MELI The Business That Was Supposed to Fix the Take-Rate Problem Just Got Less Profitable Too

Growth Decelerated Right on Schedule, But the Margin Story Split in Two

Net revenue for the second quarter of 2010 came in at $52.5 million, up 28.4% from $40.9 million a year earlier (38.5% at constant currency) - a real deceleration from Q1 2010's 42.1% reported growth, and the first sign that the weak-comp effect flagged last quarter is running its course as MercadoLibre laps the crisis-era base. Income from operations still grew faster than revenue, up 51.6% to $18.8 million, expanding operating margin by 5.5 points to 35.8% from 30.3% - continuing, if at a smaller scale, the operating-leverage story Q1 2010 called the strongest single-quarter jump in this coverage.

But the consolidated margin expansion masks a split at the segment level that Q1 2010 only hinted at. That quarter flagged MercadoPago's payments take rate falling for the first time in this coverage (10.5% vs. 12.0%), attributing it to lower installment-financing charges tied to falling interest rates - a genuinely external, not competitive, explanation. This quarter the take rate kept falling (10.4% vs. 12.4% a year earlier), and for the first time the margin followed it down: Payments segment direct contribution margin fell to 42.5% from 45.1% a year earlier, the segment's first-ever margin contraction in this coverage after leading every other segment's margin gain as recently as Q3 2009. The Marketplace take rate kept compressing too (4.7% vs. 4.8%), but every Marketplace country's direct-contribution margin still expanded - it's specifically Payments where the take-rate pressure has now reached the bottom line, not just the top one.

The Prescription

MercadoLibre should keep accelerating the shift toward fee-based, rate-insensitive revenue inside MercadoPago - the direct-payments product launched broadly in Brazil at the end of Q1 2010 is exactly the right answer to this quarter's evidence that the Payments segment's margin, not just its take rate, is now exposed to a macro interest-rate cycle the company doesn't control. Waiting for rates to turn back up is not a strategy; building a revenue base that doesn't need them to is.

What it should stop doing: going thirteen straight quarterly and annual filings without disclosing Adjusted EBITDA. A company running a fintech arm large enough to move consolidated margins the way Payments did this quarter, with a public non-GAAP net-income concept it already discloses in some contexts, owes investors a standard operating-profitability bridge rather than forcing every reader of this coverage to reconstruct margin quality from GAAP operating income alone, quarter after quarter.

Key Financial Metrics

Three months ended June 30, 2010 vs. three months ended June 30, 2009 - consolidated, reported in USD (MercadoLibre reports natively in dollars; no FX conversion is needed)

Metric	Q2 2010	Q2 2009	YoY
Net revenues	$52.51M	$40.90M	✅ +28.4% (+38.5% at constant currency)
Cost of net revenues	$(11.41)M	$(8.60)M	⚠️ +32.8%
Gross profit (78.3% margin)	$41.10M	$32.31M (79.0% margin)	✅ +27.2%, margin -0.7pp
Income from operations» (35.8% margin)	$18.81M	$12.41M (30.3% margin)	✅ +51.6%, margin +5.5pp
Adjusted EBITDA	not disclosed	not disclosed	⚠️ thirteenth straight filing undisclosed
Blended tax rate	28.6%	19.8%	⚠️ +8.8pp (second straight quarter of a widening tax burden, see below)
Net income»	$11.67M	$6.68M	✅ +74.8%
Diluted EPS	$0.26	$0.15	✅ +73.3%
Operating cash flow	~$14.64M	~$8.52M	✅ +71.8%
Free cash flow» (OCF less capex)	~$12.13M	~$8.05M	✅ +50.6%
Cash, ST & LT investments (period end)	$108.96M	$70.42M	✅ +54.7%
Loans payable (period end)	$0.22M	$15.47M	✅ -98.6% YoY, but up from $0 last quarter, see below

Operating cash flow and free cash flow are both derived: MercadoLibre discloses cash flows only on a six-month cumulative basis, so this quarter's figures are the six-month total of $26.09 million operating cash flow (less $3.91 million of property-and-equipment capex) minus the already-reported Q1 2010 figures of $11.45 million and $1.40 million respectively.

The tax line kept working against net-income growth for a second consecutive quarter: the blended tax rate rose 8.8 points to 28.6% (from 19.8%), and the effective tax rate rose 8.4 points to 28.4% (from 20.0%), on higher taxable income in Brazil (34% statutory rate) and Argentina, plus the Mexican subsidiary exhausting its loss carryforwards and starting to accrue tax for the first time this year. This confirms what Q1 2010 flagged as the reversal of FY2009's one-time, non-cash valuation-allowance tax benefit - two quarters in, the reversal shows no sign of being a one-off itself.

Revenue growth decelerated in line with a fading weak-comp effect, operating margin kept expanding on cost discipline, but the tax line has now worked against net income for two straight quarters, and the segment that was supposed to offset a falling take rate posted its first-ever margin decline instead.

Key Operational Metrics

Three months ended June 30, 2010 vs. three months ended June 30, 2009

Metric	Q2 2010	Q2 2009	YoY
Gross merchandise volume» (GMV)	$798.1M	$651.9M	✅ +22.4%
Total payment volume» (TPV)	$147.8M	$79.6M	✅ +85.7%
Confirmed registered users (cumulative, period end)	47.4M	37.8M	✅ +25.4%
New confirmed registered users (in period)	2.5M	2.1M	✅ +19.0%
Successful items sold	9.2M	6.9M	✅ +33.3%
Marketplace take rate (marketplace revenue / GMV)	4.7%	4.8%	⚠️ -0.1pp
MercadoPago take rate (payments revenue / TPV)	10.4%	12.4%	⚠️ -2.0pp

TPV growth (+85.7%) still comfortably outpaces GMV growth (+22.4%), so MercadoPago keeps taking share of every dollar transacted on the platform. But unlike Q1 2010, where that share gain was the clear offsetting story to a falling take rate, this quarter's evidence (see below) shows the take-rate pressure has started reaching Payments' own segment profitability, not just its revenue-per-dollar-processed ratio.

Two Segments, Every Country Grew Except One - Again on Currency Alone

MercadoLibre reports the same two headline segments as prior quarters - Marketplaces (Brazil, Argentina, Mexico, Venezuela, Other Countries) and Payments (MercadoPago) - with net revenue and direct contribution disclosed at the country level within Marketplaces.

Segment	Q2 2010 Revenue	YoY Revenue	Direct contribution» margin, Q2 2010	Direct contribution margin, Q2 2009	Margin change
Brazil	$18.49M	✅ +46.7%	45.9%	39.5%	✅ +6.4pp
Argentina	$7.09M	✅ +27.7%	61.6%	59.2%	✅ +2.4pp
Mexico	$4.22M	✅ +27.7%	46.1%	43.5%	✅ +2.6pp
Venezuela	$4.30M	🔴 -41.2%	54.4%	52.8%	✅ +1.6pp
Other Countries	$3.09M	✅ +37.4%	45.9%	41.0%	✅ +4.9pp
Total Marketplaces	$37.19M	✅ +19.9%	49.9%	46.7%	✅ +3.2pp
Payments (MercadoPago)	$15.32M	✅ +54.9%	42.5%	45.1%	🔴 -2.6pp

Venezuela is again the only segment down in reported dollars, and again it's a re-measurement effect rather than a business problem: local-currency Marketplace revenue in Venezuela actually grew 69.0% year-over-year, but Q2 2009 was translated at the official rate (2.15 Bolivares Fuertes per dollar) while this quarter re-measures at 6.35 - a re-basing already flagged in the Q1 2010 post and now essentially stable given Venezuela's dollar-functional-currency status since January 1, 2010. Every Marketplace country expanded its direct-contribution margin, led by Brazil (+6.4pp) and Other Countries (+4.9pp) - but Payments is the one segment, across every quarter this coverage has tracked, to post a margin decline, confirming the take-rate pressure described above isn't just a revenue-mix artifact.

A New Two-Year High

MELI closed June 30, 2010 at $52.55, up 9.0% from the March 31, 2010 close of $48.21 and a new two-year high, reversing the prior quarter's 7.1% pullback. Zoomed out over the two years ending this quarter, the stock still traded as low as $12.32 (November 2008, near the bottom of the financial crisis) - a roughly 327% round trip from trough to this quarter's new peak. 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 $1,210.4 million (base case) to $2,556.3 million (bull case), against an actual enterprise value of $2,210.0 million - MercadoLibre is still overvalued in the base case, but the bull-case-clears-price finding this coverage first flagged last quarter not only holds, it widened, as the stock made a new two-year high this quarter and the base-case gap to that price is now even larger in dollar terms, even as trailing cash flow kept growing.

June 30, 2010's $52.55 close was a new two-year high, up 9.0% from Q1 2010's $48.21, and enterprise value rose to $2,210.0 million as the rally outpaced the modest debt reappearance discussed below.

Market cap → enterprise value	Q2 2010
Share price (period-end)	$52.55
Shares outstanding	44,128,876
Market capitalization	$2,318.9M
Less: cash, ST & LT investments	$108.96M
Enterprise value	$2,210.0M

Peer-multiple sanity check	Q1 2010	Q2 2010	Change
TTM Net Revenue	$186.5M	$198.1M	-
Enterprise value	$2,030.8M	$2,210.0M	⚠️ up
EV/Sales	10.9x	11.2x	⚠️ up - stock rallied faster than trailing revenue caught up
P/E	56.8x	54.7x	✅ down, on faster earnings growth
TTM Free cash flow	$53.2M	$57.6M	-
EV/FCF	38.2x	38.4x	- essentially flat

Unlike Q1 2010, where every multiple compressed together, this quarter's multiples moved in mixed directions. There still isn't a directly comparable public company in this coverage to run against these multiples.

DCF (base/bull, illustrative) - base case starts from trailing revenue of $198.1 million and trailing FCF of $57.6 million (29.1% margin), projecting growth decelerating from 24% toward 10% over five years (a somewhat slower opening assumption than Q1's 22%, given this quarter's own reported growth already slowed to 28.4%) with FCF margin expanding to 32%, a 13% discount rate, and 4% terminal growth. Bull case holds growth at 30%/26%/22%/18%/15%, FCF margin expanding to 37%, an 11% discount rate, and 5% terminal growth:

Scenario	Key assumption	Implied enterprise value
Current (Q2 2010 close)	— actual market price, for reference	$2,210.0M
Base	Growth decelerating 24%→10% over 5yrs; FCF margin to 32%; 13% discount rate, 4% terminal growth	~$1,210.4M (~55% of current EV)
Bull	Growth held 30%→15% over 5yrs; FCF margin to 37%; 11% discount rate, 5% terminal growth	~$2,556.3M (~16% above current EV)

The bull case's clearance widened from Q1 2010's bull case, which cleared the then-current price by less than 9%.

Reverse DCF: holding the 13% discount rate and solving for the perpetual FCF growth rate that would justify today's $2,210.0 million enterprise value on the current $57.6 million FCF base gives roughly 10.1% growth, forever - essentially unchanged from Q1 2010's own reverse-DCF read, despite three months of both price appreciation and FCF growth moving in the same direction underneath it.

The base case still says MercadoLibre is priced for more growth and margin durability than this business has yet demonstrated, particularly with one segment's margin now moving the wrong way. But the bull case clearing the price by a wider margin than last quarter - not a narrower one - is itself the update: the market kept paying up faster than even a generous scenario's cash flow could catch up.

Beyond the Usual

The Payments segment posted its first-ever margin decline in this coverage

MercadoPago's direct-contribution margin fell to 42.5% in Q2 2010 from 45.1% a year earlier - a 2.6-point contraction, and the only segment (Marketplace or Payments) to post a margin decline this quarter, after leading every other segment's margin expansion as recently as Q3 2009. The company attributes the underlying take-rate decline (10.4% vs. 12.4%) to lower installment-financing charges tied to falling interest rates, the same explanation given in Q1 2010 - but this is the first quarter that pressure has visibly reached segment profitability rather than just the take-rate ratio, which is worth watching given how much of MercadoLibre's consolidated margin expansion the Payments segment has historically driven.

The blended tax rate kept climbing for a second straight quarter

Q2 2010's blended tax rate of 28.6% (up 8.8 points from 19.8% a year earlier) and effective tax rate of 28.4% (up 8.4 points) both confirm the reversal Q1 2010 first identified - FY2009's tax benefit was a one-time, non-cash valuation-allowance reversal, not a structural improvement, and two quarters into 2010 the reversal has widened each quarter rather than stabilizing.

MercadoLibre's one debt-free quarter ended - with a capital lease, not new borrowing

After closing Q1 2010 with zero loans payable for the first time in this coverage, following the final DeRemate acquisition note payment on March 4, 2010, the balance sheet shows $217,129 of loans payable and other financial liabilities as of June 30, 2010. This isn't new borrowing: it's the capitalized remainder of the $0.4 million Argentine employee car-lease contract signed February 22, 2010 (previously disclosed only as a future operating-lease commitment), now recognized on the balance sheet as a capital lease obligation. The amount is immaterial against $208.6 million of total assets, but it means the debt-free milestone lasted exactly one quarter before an unrelated lease reclassification technically ended it.

Two long-running Brazilian litigation threads closed via settlement this quarter

The Minas Gerais state-prosecutor claim over seller-fraud liability - unresolved as of the Q1 2010 filing - was settled in May 2010: MercadoLibre agreed to remove certain liability-limiting clauses from its terms of service, not modify user data without proper authorization, and pay a running fine of approximately $1,000 per day of non-compliance starting that month. Separately, a 2003-vintage trademark suit from Qix Skateboards over counterfeit-listing liability - the oldest pending litigation in this coverage's history, predating MercadoLibre's IPO by four years - was also settled on April 28, 2010, with the company agreeing to a takedown procedure for identified infringing listings rather than a payment.

The São Paulo platform-liability case still hasn't moved

The São Paulo state-prosecutor claim over seller-fraud liability, suspended pending appeal since November 2009, remains in that same posture this quarter with no disclosed change - the longest-unresolved single litigation matter in this coverage, now approaching its third year since the original 2009 judgment against the company.

The Nike trademark suit entered its evidence-production phase

The Nike International trademark lawsuit first disclosed in the Q1 2010 post progressed twice this quarter: on May 11, 2010 the Federal Court of Appeals confirmed the scope of the "Modified Injunction" (requiring seller identification rather than a blanket ban on Nike-branded listings) despite Nike's challenge, and on July 1, 2010 - just after quarter-end - the parties were notified that the evidence-production phase of the underlying lawsuit had begun. The company still assesses the risk of loss as remote.

Brazilian litigation volume kept climbing, but the loss reserve kept shrinking

Pending cases in Brazilian ordinary courts rose to 318 as of June 30, 2010 from 315 at the end of Q1 2010 (36 new cases filed in the quarter), while pending consumer-court cases held roughly flat at more than 1,832 (up from more than 1,830). The reserve for probable-loss actions fell again, to $981,595 across 288 cases from $1.02 million across 283 cases at Q1 2010 - continuing the pattern flagged last quarter that the incremental case volume skews toward lower-severity consumer-court claims rather than cases the company expects to lose.

Coverage Table

Theme	Q2 2010	Q2 2009	YoY	Why it matters
Net revenue (reported / local-currency)	$52.5M / local +38.5%	$40.9M	✅ +28.4% reported	Growth decelerated from Q1's 42.1% as the weak crisis-era comp fades
Income from operations	$18.81M (35.8% margin)	$12.41M (30.3% margin)	✅ +51.6%, margin +5.5pp	Margin expansion continued even as revenue growth slowed
Payments direct-contribution margin	42.5%	45.1%	🔴 -2.6pp	First-ever segment margin decline in this coverage
Blended tax rate	28.6%	19.8%	⚠️ +8.8pp	Second straight quarter confirming FY2009's tax benefit was one-off
Debt (loans payable)	$0.22M	$15.47M	✅ -98.6%	Down sharply YoY, but a capital-lease reclassification ended the one debt-free quarter reached in Q1 2010
EV/FCF	~38.4x	n/a	-	Essentially flat with Q1 2010's 38.2x, unlike Q1's across-the-board compression

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