Latin American e-commerce leader MercadoLibre, Inc. (MELI 1.96%) is scheduled to report the results of its recently completed fourth quarter and full year on Feb. 23. MercadoLibre -- which is Spanish for "free market" -- saw its share price increase an impressive 42% in 2016. Investors will have a keen eye on the latest results. Here's a preview of MercadoLibre's earnings report and a few things to watch on Feb. 23.
A little background
In MercadoLibre's third-quarter earnings release, it reported revenue of $230.8 million, a 37% year-over-year increase, and net income of $39 million, a 15% decrease. Those results don't appear all that impressive, but pull back to a wider view and the year-to-date performance showed revenue up by 25%, while net income improved by 27%.
MercadoLibre numbers can be tricky to interpret because it provides e-commerce services in 19 Latin American and Caribbean countries and does business in the currencies of each. Its results are then translated into dollars for the purposes of financial reporting. A stronger dollar will make the company's financial results look worse, while a weaker dollar will improve their appearance.
Image source: MercadoLibre.
Collectively, Brazil and Argentina represented 87% of MercadoLibre's revenue in its third quarter. During the fourth quarter, the dollar strengthened 3% against Brazil's currency, the real, and was up 1% against Argentina's peso. In both cases, this will have a negative effect on the reported results. Put simply, if it takes a greater number of reals or pesos in exchange for a dollar, the company's reported financial results will suffer. However, this negative affect may be less pronounced compared to the year-ago quarter, potentially providing easier comparisons.
How do the results look if you exclude the exchange rate affect?
Reviewing the results in local currencies provides a better understanding of how the company is doing. During MercadoLibre's third quarter, revenue increased by 66% in local currencies compared to 37% reported in dollars, while net income increased 32.6% compared to a decline of 15% in dollars. This is a significant difference.
A few key non-financial metrics provide even greater clarity. In its third quarter, MercadoLibre reported that total confirmed users increased 20%, items sold increased 40%, and payment transactions increased 67%. These metrics indicate that MercadoLibre's growth was quite impressive, and exchange-rate differences tend to mask this robust growth.
Data source: MercadoLibre. Chart by author.
What should investors watch?
Over the previous three quarters, growth in confirmed registered users has exceeded 19% on average, and it has been growing, increasing to 20% in the third quarter. I would like to see an increase of 20% or higher in the quarter being reported on Feb. 23, indicating that user growth is still accelerating.
Year to date, growth in payment transactions has exceeded 70% on average, though that growth also slowed. Look for growth in this area to exceed 65% for the quarter, and full-year growth to exceed 70%. MercadoLibre has been busy marketing its MercadoPago payment service to merchants outside of its ecosystem. As the payment transactions business sees greater adoption off-platform, there is potential for even higher growth rates.
Items sold have increased by 40% or more in each of the last three quarters. I would expect to see growth near 40% for the quarter and the full year.
More than most companies, assessing MercadoLibre's performance requires digging a little deeper into the results to get a true understanding of what happened during the quarter -- and what to expect going forward. This can provide investors with a clearer picture and lead to better investment decisions.
