 29.8% | 23.7% | ⚠️ +6.1pp (the FY2009 tax benefit is already reversing, see below) |
| Net income» | $9.62M | $5.39M | ✅ +78.5% |
| Diluted EPS | $0.22 | $0.12 | ✅ +83.3% |
| Operating cash flow | $11.45M | $4.85M | ✅ +136.0% |
| Free cash flow» (OCF less capex) | ~$10.06M | ~$2.77M | ✅ +263.0% |
| Cash, ST & LT investments (period end) | $96.58M | $60.12M | ✅ +60.7% |
| Loans payable (period end) | $0 | $18.49M | ✅ -100% (DeRemate notes fully repaid, see below) |
Pre-tax income actually grew faster than net income (+94.0%, to $13.7 million from $7.1 million) because the tax line moved against the company this quarter - the reverse of what drove much of FY2009's net-income growth. The blended tax rate rose 6.1 points to 29.8%, and the effective tax rate (which strips out deferred-tax and Mexican IETU effects) more than doubled, to 41.4% from 18.0%, driven by a smaller Argentine deferred-tax asset, a $1.5 million domestic tax charge tied to a Brazilian dividend distribution that itself generated a pre-tax loss, and the permanent tax effect of Venezuela's change in functional currency. The FY2009 post flagged that almost all of that year's tax-rate improvement was a one-time, non-cash valuation-allowance reversal rather than a structural change - this quarter is the first real evidence of that reversal, and net-income growth would have looked considerably stronger without it.
Revenue and operating-margin growth both look like acceleration - but a meaningful share of it is a weak Q1 2009 comparison base, and the tax line that flattered FY2009 has started working against the company instead of for it.
Key Operational Metrics
Three months ended March 31, 2010 vs. three months ended March 31, 2009
| Metric | Q1 2010 | Q1 2009 | YoY |
|---|---|---|---|
| Gross merchandise volume» (GMV) | $731.6M | $520.9M | ✅ +40.4% |
| Total payment volume» (TPV) | $123.8M | $53.2M | ✅ +132.9% |
| Confirmed registered users (cumulative, period end) | 44.9M | 35.7M | ✅ +25.8% |
| New confirmed registered users (in period) | 2.3M | 1.9M | ✅ +21.1% |
| Successful items sold | 8.3M | 6.0M | ✅ +38.3% |
| Marketplace take rate (marketplace revenue / GMV) | 4.5% | 5.0% | ⚠️ -0.5pp |
| MercadoPago take rate (payments revenue / TPV) | 10.5% | 12.0% | ⚠️ -1.5pp - first-ever quarter both take rates fell together |
TPV growth (+132.9%) continuing to outpace GMV growth (+40.4%) shows MercadoPago penetration into a larger share of transactions is still the bigger structural story than the take-rate dip - more of every dollar transacted on the platform is flowing through MercadoPago's own rails than a year ago, even if MercadoPago charges a little less on each dollar it processes for now.
Two Segments, Every Marketplace Country Grew Except One, on Currency Alone
MercadoLibre reports the same two headline reporting segments as the FY2009 post - Marketplaces (broken into Brazil, Argentina, Mexico, Venezuela, and Other Countries) and Payments (MercadoPago) - with net revenue and direct contribution disclosed at the country level within Marketplaces.
| Segment | Q1 2010 Revenue | YoY Revenue | Direct contribution» margin, Q1 2010 | Direct contribution margin, Q1 2009 | Margin change |
|---|---|---|---|---|---|
| Brazil | $15.69M | ✅ +58.8% | 41.4% | 33.1% | ✅ +8.3pp |
| Argentina | $6.72M | ✅ +35.4% | 61.4% | 56.2% | ✅ +5.2pp |
| Mexico | $4.02M | ✅ +40.0% | 43.5% | 37.4% | ✅ +6.1pp |
| Venezuela | $3.33M | 🔴 -47.7% | 47.9% | 42.6% | ✅ +5.3pp |
| Other Countries | $3.24M | ✅ +72.9% | 48.5% | 35.8% | ✅ +12.7pp |
| Total Marketplaces | $33.00M | ✅ +27.1% | 47.1% | 40.5% | ✅ +6.6pp |
| Payments (MercadoPago) | $12.94M | ✅ +103.2% | 39.8% | 35.9% | ✅ +3.9pp |
Every Marketplace country grew revenue except Venezuela, and the reason isn't a business problem - Venezuela's Marketplace revenue in local currency actually grew 58.3% year-over-year. The $3.0 million reported-dollar decline is entirely a re-measurement effect: Q1 2009 was translated at the official rate (2.15 Bolivares Fuertes per dollar), while this quarter is re-measured at a monthly average parallel rate of 6.52 - roughly three times weaker. Every segment also expanded its direct-contribution margin, continuing the pattern the FY2009 post first confirmed at the full-year level, but the composition flipped: Payments posted the smallest margin gain of any segment (+3.9pp) for the first time in this coverage, after leading every prior quarter - direct evidence of the take-rate pressure described above showing up in the segment's own numbers, not just the consolidated blend. Other Countries posted both the fastest revenue growth (+72.9%) and the largest margin gain (+12.7pp), continuing to punch above a segment this small in this coverage's country-level story.
The Two-Year Round Trip
MELI closed March 31, 2010 at $48.21, down 7.1% from the December 31, 2009 close of $51.87 - the first sequential quarterly decline after four consecutive quarters of double-digit gains. Zoomed out over the two years ending this quarter, the stock traded as low as $12.32 (November 2008, near the bottom of the financial crisis) and as high as $51.87 (December 2009) - a roughly 321% round trip from trough to peak, all inside a single 24-month window, before this quarter's pullback. MercadoLibre has never split its common stock since its August 2007 IPO, so none of these are split-adjusted figures.
Target Valuation Range
DCF fair-value enterprise value of roughly $1,052.8 million (base case) to $2,210.5 million (bull case), against an actual enterprise value of $2,030.8 million - MercadoLibre is still overvalued in the base case, but for the first time in this coverage, a deliberately generous bull case can now clear the actual market price, not because expectations came down, but because the stock pulled back 7.1% this quarter while trailing free cash flow kept climbing, narrowing the gap the FY2009 post first quantified as a real overvaluation.
March 31, 2010's $48.21 close put market capitalization at approximately $2,127.3 million, down from $2,200.8 million (net of cash) enterprise value at FY2009's close even as the underlying business grew.
| Market cap → enterprise value | Q1 2010 |
|---|---|
| Share price (period-end) | $48.21 |
| Shares outstanding | 44,126,557 |
| Market capitalization | $2,127.3M |
| Total liabilities (no debt this quarter) | — |
| Less: cash, ST & LT investments | $96.58M |
| Enterprise value | $2,030.8M |
| Peer-multiple sanity check | FY2009 | Q1 2010 | Change |
|---|---|---|---|
| TTM Net Revenue | n/a | $186.5M | - |
| Enterprise value | $2,200.8M | $2,030.8M | ⚠️ down |
| EV/Sales | 12.7x | 10.9x | ✅ down |
| P/E | ~69x | 56.8x | ✅ down |
| TTM Free cash flow | n/a | $53.2M | - |
| EV/FCF | ~48x | 38.2x | ✅ down - every headline multiple compressed together for the first time in this coverage |
There isn't yet a directly comparable public company in this coverage to run against these multiples; that check will follow once one is added to the roster.
DCF (base/bull, illustrative) - base case starts from trailing revenue of $186.5 million and trailing FCF of $53.2 million (28.5% margin), projecting growth decelerating from 22% toward 10% over five years with FCF margin expanding to 31%, a 13% discount rate (reflecting genuine Latin American country/currency risk), and 4% terminal growth. Bull case holds growth at 30%/26%/22%/18%/15%, FCF margin expanding to 34%, an 11% discount rate, and 5% terminal growth:
| Scenario | Key assumption | Implied enterprise value |
|---|---|---|
| Current (Q1 2010 close) | — actual market price, for reference | $2,030.8M |
| Base | Growth decelerating 22%→10% over 5yrs; FCF margin to 31%; 13% discount rate, 4% terminal growth | ~$1,052.8M (~52% of current EV) |
| Bull | Growth held 30%→15% over 5yrs; FCF margin to 34%; 11% discount rate, 5% terminal growth | ~$2,210.5M (above current EV) |
Reverse DCF: holding the 13% discount rate and solving for the perpetual FCF growth rate that would justify today's $2,030.8 million enterprise value on the current $53.2 million FCF base gives roughly 10.1% growth, forever - in the same high-single-to-low-double-digit range this coverage has flagged before, and still a demanding assumption to hold in perpetuity given the take-rate pressure and currency volatility documented above.
The base case still says the stock is priced for more than this business has yet shown it can sustainably deliver. But the fact that a bull case can now clear the price at all - something that wasn't true even one quarter ago - is itself the update: the valuation gap didn't close because MercadoLibre proved something new, it narrowed because the market gave some of the FY2009 rally back while the cash-flow base kept compounding underneath it.
Beyond the Usual
Venezuela's currency-translation basis reached what looks like a stable endpoint after three changes in three years
MercadoLibre's Venezuelan subsidiaries used the official exchange rate (2.15 Bolivares Fuertes per dollar) through Q3 2009, switched to the parallel rate (5.67 average) starting Q4 2009 - the change tracked in the FY2009 post that cut Q4 2009 revenue and net income by $7.0 million and $2.3 million - and, as of January 1, 2010, transitioned Venezuela to "highly inflationary" status under US GAAP, meaning the subsidiaries' functional currency is now the US dollar itself rather than the Bolivar. This is the change the FY2009 post noted was "locked in before it's even reported," and it's now reported: no translation adjustment ran through other comprehensive income in Q1 2010 related to Venezuela at all, because there's no longer a local-currency-to-dollar translation step to run. The re-measurement volatility that has hit revenue and the tax line for two straight years hasn't disappeared - Venezuela's US-dollar-denominated results are still re-measured against the still-moving parallel rate (6.52 average this quarter) - but the three-year sequence of basis changes (official, then parallel, now dollar-functional) appears to have reached its terminal state, which should make future Venezuela comparisons more mechanically consistent than any pair of quarters in this coverage to date.
The last DeRemate acquisition note was paid in full, closing a financing thread open since September 2008
The $18 million in seller promissory notes issued for the 2008 DeRemate acquisition - restructured once in February 2009 and paid down in installments every quarter since - had its final $3.24 million payment (principal plus accrued interest) made on March 4, 2010. As of March 31, 2010, MercadoLibre carries no loans payable at all, the first quarter in this coverage the company has reported zero debt on its balance sheet.
A Brazilian court claim from a major global apparel brand surfaced for the first time in this coverage
Nike International Ltd. sought and won a preliminary injunction against MercadoLibre's Argentine subsidiary in August 2008 over allegedly counterfeit Nike-branded listings, which an appeals court partially lifted in March 2009 subject to the company collecting more seller identification; Nike then filed a full lawsuit in the same Argentine venue in May 2009, and MercadoLibre presented its defense on April 21, 2010. This is the first litigation in this coverage brought by a recognizable global consumer brand rather than a Brazilian consumer or a state prosecutor, though the company assesses the risk of loss as remote.
Brazilian litigation volume ticked back up after two quarters of easing
Pending cases in Brazilian ordinary courts rose to 315 as of March 31, 2010 from 296 at the end of FY2009 (33 new cases filed in the quarter), and pending consumer-court cases rose to more than 1,830 from FY2009's disclosed count of more than 1,691 (449 new summonses received in the quarter) - reversing the easing trend the FY2009 post flagged. The reserve for probable-loss actions actually fell slightly to $1.02 million across 283 cases, from $1.1 million across 299 cases, suggesting the incremental volume is mostly lower-severity consumer-court claims rather than cases the company expects to lose.
The São Paulo platform-liability case is still pending; a second-state claim flagged last quarter isn't mentioned this time
The São Paulo state-prosecutor claim over seller-fraud liability - suspended pending appeal as of November 2009, per the FY2009 post - remains pending in this filing with no change in status disclosed. The similar claim in Minas Gerais state that surfaced in the FY2009 10-K isn't referenced anywhere in this quarter's legal-proceedings disclosure, which names only the São Paulo matter and the new Nike case as material.
The Buenos Aires headquarters building is nearly funded, and a new related-party-adjacent equipment lease appeared this quarter
The Argentine subsidiary's investment in the real estate trust financing MercadoLibre's planned Buenos Aires headquarters reached $8.42 million as of March 31, 2010 (up from $7.2 million at FY2009), with another $0.8 million expected within two months and relocation still targeted for the fourth quarter of 2010. Separately, on February 22, 2010, the Argentine subsidiary signed a new $0.4 million car-lease contract to buy 12 vehicles for certain employees, maturing January 2013, with the full cost of the lease deducted from those employees' long-term retention plan payouts rather than expensed directly by the company - an unusual structure that effectively shifts a company car benefit's cost onto the employees' own deferred compensation.
Coverage Table
| Theme | Q1 2010 | Q1 2009 | YoY | Why it matters |
|---|---|---|---|---|
| Net revenue (reported / local-currency) | $45.9M / local +45.0% | $32.3M | ✅ +42.1% reported | Strongest reported growth in this coverage, aided by a weak crisis-era comp |
| Income from operations | $15.50M (33.7% margin) | $6.77M (20.9% margin) | ✅ +129.1%, margin +12.8pp | Largest single-quarter margin expansion in this coverage |
| MercadoPago take rate | 10.5% | 12.0% | ⚠️ -1.5pp | First-ever quarter both take rates fell together, on falling interest rates |
| Blended tax rate | 29.8% | 23.7% | ⚠️ +6.1pp | FY2009's tax benefit is already reversing, as flagged last quarter |
| Debt (loans payable) | $0 | $18.49M | ✅ -100% | DeRemate acquisition notes fully repaid, first debt-free quarter in this coverage |
| EV/FCF | ~38.2x | n/a | - | Down from FY2009's 48x - the first quarter every valuation multiple compressed together |
MercadoLibre, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2010, filed with the U.S. Securities and Exchange Commission and signed May 7, 2010 by CEO Marcos Galperín and CFO Hernán Kazah. Historical MELI share price data covers month-end closes from March 2008 through March 2010; MercadoLibre has never split its common stock since its IPO, so no split adjustment applies to these figures.