After a somewhat brutal second quarter, there were a lot of concerns for investors in MercadoLibre (MELI -1.21%). The company has historically had to deal with geopolitical and economic instability. But earlier this year, an accounting regulation change -- which had no effect on the bottom line -- made top-line growth appear to slow, marking a confusing transition for those who follow the stock.
The hits kept coming in recent quarters with a postal rate hike and a truckers' strike, both in the company's largest market, Brazil.
MercadoLibre was able to put some investor concerns to rest when it reported third-quarter results that weren't as bad as many had feared.
Image source: MercadoLibre.
Is it as bad as it looks?
|
Metric |
Q3 2018 |
Q3 2017 |
Change (YOY) |
|---|---|---|---|
|
Net revenue |
$355.3 million |
$304.9 million |
17% |
|
Operating income (loss) |
($11.0 million) |
$27.5 million |
(140%) |
|
Net income |
($10.1 million) |
$27.7 million |
(136%) |
|
Earnings per share |
($0.23) |
$0.63 |
(136%) |
Data source: MercadoLibre third-quarter 2018 financial release. YOY = year over year.
Gross billings hit $462.8 million, an increase of 25% year over year, and up 48% on a currency neutral basis. Net revenue, including the recent accounting changes (more on that below), grew to $355 million, up 17% year over year, or 58% on a currency neutral basis, beating analysts' consensus estimates of $348.6 million. A net loss of $10.1 million resulted in a loss per share of $0.23, versus a gain of $0.63 in the prior-year quarter, and worse than the $0.10 per share loss anticipated by analysts.
This is the eighth consecutive quarter that foreign-exchange-neutral gross billings increased by more than 45% year over year, and growth was broad based across each of the company's major markets.
Resetting the growth rate
A change to U.S. accounting standards (ASC 606 for you accounting buffs) was implemented earlier this year by MercadoLibre, which required the company to subtract shipping incentives from both its revenue and cost of goods sold. While it didn't have any impact on the financial results, it does make the top-line growth rate appear much lower than it would otherwise, as this chart shows:
|
Period |
Q2 17 |
Q3 17 |
Q4 17 |
Q1 18 |
Q2 18 |
Q3 18 |
|---|---|---|---|---|---|---|
|
Previous standard |
$316.5 million |
$370.7 million |
$437 million |
$433.5 million |
$432.0 million |
$462.8 million |
|
Reduction |
($32.6 million) |
($65.7 million) |
($78.9 million) |
($112.5 million) |
($96.6 million) |
($107.6 million) |
|
New standard |
$283.9 million |
$304.9 million |
$358.1 million |
$321.0 million |
$335.4 million |
$355.3 million |
Data source: MercadoLibre 2018 financial releases.
The above chart illustrates the growing rate of free and subsidized shipping, much of which is covered by MercadoLibre's merchants. In the current quarter, it accounted for a full 23% of top-line growth, but is now excluded from revenue -- making it appear that revenue growth is slowing, when it really isn't.
Operational growth is still strong
|
Metric |
Q3 2018 |
Q3 2017 |
Change (YOY) |
|---|---|---|---|
|
Confirmed registered users |
249 million |
201 million |
24% |
|
Items sold |
84 million |
74 million |
13% |
|
Payment transactions |
104 million |
62 million |
67% |
Data source: MercadoLibre Third-Quarter 2018 Financial Release.
The above metrics strip out the impact of changing exchange rates and show that growth is still proceeding nicely. The one factor that requires explanation in the chart is items sold, which took a hit this quarter. In Brazil, MercadoLibre's biggest market, the company instituted a flat shipping fee of 5 Brazilian reals (about $1.35) on all items that sell for less than 120 reals (about $32.50). The company will also no longer sell items on its platform that retail for less than 6 reals.
MercadoLibre believes that this decision will help its business in a number of ways, but will be a short-term drag on the number of items sold. It will, however, serve to grow the average purchase ticket total and improve the economics on its free shipping program.
Payment growth continued to accelerate, as MecadoPago (MercadoLibre's payment solution) processed more total payment transactions off-platform than on-platform. The number of payment transactions topped 100 million for the first time in a single quarter, as a growing number of brick-and-mortar and digital sellers adopted MercadoPago as their payment option of choice.
MercadoLibre also received regulatory approval in Brazil to act as a financial services firm, and will now be able to make loans to merchants directly, rather than acting as a go-between with local banks. The company will also be able to offer financial services to individuals, and offers a full suite of financial products and services in Argentina.
Growing pains
Despite some recent challenges, MercadoLibre is still the leading e-commerce platform in Latin America, and continues to expand its offerings to merchants and customers alike, including payments, shipping, and financial services. With solid top-line growth, expansion of its shipping and logistics operations, and a soaring payments business, the company is still making all the right moves. MercadoLibre has always made the tough decisions that exchange short-term pain for long-term gains. Its recent difficulties will soon be a faded memory.
