UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2019March 31, 2020
-OR-
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-33647
MercadoLibre, Inc.
(Exact name of Registrant as specified in its Charter)
Delaware |
| 98-0212790 |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification Number) |
Arias 3751, 7th Floor
Buenos Aires, Argentina, C1430CRG
(Address of registrant’s principal executive offices)
(+5411) 4640-8000
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: | ||||
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, $0.001 par value per share | MELI | Nasdaq Global Select Market | ||
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files. Yes x No ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large Accelerated Filer | x | Accelerated Filer | ¨ | |||
Non-Accelerated Filer | ¨ | Smaller Reporting Company | ¨ | |||
Emerging Growth Company | ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
49,709,955 shares of the issuer’s common stock, $0.001 par value, outstanding as of October 28, 2019.May 4, 2020.
MERCADOLIBRE, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION | |
Item 1 — Unaudited Interim Condensed Consolidated Financial Statements | |
1 | |
2 | |
3 | |
4 | |
| |
Notes to Interim Condensed Consolidated Financial Statements (unaudited) |
|
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations |
|
Item 3 — Qualitative and Quantitative Disclosures About Market Risk | 53 |
| |
57 | |
57 | |
57 | |
| |
|
MercadoLibre, Inc.
Interim Condensed Consolidated Balance Sheets
As of September 30, 2019March 31, 2020 and December 31, 20182019
(In thousands of U.S. dollars, except par value)
(Unaudited)
September 30, | December 31, | March 31, | December 31, | |||
2019 | 2018 | 2020 | 2019 | |||
Assets | ||||||
Current assets: | ||||||
Cash and cash equivalents | $ 1,419,934 | $ 440,332 | $ 1,071,217 | $ 1,384,740 | ||
Restricted cash and cash equivalents | 37,031 | 24,363 | 194,166 | 66,684 | ||
Short-term investments (371,572 and 284,317 held in guarantee) | 1,726,189 | 461,541 | ||||
Short-term investments (353,162 and 522,798 held in guarantee) | 1,558,325 | 1,597,241 | ||||
Accounts receivable, net | 35,791 | 35,153 | 34,060 | 35,446 | ||
Credit cards receivable, net | 288,588 | 360,298 | 366,803 | 379,969 | ||
Loans receivable, net | 176,074 | 95,778 | 141,419 | 182,105 | ||
Prepaid expenses | 17,898 | 27,477 | 35,294 | 45,309 | ||
Inventory | 10,132 | 4,612 | 12,114 | 8,626 | ||
Other assets | 68,993 | 61,569 | 96,876 | 88,736 | ||
Total current assets | 3,780,630 | 1,511,123 | 3,510,274 | 3,788,856 | ||
Non-current assets: | ||||||
Long-term investments | 3,595 | 276,136 | 269,955 | 263,983 | ||
Loans receivable, net | 6,879 | 6,439 | ||||
Property and equipment, net | 220,854 | 165,614 | 239,249 | 244,257 | ||
Operating lease right-of-use assets | 175,022 | — | 183,534 | 200,449 | ||
Goodwill | 86,114 | 88,883 | 82,283 | 87,609 | ||
Intangible assets, net | 15,114 | 18,581 | 17,133 | 14,275 | ||
Deferred tax assets | 108,551 | 141,438 | 102,296 | 117,582 | ||
Other assets | 49,461 | 37,744 | 46,477 | 58,241 | ||
Total non-current assets | 658,711 | 728,396 | 947,806 | 992,835 | ||
Total assets | $ 4,439,341 | $ 2,239,519 | $ 4,458,080 | $ 4,781,691 | ||
Liabilities | ||||||
Current liabilities: | ||||||
Accounts payable and accrued expenses | $ 342,433 | $ 266,759 | $ 295,500 | $ 372,309 | ||
Funds payable to customers | 708,716 | 640,954 | 718,454 | 894,057 | ||
Salaries and social security payable | 92,452 | 60,406 | 100,059 | 101,841 | ||
Taxes payable | 39,230 | 31,058 | 46,394 | 60,247 | ||
Loans payable and other financial liabilities | 108,908 | 132,949 | 316,508 | 186,138 | ||
Operating lease liabilities | 17,441 | — | 23,025 | 23,259 | ||
Other liabilities | 75,630 | 34,098 | 76,560 | 114,469 | ||
Total current liabilities | 1,384,810 | 1,166,224 | 1,576,500 | 1,752,320 | ||
Non-current liabilities: | ||||||
Salaries and social security payable | 27,393 | 23,161 | 16,165 | 26,803 | ||
Loans payable and other financial liabilities | 623,114 | 602,228 | 616,295 | 631,353 | ||
Operating lease liabilities | 159,001 | — | 169,147 | 176,673 | ||
Deferred tax liabilities | 96,925 | 91,698 | 98,048 | 99,952 | ||
Other liabilities | 11,081 | 19,508 | 16,515 | 12,627 | ||
Total non-current liabilities | 917,514 | 736,595 | 916,170 | 947,408 | ||
Total liabilities | $ 2,302,324 | $ 1,902,819 | $ 2,492,670 | $ 2,699,728 | ||
Commitments and Contingencies (Note 7) |
|
| ||||
Commitments and Contingencies (Note 9) |
|
| ||||
Redeemable convertible preferred stock, $0.001 par value, 40,000,000 shares | ||||||
authorized, 100,000 shares issued and outstanding at September 30, 2019 (Note 10) | $ 98,843 | $ — | ||||
Redeemable convertible preferred stock, $0.001 par value, 40,000,000 shares authorized, | ||||||
100,000 shares issued and outstanding at March 31, 2020 and December 31, 2019 | $ 98,843 | $ 98,843 | ||||
Equity | ||||||
Common stock, $0.001 par value, 110,000,000 shares authorized, | ||||||
49,709,955 and 45,202,859 shares issued and outstanding at September 30, | ||||||
2019 and December 31, 2018 | $ 50 | $ 45 | ||||
49,709,955 shares issued and outstanding at March 31, | ||||||
2020 and December 31, 2019 | $ 50 | $ 50 | ||||
Additional paid-in capital | 2,075,693 | 224,800 | 2,068,048 | 2,067,869 | ||
Treasury stock | (720) | — | (720) | (720) | ||
Retained earnings | 377,590 | 503,432 | 295,913 | 322,592 | ||
Accumulated other comprehensive loss | (414,439) | (391,577) | (496,724) | (406,671) | ||
Total Equity | 2,038,174 | 336,700 | 1,866,567 | 1,983,120 | ||
Total Liabilities, Redeemable convertible preferred stock and Equity | $ 4,439,341 | $ 2,239,519 | $ 4,458,080 | $ 4,781,691 | ||
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
MercadoLibre, Inc.
Interim Condensed Consolidated Statements of Income
For the nine and three-month periods ended September 30,March 31, 2020 and 2019 and 2018
(In thousands of U.S. dollars, except for share data)
(Unaudited)
Nine Months Ended September 30, | Three Months Ended September 30, | Three Months Ended March 31, | ||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | |||||||
Net revenues | $ 1,622,043 | $ 1,011,634 | $ 603,031 | $ 355,281 | $ 652,091 | $ 473,770 | ||||||
Cost of net revenues | (828,267) | (519,410) | (318,689) | (185,563) | (339,277) | (236,766) | ||||||
Gross profit | 793,776 | 492,224 | 284,342 | 169,718 | 312,814 | 237,004 | ||||||
Operating expenses: | ||||||||||||
Product and technology development | (165,787) | (107,311) | (59,495) | (35,478) | (73,435) | (52,369) | ||||||
Sales and marketing | (564,271) | (342,382) | (252,903) | (110,443) | (206,507) | (130,676) | ||||||
General and administrative | (147,992) | (111,195) | (53,869) | (34,800) | (62,566) | (43,820) | ||||||
Total operating expenses | (878,050) | (560,888) | (366,267) | (180,721) | (342,508) | (226,865) | ||||||
Loss from operations | (84,274) | (68,664) | (81,925) | (11,003) | ||||||||
(Loss) income from operations | (29,694) | 10,139 | ||||||||||
Other income (expenses): | ||||||||||||
Interest income and other financial gains | 86,590 | 27,746 | 28,462 | 8,636 | 36,784 | 24,444 | ||||||
Interest expense and other financial losses | (44,689) | (39,805) | (14,451) | (15,869) | (23,584) | (15,559) | ||||||
Foreign currency (losses) gains | (1,899) | 22,102 | 987 | 3,924 | ||||||||
Net loss before income tax (loss) gain | (44,272) | (58,621) | (66,927) | (14,312) | ||||||||
Foreign currency losses | (186) | (3,669) | ||||||||||
Net (loss) income before income tax expense | (16,680) | 15,355 | ||||||||||
Income tax (loss) gain | (73,729) | 24,372 | (79,155) | 4,234 | ||||||||
Net loss | $ (118,001) | $ (34,249) | $ (146,082) | $ (10,078) | ||||||||
Income tax expense | (4,429) | (3,491) | ||||||||||
Net (loss) income | $ (21,109) | $ 11,864 | ||||||||||
Nine Months Ended September 30, | Three Months Ended September 30, | Three Months Ended March 31, | ||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | |||||||
Basic EPS | ||||||||||||
Basic net loss | ||||||||||||
Basic net (loss) income | ||||||||||||
Available to shareholders per common share | $ (2.60) | $ (0.77) | $ (2.96) | $ (0.23) | $ (0.44) | $ 0.13 | ||||||
Weighted average of outstanding common shares | 48,350,165 | 44,302,724 | 49,710,723 | 44,588,704 | 49,709,955 | 45,980,255 | ||||||
Diluted EPS | ||||||||||||
Diluted net loss | ||||||||||||
Diluted net (loss) income | ||||||||||||
Available to shareholders per common share | $ (2.60) | $ (0.77) | $ (2.96) | $ (0.23) | $ (0.44) | $ 0.13 | ||||||
Weighted average of outstanding common shares | 48,350,165 | 44,302,724 | 49,710,723 | 44,588,704 | 49,709,955 | 45,980,255 | ||||||
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
MercadoLibre, Inc.
Interim Condensed Consolidated Statements of Comprehensive Income
For the nine and three-month periods ended September 30,March 31, 2020 and 2019 and 2018
(In thousands of U.S. dollars)
(Unaudited)
Nine Months Ended September 30, | Three Months Ended September 30, | ||||||
2019 | 2018 | 2019 | 2018 | ||||
Net loss | $ (118,001) | $ (34,249) | $ (146,082) | $ (10,078) | |||
Other comprehensive loss, net of income tax (loss) gain: | |||||||
Currency translation adjustment | (22,195) | (101,980) | (25,548) | 550 | |||
Unrealized gains on hedging activities | — | 2,406 | — | 1,494 | |||
Unrealized net gains on available for sale investments | 2,062 | 142 | (442) | 77 | |||
Less: Reclassification adjustment for gains from accumulated other comprehensive income | 2,729 | 3,497 | — | 1,779 | |||
Net change in accumulated other comprehensive loss, net of income tax (loss) gain | (22,862) | (102,929) | (25,990) | 342 | |||
Total Comprehensive loss | $ (140,863) | $ (137,178) | $ (172,072) | $ (9,736) | |||
Three Months Ended March 31, | ||||
2020 | 2019 | |||
Net (loss) income | $ (21,109) | $ 11,864 | ||
Other comprehensive loss, net of income tax: | ||||
Currency translation adjustment | (94,597) | (294) | ||
Unrealized gains on hedging activities | 3,981 | — | ||
Unrealized net gains on available for sale investments | 2,268 | 2,012 | ||
Less: Reclassification adjustment for gains from accumulated other comprehensive (loss) income | 1,705 | 2,729 | ||
Net change in accumulated other comprehensive loss, net of income tax | (90,053) | (1,011) | ||
Total Comprehensive (loss) income | $ (111,162) | $ 10,853 | ||
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
MercadoLibre, Inc.
Interim Condensed Consolidated Statements of Equity
For the nine and three-month periods ended September 30,March 31, 2020 and 2019 and 2018
(In thousands of U.S. dollars)
(Unaudited)
Accumulated | ||||||||||||||||||||
Additional | other | |||||||||||||||||||
Common stock | paid-in | Treasury | Retained | comprehensive | Total | |||||||||||||||
Shares | Amount | capital | Stock | Earnings | loss | Equity | ||||||||||||||
Balance as of December 31, 2018 | 45,203 | $ | 45 | $ | 224,800 | $ | — | $ | 503,432 | $ | (391,577) | $ | 336,700 | |||||||
Common Stock issued | 4,116 | 4 | 1,866,496 | — | — | — | 1,866,500 | |||||||||||||
Exercise of convertible notes | — | — | 2 | — | — | — | 2 | |||||||||||||
Unwind Capped Call | — | — | 3 | — | — | — | 3 | |||||||||||||
Net income | — | — | — | — | 11,864 | — | 11,864 | |||||||||||||
Amortization of Preferred Stock discount | — | — | 5,841 | — | (5,841) | — | — | |||||||||||||
Other comprehensive loss | — | — | — | — | — | (1,011) | (1,011) | |||||||||||||
Balance as of March 31, 2019 | 49,319 | $ | 49 | $ | 2,097,142 | $ | — | $ | 509,455 | $ | (392,588) | $ | 2,214,058 | |||||||
Transaction Costs | — | — | 715 | — | — | — | 715 | |||||||||||||
Exercise of convertible notes | — | — | 2 | — | — | — | 2 | |||||||||||||
Capped Call | — | — | (88,362) | — | — | — | (88,362) | |||||||||||||
Redeemable convertible preferred stock dividend distribution ($9.99 per share) | — | — | — | — | (1,000) | — | (1,000) | |||||||||||||
Net income | — | — | — | — | 16,217 | — | 16,217 | |||||||||||||
Other comprehensive income | — | — | — | — | — | 4,139 | 4,139 | |||||||||||||
Balance as of June 30, 2019 | 49,319 | $ | 49 | $ | 2,009,497 | $ | — | $ | 524,672 | $ | (388,449) | $ | 2,145,769 | |||||||
Exercise of convertible notes | 523 | 1 | 65,952 | — | — | — | 65,953 | |||||||||||||
Exercise of capped call option - shares retirement | (132) | — | 30 | — | — | — | 30 | |||||||||||||
Redeemable convertible preferred stock dividend distribution ($9.99 per share) | — | — | — | — | (1,000) | — | (1,000) | |||||||||||||
Stock-based compensation — restricted shares issued | 1 | — | 214 | — | — | — | 214 | |||||||||||||
Common Stock repurchased | (1) | — | — | (720) | — | — | (720) | |||||||||||||
Net loss | — | — | — | — | (146,082) | — | (146,082) | |||||||||||||
Other comprehensive loss | — | — | — | — | — | (25,990) | (25,990) | |||||||||||||
Balance as of September 30, 2019 | 49,710 | $ | 50 | $ | 2,075,693 | $ | (720) | $ | 377,590 | $ | (414,439) | $ | 2,038,174 | |||||||
Accumulated | ||||||||||||||||||||
Additional | other | |||||||||||||||||||
Common stock | paid-in | Treasury | Retained | comprehensive | Total | |||||||||||||||
Shares | Amount | capital | Stock | Earnings | loss | Equity | ||||||||||||||
Balance as of December 31, 2019 | 49,710 | $ | 50 | $ | 2,067,869 | $ | (720) | $ | 322,592 | $ | (406,671) | $ | 1,983,120 | |||||||
Changes in accounting standards | — | — | — | — | (4,570) | — | (4,570) | |||||||||||||
Balance as of December 31, 2019 Restated | 49,710 | $ | 50 | $ | 2,067,869 | $ | (720) | $ | 318,022 | $ | (406,671) | $ | 1,978,550 | |||||||
Stock-based compensation — restricted shares issued | — | — | 179 | — | — | — | 179 | |||||||||||||
Net loss | — | — | — | — | (21,109) | — | (21,109) | |||||||||||||
Redeemable convertible preferred stock dividend distribution ($9.99 per share) | — | — | — | — | (1,000) | — | (1,000) | |||||||||||||
Other comprehensive loss | — | — | — | — | — | (90,053) | (90,053) | |||||||||||||
Balance as of March 31, 2020 | 49,710 | $ | 50 | $ | 2,068,048 | $ | (720) | $ | 295,913 | $ | (496,724) | $ | 1,866,567 | |||||||
Accumulated | |||||||||||||||||
Additional | other | ||||||||||||||||
Common stock | paid-in | Retained | comprehensive | Total | |||||||||||||
Shares | Amount | capital | Earnings | loss | Equity | ||||||||||||
Balance as of December 31, 2017 | 44,157 | $ | 44 | $ | 70,661 | $ | 537,925 | $ | (282,851) | $ | 325,779 | ||||||
Capped Call | — | — | (45,692) | — | — | (45,692) | |||||||||||
Changes in accounting Standards | — | — | — | 2,092 | — | 2,092 | |||||||||||
Net loss | — | — | — | (12,919) | — | (12,919) | |||||||||||
Other comprehensive loss | — | — | — | — | (16,393) | (16,393) | |||||||||||
Balance as of March 31, 2018 | 44,157 | $ | 44 | $ | 24,969 | $ | 527,098 | $ | (299,244) | $ | 252,867 | ||||||
Net loss | — | — | — | (11,252) | — | (11,252) | |||||||||||
Other comprehensive loss | — | — | — | — | (86,878) | (86,878) | |||||||||||
Balance as of June 30, 2018 | 44,157 | $ | 44 | $ | 24,969 | $ | 515,846 | $ | (386,122) | $ | 154,737 | ||||||
Common Stock Issued in exchange of 2019 Notes | 1,045 | 1 | 342,999 | — | — | 343,000 | |||||||||||
Exercise of Convertible Notes | — | — | (156) | — | — | (156) | |||||||||||
Repurchase of 2019 Notes Conversion Option | — | — | (433,289) | — | — | (433,289) | |||||||||||
Convertible notes - 2028 Notes Equity Component | — | — | 257,277 | — | — | 257,277 | |||||||||||
Unwind Capped Call | — | — | 121,703 | — | — | 121,703 | |||||||||||
Capped Call | — | — | (91,784) | — | — | (91,784) | |||||||||||
Net loss | — | — | — | (10,078) | — | (10,078) | |||||||||||
Other comprehensive income | — | — | — | — | 342 | 342 | |||||||||||
Balance as of September 30, 2018 | 45,202 | $ | 45 | $ | 221,719 | $ | 505,768 | $ | (385,780) | $ | 341,752 | ||||||
Accumulated | |||||||||||||||||
Additional | other | ||||||||||||||||
Common stock | paid-in | Retained | comprehensive | Total | |||||||||||||
Shares | Amount | capital | Earnings | loss | Equity | ||||||||||||
Balance as of December 31, 2018 | 45,203 | $ | 45 | 224,800 | $ | 503,432 | $ | (391,577) | $ | 336,700 | |||||||
Common Stock issued | 4,116 | 4 | 1,866,496 | — | — | 1,866,500 | |||||||||||
Exercise of convertible notes | — | — | 2 | — | — | 2 | |||||||||||
Unwind Capped Call | — | — | 3 | — | �� | 3 | |||||||||||
Net income | — | — | — | 11,864 | — | 11,864 | |||||||||||
Amortization of Preferred Stock discount | — | — | 5,841 | (5,841) | — | — | |||||||||||
Other comprehensive loss | — | — | — | — | (1,011) | (1,011) | |||||||||||
Balance as of March 31, 2019 | 49,319 | $ | 49 | $ | 2,097,142 | $ | 509,455 | $ | (392,588) | $ | 2,214,058 | ||||||
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
MercadoLibre, Inc.
Interim Condensed Consolidated Statements of Cash Flow
For the nine-monththree-month periods ended September 30,March 31, 2020 and 2019 and 2018
(In thousands of U.S. dollars)
(Unaudited)
Nine Months Ended September 30, | Three Months Ended March 31, | |||||||
2019 | 2018 | 2020 | 2019 | |||||
Cash flows from operations: | ||||||||
Net loss | $ (118,001) | $ (34,249) | ||||||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
Net (loss) income | $ (21,109) | $ 11,864 | ||||||
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: | ||||||||
Unrealized devaluation loss, net | 45,857 | 9,262 | 18,505 | 1,886 | ||||
Depreciation and amortization | 52,518 | 33,861 | 21,550 | 15,694 | ||||
Accrued interest | (39,550) | (11,258) | (22,352) | (8,699) | ||||
Non cash interest, convertible notes amortization of debt discount and amortization of debt issuance costs and other charges | 69,769 | 18,386 | 20,787 | 3,018 | ||||
Financial results on derivative instruments | (16,767) | — | ||||||
Stock-based compensation expense — restricted shares | 214 | — | 179 | — | ||||
LTRP accrued compensation | 48,313 | 27,706 | 15,664 | 13,441 | ||||
Deferred income taxes | 29,640 | (75,275) | (4,199) | (14,456) | ||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | 1,464 | (14,891) | 19,748 | 337 | ||||
Credit card receivables | 65,968 | 121,896 | (33,303) | 35,893 | ||||
Prepaid expenses | 9,338 | (6,810) | 8,560 | 3,316 | ||||
Inventory | (5,939) | (6,015) | (5,272) | 1,652 | ||||
Other assets | (24,259) | (17,463) | (5,796) | (5,085) | ||||
Payables and accrued expenses | 88,918 | 50,979 | (43,101) | (491) | ||||
Funds payable to customers | 95,079 | 82,909 | (21,344) | 63,730 | ||||
Other liabilities | 18,113 | 6,077 | (32,206) | 12,735 | ||||
Interest received from investments | 35,375 | 10,986 | 14,805 | 3,536 | ||||
Net cash provided by operating activities | 372,817 | 196,101 | ||||||
Net cash (used in) provided by operating activities | (85,651) | 138,371 | ||||||
Cash flows from investing activities: | ||||||||
Purchase of investments | (3,262,637) | (1,814,416) | (1,323,631) | (1,624,226) | ||||
Proceeds from sale and maturity of investments | 2,240,468 | 1,964,480 | 1,249,960 | 439,712 | ||||
Receipts from settlements of derivative instruments | 3,668 | — | ||||||
Payment for acquired businesses, net of cash acquired | — | (2,281) | (7,561) | — | ||||
Purchases of intangible assets | (50) | (217) | (93) | (34) | ||||
Advance for property and equipment | — | (4,426) | ||||||
Changes in principal of loans receivable, net | (150,442) | (55,860) | (27,250) | (42,609) | ||||
Purchases of property and equipment | (100,732) | (65,133) | (45,175) | (32,928) | ||||
Net cash (used in) provided by investing activities | (1,273,393) | 22,147 | ||||||
Net cash used in investing activities | (150,082) | (1,260,085) | ||||||
Cash flows from financing activities: | ||||||||
Funds received from the issuance of convertible notes | — | 880,000 | ||||||
Transaction costs from the issuance of convertible notes | — | (16,264) | ||||||
Purchase of convertible note capped call | (88,362) | (137,476) | ||||||
Unwind of convertible note capped call | — | 121,703 | ||||||
Payments on convertible notes | (25) | (348,123) | ||||||
Proceeds from loans payable and other financial liabilities | 171,603 | 156,075 | 749,617 | 33,977 | ||||
Payments on loans payable and other financing liabilities | (104,062) | (78,705) | (593,497) | (23,816) | ||||
Payment of finance lease obligations | (1,416) | — | (564) | (662) | ||||
Dividends paid | — | (6,624) | ||||||
Common Stock repurchased | (720) | — | ||||||
Dividends paid of preferred stock | (1,844) | — | (1,000) | — | ||||
Proceeds from issuance of convertible redeemable preferred stock, net | 98,688 | — | — | 98,688 | ||||
Proceeds from issuance of common stock, net | 1,867,215 | — | — | 1,866,500 | ||||
Net cash provided by financing activities | 1,941,077 | 570,586 | 154,556 | 1,974,687 | ||||
Effect of exchange rate changes on cash, cash equivalents, restricted cash and cash equivalents | (48,231) | (99,364) | (104,864) | (11,407) | ||||
Net increase in cash, cash equivalents, restricted cash and cash equivalents | 992,270 | 689,470 | ||||||
Net (decrease) increase in cash, cash equivalents, restricted cash and cash equivalents | (186,041) | 841,566 | ||||||
Cash, cash equivalents, restricted cash and cash equivalents, beginning of the period | $ 464,695 | $ 388,260 | $ 1,451,424 | $ 464,695 | ||||
Cash, cash equivalents, restricted cash and cash equivalents, end of the period | $ 1,456,965 | $ 1,077,730 | $ 1,265,383 | $ 1,306,261 | ||||
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
1. Nature of Business
MercadoLibre, Inc. (“MercadoLibre” or the “Company”) was incorporated in the state of Delaware, in the United States of America in October 1999. MercadoLibre is the largest online commerce ecosystem in Latin America, serving as an integrated regional platform and as a provider ofthe necessary online and technology-basedtechnology tools that allow businesses and individuals to trade products and services in the region. The Company enables commerce through its marketplace platform (including online classifieds for motor vehicles, vessels, aircraft, services and real estate), which allows users to buy and sell in most of Latin America.
Through Mercado Pago, the Company’s FinTech solution, MercadoLibre enables individuals and businesses to send and receive online payments; through Mercado Envios, MercadoLibre facilitates the shipping of goods from sellers to buyers; through ourthe advertising products, MercadoLibre facilitates advertising services for large retailers and brands to promote their product and services on the web; through Mercado Shops, MercadoLibre allows users to set-up, manage, and promote their own on-line web-stores under a subscription-based business model; through Mercado Credito, MercadoLibre extends loans to certain merchants and consumers; and through Mercado Fondo, MercadoLibre allows users to invest funds deposited in their Mercado Pago accounts. In addition, MercadoLibre develops and sells software enterprise solutions to e-commerce business clients in Brazil.
As of September 30, 2019,March 31, 2020, MercadoLibre, through its wholly-owned subsidiaries, operated online ecommerce platforms directed towards Argentina, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Peru, Mexico, Panama, Honduras, Nicaragua, El Salvador, Uruguay, Bolivia, Guatemala, Paraguay and Venezuela. Additionally, MercadoLibre operates an online paymentsits FinTech solution in Argentina, Brazil, Mexico, Colombia, Chile, Peru and Uruguay. It also offers a shipping solution directed towards Argentina, Brazil, Mexico, Colombia, Chile and Uruguay.
2. Summary of significant accounting policies
Basis of presentation
The accompanying unaudited interim condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) and include the accounts of the Company, its wholly-owned subsidiaries and consolidated Variable Interest Entities (“VIE”). These interim condensed consolidated financial statements are stated in U.S. dollars, except where otherwise indicated. Intercompany transactions and balances with subsidiaries have been eliminated for consolidation purposes.
Substantially all net revenues, cost of net revenues and operating expenses are generated in the Company’s foreign operations. Long-lived assets, intangible assets and goodwill located in the foreign jurisdictions totaled $320,825$337,930 thousands and $270,073$345,204 thousands as of September 30, 2019March 31, 2020 and December 31, 2018,2019, respectively.
These interim condensed consolidated financial statements reflect the Company’s consolidated financial position as of September 30, 2019March 31, 2020 and December 31, 2018.2019. These financial statements include the Company’s consolidated statements of income, comprehensive income, and equity for the nine and three-month periods ended September 30, 2019 and 2018 and statement of cash flows for the nine-monththree-month periods ended September 30, 2019March 31, 2020 and 2018.2019. These interim condensed consolidated financial statements include all normal recurring adjustments that Management believes are necessary to fairly state the Company’s financial position, operating results and cash flows.
Because all of the disclosures required by U.S. GAAP for annual consolidated financial statements are not included herein, these unaudited interim condensed financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for the year ended December 31, 2018,2019, contained in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”). The condensed consolidated statements of income, comprehensive income, equity and cash flows for the periods presented herein are not necessarily indicative of results expected for any future period. For a more detailed discussion of the Company’s significant accounting policies, see note 2 to the financial statements in the Company’s Form 10-K for the year ended December 31, 2018.2019. During the nine-monththree-month period ended September 30, 2019,March 31, 2020, there were no material updates made to the Company’s significant accounting policies, except for the adoption of ASC 842 and the investments fair value option326 as of January 1, 2019.2020. See Note 2 to these interim condensed consolidated financial statements for more details.
Cash and cash equivalents
Cash, cash equivalents and restricted cash and cash equivalents of $1,456,965 thousands and $464,695 thousands as reported in the consolidated statements of cash flow as of September 30, 2019 and December 31, 2018, respectively, is the sum of $1,419,934 thousands and $37,031 thousands as of September 30, 2019 and the sum of $440,332 thousands and $24,363 thousands as of December 31, 2018 shown in lines Cash and cash equivalents and Restricted cash and cash equivalents of the consolidated balance sheet.
Revenue recognition
Revenue recognition criteria for the services mentioned above are described in note 2 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.2019.
Contract Balances
Timing of revenue recognition may differ from the timing of invoicing to customers. Receivables represent amounts invoiced and revenue recognized prior to invoicing when the Company has satisfied the performance obligation and has the unconditional right to payment. TheReceivables are presented net of allowance for doubtful accounts, loans receivable and chargebacks is estimated based upon our assessment of various factors including historical experience, the age of the accounts receivable balances, current economic conditions and other factors that may affect our customers’ ability to pay. The allowance for doubtful accounts, loans receivable and chargebacks was $57,929$44,356 thousands and $23,411$38,079 thousands as of September 30, 2019March 31, 2020 and December 31, 2018,2019, respectively.
Deferred revenue consists of fees received related to unsatisfied performance obligations at the end of the period in accordance with ASC 606. Due to the generally short-term duration of contracts, the majority of the performance obligations are satisfied in the following reporting period. Deferred revenue as of December 31, 2019 and 2018 and 2017 was $5,918$16,590 thousands and $6,116$5,918 thousands, respectively, of which $4,954$5,562 thousands and $4,913$3,188 thousands were recognized as revenue during the nine-monththree-month periods ended September 30,March 31, 2020 and 2019, and 2018, respectively.
As of September 30, 2019,March 31, 2020, total deferred revenue was $5,847$16,567 thousands, mainly due to fees related to listing and optional feature services billed and loyalty programs that are expected to be recognized as revenue in the coming months.
Leases
Allowances for doubtful accounts on accounts receivable and loans receivable
Since January 1, 2020 the Company maintains allowances for doubtful accounts for Management’s estimate of current expected credit losses (“CECL”) that may result if customers do not make the required payments.
Measurement of current expected credit losses
The company estimates its allowance for credit losses as the lifetime expected credit losses of the accounts receivables mentioned above. The CECL represent the present value of the uncollectible portion of the principal, interest, late fees, and other allowable charges.
Loans Receivable
Loans Receivable in this portfolio include the products that the company offers to: 1) on-line merchant, 2) instore merchant and 3) consumers.
For loans receivable that share similar risk characteristics such as product type, country, unpaid installments, days delinquent, and other relevant factors, the company estimates the lifetime expected credit loss allowance based on a collective assessment.
The lifetime expected credit losses is determined by applying probability of default and loss given default models to monthly projected exposures, then discounting these cash flows to present value using the portfolio’s loans interest rate, estimated as a weighted average of the original effective interest rate of all the loans that conform the portfolio segment.
The probability of default is an estimation of the likelihood that a loan receivable will default over a given time horizon. Probability of default models are estimated using a transition matrix method; these matrices are constructed using roll rates and then transformed, taking into account the expected future delinquency rate (forward looking models). Therefore, the models include macroeconomic outlook or projections and recent performance. With this model, the Company estimates marginal monthly default probabilities for each delinquency bucket, type of product and country. Each marginal monthly probability of default represents a different possible scenario of default.
The exposure at default is equal to the receivables’ expected outstanding principal, interest and other allowable balances. The Company estimates the exposure at default that the portfolio of loans would have in each possible moment of default, meaning for each possible scenario mentioned above.
The loss given default is the percentage of the exposure at default that is not recoverable. The Company estimates this percentage using the transition matrix method mentioned above and the portfolio segment´s interest rate.
The measurement of CECL is based on probability-weighted scenarios (probability of default for each month), in view of past events (roll rates), current conditions and adjustments to reflect the reasonable and supportable forecast of future economic
conditions which were affected, among other factors, by the COVID-19 pandemic. The Company will continue to monitor the impact of the pandemic on expected credit losses estimates.
The Company determines if an arrangementwrites off loans receivable when the customer balance becomes 90 days past due.
Accounts Receivable
To measure the CECL, accounts receivable have been grouped based on shared credit risk characteristics and the number of days past due. The Company has therefore concluded that the expected loss rates for accounts receivable is a lease at inception. Operating leasesreasonable approximation of the historical loss rates for those assets. Accounts receivable are recovered over a period of 0-180 days, therefore, forecasted changes to economic conditions are not expected to have a significant effect on the estimate of the allowance for doubtful accounts.
The Company writes off accounts receivable when the customer balance becomes 180 days past due.
Cash and cash equivalents, restricted cash and cash equivalents, short-term investments and credit cards receivable
The Company’s management assesses balances for credit losses included in operating lease right-of-use (“ROU”) assetscash and operating lease liabilities in the consolidated balance sheets. ROU assets represent the Company’s right to use an underlying asset for the lease term, which is a non-monetary asset,cash equivalents, restricted cash and lease liabilities represent the Company’s obligation to make lease payments arising from the lease, which is a monetary liability. Operating lease ROU assetscash equivalents, short-term investments (measured at amortized cost) and liabilities are recognized at commencement datecredit cards receivable, based on the present value of lease payments over the lease term. As mosta review of the leases do not provide an implicit rate,average period for which the financial asset is held, credit ratings of the financial institutions and probability of default and loss given default models. As of March 31, 2020, the Company uses incremental borrowing rates based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includesdid not account for any lease prepaid payments made. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term.
According to transition guidance, finance leases that existed at December 31, 2018 are included in property and equipment, and loans payable and other financial liabilities in the consolidated balance sheets. credit loss.
Foreign currency translation
All of the Company’s consolidated foreign operations use the local currency as their functional currency, except for Argentina, which has used the U.S. dollar as its functional currency since July 1, 2018, as described below. Accordingly, the foreign subsidiaries with local currency as functional currency translate assets and liabilities from their local currencies into U.S. dollars by using year-end exchange rates while income and expense accounts are translated at the average monthly rates in effect during the year, unless exchange rates fluctuate significantly during the period, in which case the exchange rates at the date of the transaction are used. The resulting translation adjustment is recorded as a component of other comprehensive loss.
Argentine currency status
As of July 1, 2018, the Company transitioned its Argentinian operations to highly inflationary status in accordance with U.S. GAAP, and changed the functional currency for Argentine subsidiaries from Argentine Pesos to U.S. dollars, which is the functional currency of their immediate parent company.
Pursuant to the change in the functional currency, monetary assets and liabilities are remeasured at closing exchange rate, and non-monetary assets, revenues and expenses are remeasured at the rate prevailing on the date of the respective transaction. The effect of the re measurement is recognized as foreign currency (losses) gains.
Argentina is the second largest principal market of the Company’s business, as measured by net revenue (see Note 5 – Segment Reporting). The economic environment in Argentina has been volatile with weak economic conditions, devaluation of local currency, high interest rates, high level of inflation and a large public deficit which led Argentina to request financial assistance from the International Monetary Fund.
Derivative Financial Instruments
The Company’s operations are in various foreign currencies and consequently are exposed to foreign currency risk. The Company designates certainuses derivative instruments to reduce the volatility of earnings and cash flows which were designated as hedges. All outstanding derivatives are recognized in the Company’s consolidated balance sheet at fair value. The effective portion of a designated derivative’s gain or loss in a cash flow hedge is initially reported as hedgesa component of particular risks associated with forecasted purchases (firm commitments). These transactions (mainly currency forward contracts on firm commitments) are classified as fair value hedge.
accumulated other comprehensive (loss) income and is subsequently reclassified into the financial statement line item in which the variability of the hedged item is recorded in the period the hedging transaction affects earnings.
The Company also hedges its economic exposure to foreign currency risk related to foreign currency denominated monetary assets and liabilities with foreign derivative currency contracts.contracts which were not designated as hedges. The gains and losses on the foreign exchange derivative contracts economically offset gains and losses on certain foreign currency denominated monetary assets and liabilities.
Allliabilities recognized in earnings. Accordingly, these outstanding non-designated derivatives are recognized in the Company’s consolidated balance sheet at fair value. Changesvalue, and changes in the fair value of derivatives that are designated and qualify as fair value hedgesfrom these contracts are recorded in other income (expense), net in the consolidated statement of income, together with any changes in the fair value of the firm commitment that are attributable to the hedged risk. Changes in the fair value of derivative instruments not designated as a hedge are recognized in earnings.
In addition, the Company used derivative instruments to reduce the volatility of earnings and cash flows, which were classified as cash flow hedge as of September 30, 2018. The effective portion of a designated derivative’s gain or loss was initially reported as a component of accumulated other comprehensive loss and subsequently reclassified into the financial statement line item in which the variability of the hedged item was recorded in the period the hedging transaction affects earnings.
(loss) income.
Income taxtaxes
The Company is subject to U.S. and foreign income taxes. The Company accounts for income taxes following the liability method of accounting which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Deferred tax assets are also recognized for tax loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets or liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company’s income tax expense consists of taxes currently payable, if any, plus the change during the period in the Company’s deferred tax assets and liabilities.
A valuation allowance is recorded when, based on the available evidence, it is more likely than not that all or a portion of the Company’s deferred tax assets will not be realized. Accordingly, Management periodically assesses the need to establish a valuation allowance for deferred tax assets considering positive and negative objective evidence related to the realization of the deferred tax assets. Management’s judgments related to this assessment consider, among other factors, the nature, frequency and magnitude of current and cumulative losses on an individual subsidiary basis, projections of future taxable income, the duration of statutory carryforward periods, as well as feasible tax planning strategies, which would be employed by the Company to prevent
tax loss carryforwards from expiring unutilized. Based on Management’s assessment of available objective evidence and considering the future effect of the Company’s initiatives to capture long-term business opportunities, as of September 30, 2019, the Company accounted for a valuation allowance in certain subsidiaries in its Mexican and Colombian operations of $91,536$14,186 thousands and $7,243 thousands, respectively.for the three-month period ended March 31, 2020.
On August 17, 2011, the Argentine government issued a software development law and on September 9, 2013, the Argentine government issued a regulatory decree establishing the requirements to become a beneficiary of the software development law, including a requirement to comply with annual incremental ratios related to exports of services and research and development. The law will expireexpired on December 31, 2019.
The Argentine Industry Secretary approved the Company’s application for eligibility under the law for the Company’s Argentine subsidiary, MercadoLibre S.R.L. As a result, the Company’s Argentine subsidiary has beenwas granted a tax holiday retroactive from September 18, 2014. A portion of the benefits obtained is a 60% relief of total income tax related to software development activities and a 70% relief of payroll taxes related to software development activities.
As a result of the Company’s eligibility under the new law, it recorded an income tax benefit of $15,935 thousands and $11,842$3,319 thousands during the nine and three-month periodsperiod ended September 30, 2019, respectively. The aggregateMarch 31, 2019. Aggregate per share benefiteffect of the Argentine tax holiday amounted to $0.33 and $0.24$0.07 for the nine and three-month periodsperiod ended September 30, 2019, respectively.March 31, 2019. Furthermore, the Company recorded a labor cost benefit of $6,473 thousands and $1,836$2,396 thousands during the nine and three-month periodsperiod ended September 30, 2019, respectively.March 31, 2019. Additionally, $1,569 thousands and $958$400 thousands were accrued to pay software development law audit fees during the nine and three-month periods ended September 30, 2019, respectively. As a resultfirst quarter of the Company’s eligibility under the law, it recorded an income tax benefit of $18,474 thousands and $7,912 thousands during the nine and three-month periods ended September 30, 2018, respectively. The aggregate per share benefit of the Argentine tax holiday amounted to $0.42 and $0.18 for the nine and three-month periods ended September 30, 2018, respectively. Furthermore, the Company recorded a labor cost benefit of $5,415 thousands and $1,681 thousands during the nine and three-month periods ended September 30, 2018, respectively. Additionally, $1,438 thousands and $437 thousands were accrued to pay software development law audit fees during the nine and three-month periods ended September 30, 2018, respectively.2019.
On June 10, 2019, the Argentine government enacted Law No. 27,506 (knowledge-based economy promotional regime), which established a regime that provides certain tax benefits for companies that meet specific criteria, such as companies that derive at least 70% of their revenues from certain specified activities. Law No. 27,506 allows companies currently benefiting from the software development law, to apply for tax benefits under Law No. 27,506, which will be effective from January 1, 2020 to December 31, 2029. Eligible companies are entitled to i) a 15% corporate income tax rate (instead of the otherwise applicable 25% corporate income tax rate), ii) a freeze on the taxpayer’s overall federal tax burden, iii) a reduction in employer social security contributions and iv) a tax credit in the amount of 1.6 times the amount payable as social security contributions. The tax credit may be used to offset federal taxes, such as value-added tax and income tax.
Companies currently benefitting fromThe above mentioned regime was suspended on January 20, 2020 through a new resolution issued by Argentina’s Ministry of Productive Development until new rules for the software development lawapplication of the knowledge-based economy promotional regime are required to submit an application letter to provisionally qualify under Law No. 27,506 before December 31, 2019, and a formal application proving compliance with the requirements under the new law before June 30, 2020.
issued. The Company is currently assessingwill analyze whether it will be eligible to benefit from the new law and its related tax benefits such eligibility remaining subject to Argentine government approval.
Redeemable Convertible Preferred Stock
On March 29, 2019 an affiliate of Dragoneer Investment Group purchased, in a private placement, 100,000 shares of perpetual convertible preferred stock designated as Series A Preferred Stock, par value $0.001 per share (once the “Preferred Stock”), of the Company for $100 million in the aggregate.
The Company determined that the shares of Preferred Stock should be classified as mezzanine equity upon their issuance since theynew regulations are contingently redeemable as explained in Note 10. The Company also determined that there is a beneficial conversion feature of $5,841 thousands attributable to the Preferred Stock because the initial conversion price was lower than the fair value of MercadoLibre’s common stock on March 29, 2019 (the commitment date). The beneficial conversion feature was fully amortized at issuance, increasing the Preferred Stock’s carrying amount, since the shares of Preferred Stock are perpetual and the holders of Preferred Stock have the right to convert immediately.
In addition, the Company determined that there were no embedded derivatives requiring bifurcation.issued.
Fair value option applied to certain financial instruments
Under ASC 825, U.S. GAAP provides an option to elect fair value with impact on the statement of income as an alternative measurement for certain financial instruments and other items on the balance sheet.
The Company has elected to measure certain financial assets at fair value with impact on the statement of income from January 1, 2019 for several reasons including to avoid the mismatch generated by the recognition of certain linked instruments / transactions, separately, in consolidated statement of income and consolidated statement of other comprehensive income and to better reflect the financial model applied for selected instruments.
The Company’s election of the fair value option applies to the: i) Brazilian federal government bonds and ii) U.S. treasury notes. As result of the election of the fair value option, the Company recognized gains in interest income and other financial gains of $3,157$12,004 thousands and $3,048 thousands as of September 30, 2019.March 31, 2020 and 2019, respectively.
Accumulated other comprehensive loss
The following table sets forth the Company’s accumulated other comprehensive loss as of September 30, 2019March 31, 2020 and December 31, 2018:2019:
September 30, | December 31, | March 31, | December 31, | ||||||||
2019 | 2018 | 2020 | 2019 | ||||||||
(In thousands) | (In thousands) | ||||||||||
Accumulated other comprehensive loss: | |||||||||||
Foreign currency translation | $ (416,501) | $ (394,306) | $ (502,696) | $ (408,099) | |||||||
Unrealized gains on investments | 2,599 | 3,345 | 2,890 | 2,029 | |||||||
Estimated tax loss on unrealized gains on investments | (537) | (616) | |||||||||
Unrealized gains (losses) on hedging activities | 5,561 | (250) | |||||||||
Estimated tax loss on unrealized gains | (2,479) | (351) | |||||||||
$ (414,439) | $ (391,577) | $ (496,724) | $ (406,671) | ||||||||
The following tables summarize the changes in accumulated balances of other comprehensive loss for the nine-monthsthree-months ended September 30, 2019:March 31, 2020:
Unrealized | Foreign | Estimated tax | Unrealized | Unrealized | Foreign | Estimated tax | |||||||||||||||
(Losses) Gains on | Currency | (expense) | (Losses) Gains on | (Losses) Gains on | Currency | (expense) | |||||||||||||||
Investments | Translation | benefit | Total | hedging activities, net | Investments | Translation | benefit | Total | |||||||||||||
(In thousands) | (In thousands) | ||||||||||||||||||||
Balances as of December 31, 2018 | $ 3,345 | $ (394,306) | $ (616) | $ (391,577) | |||||||||||||||||
Balances as of December 31, 2019 | $ (250) | $ 2,029 | $ (408,099) | $ (351) | $ (406,671) | ||||||||||||||||
Other comprehensive income (loss) before reclassifications | 2,599 | (22,195) | (537) | (20,133) | 5,852 | 2,890 | (94,597) | (2,493) | (88,348) | ||||||||||||
Amount of loss (gain) reclassified from accumulated other comprehensive loss | (3,345) | — | 616 | (2,729) | (41) | (2,029) | — | 365 | (1,705) | ||||||||||||
Net current period other comprehensive income (loss) | (746) | (22,195) | 79 | (22,862) | 5,811 | 861 | (94,597) | (2,128) | (90,053) | ||||||||||||
Ending balance | $ 2,599 | $ (416,501) | $ (537) | $ (414,439) | $ 5,561 | $ 2,890 | $ (502,696) | $ (2,479) | $ (496,724) | ||||||||||||
Amount of (Loss) Gain | |||||||||||
Reclassified from | |||||||||||
Details about Accumulated | Accumulated Other | ||||||||||
Other Comprehensive Loss | Comprehensive | Affected Line Item | |||||||||
Components | Loss | in the Statement of Income | |||||||||
(In thousands) | |||||||||||
Unrealized gains on investments | $ | Interest income and other financial gains | |||||||||
Unrealized losses on hedging activities | 41 | Cost of net revenues | |||||||||
Estimated tax |
| (365) | Income tax | ||||||||
Total reclassifications for the period | $ | Total, net of income taxes | |||||||||
Use of estimates
The preparation of interim condensed consolidated financial statements in conformity with U.S. GAAP requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are used for, but not limited to, accounting for allowances for doubtful accounts and chargeback provisions, allowance for loans receivables, recoverability of goodwill, intangible assets with indefinite useful lives and deferred tax assets, impairment of short-term and long-term investments, impairment of long-lived assets, compensation costs relating to the Company’s long term retention plan, fair value of convertible debt, fair value of investments, fair value of derivative instruments, recognition of income taxes and contingencies and determination of the incremental borrowing rate at commencement date of lease operating agreements. Actual results could differ from those estimates.
Recently Adopted Accounting Standards
In February 2016, the FASB issued a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of right-of-use (ROU) assets and lease liabilities on the balance sheet. Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases under current U.S. GAAP. Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. Under the new standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.
The guidance permits the use of a modified retrospective approach, which requires an entity to recognize and measure leases existing at, or entered into after, the beginning of the earliest comparative period presented. Alternatively, the guidance permits a “Comparatives Under 840 Option” that changes the date of initial application to the beginning of the period of adoption. The Company elected the Comparatives Under 840 Option in which it must apply ASC 840 to all comparative periods, including disclosures, and there were no effects of applying ASC 842 as a cumulative-effect adjustment to retained earnings as of January 1, 2019. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allows the Company to carryforward the historical lease classification. In addition, the Company elected certain practical expedients and accounting policies including the lessee practical expedient to not separate lease components. The Company also made an accounting policy election to keep leases with an initial term of 12 months or less off of the balance sheet. The Company recognizes those lease payments in the consolidated statements of income on a straight-line basis over the lease term.
The standard had a material impact on the Company’s consolidated balance sheets. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases, while the accounting for existing finance leases remains substantially unchanged.
Recently issued accounting pronouncements not yet adopted
On June 16, 2016 the FASB issued the ASU 2016-13 “Financial Instruments-Credit Losses (Topic 326): Measurement of credit losses on financial instruments”. This update amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, this update eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP, however this topic will require that credit losses be presented as an allowance rather than as a write-down. The newCompany adopted this standard is effective for fiscal years beginning after December 15, 2019. The Company is assessing the effects that the adoptionJanuary 1, 2020 using a modified retrospective approach transition method, resulting in a decrease of this accounting pronouncement may have on its financial statements.
On August 28, 2018 the FASB issued the ASU 2018-13 “Fair value measurement (Topic 820): Disclosure Framework—Changes$4,570 thousands (net of income tax) to the disclosure requirements for fair value measurement”. This update modified the disclosure requirements on fair value measurements based on concepts in the FASB Concepts Statement. The amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The adoptionopening balance of this standard is not expected to have a material impact on the Company’s financial statements. retained earnings.
On August 29, 2018 the FASB issued the ASU 2018-15 “Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40)”. The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The amendments require an entity (customer) in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. The amendments in this update are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The adoption of this standard did not have a material impact on the Company’s financial statements.
Recently issued accounting pronouncements not yet adopted
On December 18, 2019 the FASB issued the ASU 2019-12 “Income taxes (Topic 740)—Simplifying the accounting for income taxes”. The amendments in this update simplify the accounting for income taxes by removing certain exceptions to the general principles and also improve consistent application by clarifying and amending existing guidance, such as franchise taxes and interim recognition of enactment of tax laws or rate changes. The amendments in this update are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company is assessing the effects that the adoption of this accounting pronouncement may have on its financial statements.
3. Net loss(loss) income per share
Basic earnings per share for the Company’s common stock is computed by dividing, net loss(loss) income available to common shareholders attributable to common stock for the period by the weighted average number of common shares outstanding during the period.
On June 30, 2014, the Company issued $330 million of 2.25% Convertible Senior Notes due 2019 and on August 24, 2018 and August 31, 2018 the Company issued an aggregate principal amount of $880 million of 2.00% Convertible Senior Notes due 2028 (see Note 911 to these interim condensed consolidated financial statements). Additionally, on March 29, 2019 the Company issued Preferred Stock (see Note 2 and Note 1012 to these interim condensed consolidated financial statements). The conversion of these notes and the Preferred Stock are included in the calculation for diluted earnings per share utilizing the “if converted” method. Accordingly, conversion of these Notes and the redeemable convertible preferred stock are not assumed for purposes of computing diluted earnings per share if the effect is antidilutive.
The denominator for diluted net loss(loss) income per share for the nine and three-month periods ended September 30,March 31, 2020 and 2019 and 2018 does not include any effect from the 2019 Notes Capped Call Transactions (as defined in Note 9) or the 2028 Notes Capped Call Transactions (as defined in Note 9)11) because it would be antidilutive. In the event of conversion of any or all of the 2028 Notes, the shares that would be delivered to the Company under the Capped Call Transactions (as defined in Note 9)11) are designed to partially neutralize the dilutive effect of the shares that the Company would issue under the Notes. See Note 911 to these interim condensed consolidated financial statements and Note 1715 of the financial statements as of December 31, 20182019 on Form 10-K for more details. For the nine and three-month periods ended September 30,March 31, 2020 and 2019 and 2018, the effects of the conversion of the Notes and the redeemable convertible preferred stock would have been antidilutive and, as a consequence, they were not factored into the calculation of diluted earnings per share.
Net loss(loss) income per share of common stock is as follows for the nine and three-month periods ended September 30, 2019March 31, 2020 and 2018:2019:
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
(In thousands) | ||||||||
Basic | Diluted | Basic | Diluted | |||||
Net (loss) income per common share | $ (0.44) | $ (0.44) | $ 0.13 | $ 0.13 | ||||
Numerator: | ||||||||
Net (loss) income | $ (21,109) | $ (21,109) | $ 11,864 | $ 11,864 | ||||
Amortization of redeemable convertible preferred stock | — | — | (5,841) | (5,841) | ||||
Dividends on preferred stock | (1,000) | (1,000) | — | — | ||||
Net (loss) income corresponding to common stock | $ (22,109) | $ (22,109) | $ 6,023 | $ 6,023 | ||||
Denominator: | ||||||||
Weighted average of common stock outstanding for Basic earnings per share | 49,709,955 | — | 45,980,255 | — | ||||
Adjusted weighted average of common stock outstanding for Diluted earnings per share | — | 49,709,955 | — | 45,980,255 | ||||
4. Cash, cash equivalents, restricted cash and cash equivalent and investments
The composition of cash, cash equivalents, restricted cash and cash equivalents, short-term and long-term investments is as follows:
Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
(In thousands) | (In thousands) | |||||||||||||||
Basic | Diluted | Basic | Diluted | Basic | Diluted | Basic | Diluted | |||||||||
Net loss per common share | $ (2.60) | $ (2.60) | $ (0.77) | $ (0.77) | $ (2.96) | $ (2.96) | $ (0.23) | $ (0.23) | ||||||||
Numerator: | ||||||||||||||||
Net loss | $ (118,001) | $ (118,001) | $ (34,249) | $ (34,249) | $ (146,082) | $ (146,082) | $ (10,078) | $ (10,078) | ||||||||
Amortization of redeemable convertible preferred stock | (5,841) | (5,841) | — | — | — | — | — | — | ||||||||
Dividends on preferred stock | (2,000) | (2,000) | — | — | (1,000) | (1,000) | — | — | ||||||||
Net loss corresponding to common stock | $ (125,842) | $ (125,842) | $ (34,249) | $ (34,249) | $ (147,082) | $ (147,082) | $ (10,078) | $ (10,078) | ||||||||
Denominator: | ||||||||||||||||
Weighted average of common stock outstanding for Basic earnings per share | 48,350,165 | — | 44,302,724 | — | 49,710,723 | — | 44,588,704 | — | ||||||||
Adjusted weighted average of common stock outstanding for Diluted earnings per share | — | 48,350,165 | — | 44,302,724 | — | 49,710,723 | — | 44,588,704 | ||||||||
March 31, | December 31, | |||
2020 | 2019 | |||
(In thousands) | ||||
Cash and cash equivalents | $ 1,071,217 | $ 1,384,740 | ||
Restricted cash and cash equivalents | ||||
Securitization Transactions | $ 47,010 | $ 37,424 | ||
Sovereign Debt Securities (Secured lines of credit guarantee) | 19,538 | 29,260 | ||
Bank account (Argentine Central Bank regulation) | 127,618 | — | ||
Total restricted cash and cash equivalents | $ 194,166 | $ 66,684 | ||
Total cash, cash equivalents, restricted cash and cash equivalents (*) | $ 1,265,383 | $ 1,451,424 | ||
Short-term investments | ||||
Time Deposits | $ 320,747 | $ 189,660 | ||
Sovereign Debt Securities (Central Bank of Brazil mandatory guarantee) | 326,699 | 506,175 | ||
Sovereign Debt Securities (Secured lines of credit guarantee) | 26,463 | 16,623 | ||
Sovereign Debt Securities | 884,366 | 884,720 | ||
Corporate Debt Securities | 50 | 63 | ||
Total short-term investments | $ 1,558,325 | $ 1,597,241 | ||
Long-term investments | ||||
Sovereign Debt Securities | $ 266,159 | $ 260,320 | ||
Corporate Debt Securities | 156 | 173 | ||
Others Investments | 3,640 | 3,490 | ||
Total long-term investments | $ 269,955 | $ 263,983 | ||
(*) Cash, cash equivalents, restricted cash and cash equivalents as reported in the consolidated statements of cash flow.
Regulation issued by Argentine Central Bank
In January 2020, the Central Bank of Argentina enacted regulations related to the payment service providers that applies to Fintech companies that are not financial institutions but nevertheless, provide payment services in at least one of the processes of the payments system. According to these regulations, all payment service providers must apply to obtain a registry issued by the Central Bank of Argentina before March 31, 2020 (the required information for registration is currently under analysis by Central Bank of Argentina). These regulations sets forth certain rules that require payment services providers to, among other things, (i) segregate information related to users’ investments funds; (ii) deposit and maintain users’ funds in specific banks’ accounts, payable on demand; (iii) maintain different bank accounts to segregate the Company’s funds from users’ funds; (iv) introduce clarifications on advertising and documents about the standard terms and conditions of the payment service provider; and (v) implement a periodic reporting regime with the Central Bank of Argentina. As of March 31, 2020, in accordance with the regulation, the Company held $127,618 thousands in a bank account, payable on demand.
Sovereign Debt Securities (Central Bank of Brazil mandatory guarantee)
On November 1, 2018, the Company obtained approval from the Central Bank of Brazil to operate as an authorized payment institution. With this authorization, Mercado Pago in Brazil is subject to the supervision of the Central Bank of Brazil and must fully comply with all obligations established by current regulations. Among other obligations, the regulations require authorized payment institutions to hold any electronic balance in a payment institution account in either a specific account of the Central Bank of Brazil that does not pay interest or Brazilian federal government bonds registered with the “Sistema Especial de Liquidacao e Custodia.” 100% of electronic funds were required to be deposited as of March 31, 2020 and December 31, 2019, respectively. As of March 31, 2020 and December 31, 2019, in accordance with the regulation, the Company held $326,699 thousands and $506,175 thousands deposited in Brazilian federal government bonds, respectively, as a mandatory guarantee.
4. Goodwill and intangible assets5. Loans receivable, net
The compositionCompany manages loans receivable as “consumer”, “online merchant” and “In-store merchant”. As of goodwillMarch 31, 2020 and intangible assets isDecember 31, 2019, Loans receivable, net were as follows:
March 31, | December 31, | ||||
2020 | 2019 | ||||
(In thousands) | |||||
Online merchant | $ | 102,228 | $ | 130,102 | |
Consumer | 58,107 | 60,179 | |||
In-store merchant | 18,326 | 18,707 | |||
Loans receivable | 178,661 | 208,988 | |||
Allowance for uncollectible accounts | (30,363) | (20,444) | |||
Loans receivable, net | $ | 148,298 | $ | 188,544 | |
Current | $ | 141,419 | $ | 182,105 | |
Non-current | 6,879 | 6,439 | |||
Loans receivable, net | $ | 148,298 | $ | 188,544 | |
The credit quality analysis of loans receivables was as follows:
March 31, | December 31, | ||||
2020 | 2019 | ||||
(In thousands) | |||||
1-30 days past due | $ | 24,648 | $ | 20,430 | |
31-60 days past due | 6,190 | 6,916 | |||
61 -90 days past due | 7,180 | 7,580 | |||
Total past due | 38,018 | 34,926 | |||
To become due | 140,643 | 174,062 | |||
Total | $ | 178,661 | $ | 208,988 | |
The following table summarizes the allowance for uncollectible accounts activity during the three-months periods ended March 31, 2020 and 2019:
September 30, | December 31, | |||
2019 | 2018 | |||
(In thousands) | ||||
Goodwill | $ 86,114 | $ 88,883 | ||
Intangible assets with indefinite lives | ||||
- Trademarks | 8,304 | 8,584 | ||
Amortizable intangible assets | ||||
- Licenses and others | 5,243 | 5,406 | ||
- Non-compete agreement | 2,681 | 3,028 | ||
- Customer list | 13,952 | 14,897 | ||
- Trademarks | 4,638 | 4,565 | ||
Total intangible assets | $ 34,818 | $ 36,480 | ||
Accumulated amortization | (19,704) | (17,899) | ||
Total intangible assets, net | $ 15,114 | $ 18,581 | ||
March 31, | |||||
2020 | 2019 (1) | ||||
(In thousands) | |||||
Balance at beginning of year | $ | 20,444 | $ | 6,636 | |
Adoption of ASC 326 (2) | 4,977 | - | |||
Charged/credited to Net (loss) income | 24,419 | 6,605 | |||
Charges/Utilized/Currency translation adjustments/Write-offs | (19,477) | (4,285) | |||
Balance at end of period | $ | 30,363 | $ | 8,956 | |
(1) | The comparative information has not been restated and continues to be reported under the accounting standard in effect during 2019. |
(2) | Cumulative pre-tax adjustments recorded to retained earnings as of January 1, 2020. |
Goodwill
The changes in the carrying amount of goodwill for the nine-month period ended September 30, 2019 and the year ended December 31, 2018 are as follows:
Period Ended September 30, 2019 | |||||||||||||||
Brazil | Argentina | Mexico | Chile | Colombia | Other Countries | Total | |||||||||
(In thousands) | |||||||||||||||
Balance, beginning of the period | $ 30,069 | $ 6,946 | $ 31,340 | $ 16,014 | $ 3,339 | $ 1,175 | $ 88,883 | ||||||||
Purchase price allocations adjustments | — | 45 | — | — | — | — | 45 | ||||||||
Effect of exchange rates changes | (1,794) | — | (93) | (709) | (197) | (21) | (2,814) | ||||||||
Balance, end of the period | $ 28,275 | $ 6,991 | $ 31,247 | $ 15,305 | $ 3,142 | $ 1,154 | $ 86,114 | ||||||||
Year Ended December 31, 2018 | |||||||||||||||
Brazil | Argentina | Mexico | Chile | Colombia | Other Countries | Total | |||||||||
(In thousands) | |||||||||||||||
Balance, beginning of the year | $ 32,492 | $ 5,761 | $ 30,396 | $ 18,805 | $ 3,632 | $ 1,193 | $ 92,279 | ||||||||
Business acquisitions | 3,110 | 3,175 | 543 | 61 | 80 | 53 | 7,022 | ||||||||
Effect of exchange rates changes | (5,533) | (1,990) | 401 | (2,852) | (373) | (71) | (10,418) | ||||||||
Balance, end of the year | $ 30,069 | $ 6,946 | $ 31,340 | $ 16,014 | $ 3,339 | $ 1,175 | $ 88,883 | ||||||||
6. Business combinations, goodwill and intangible assets
Business combinations
Acquisition of a software development company
In March 2020, the Company, through its subsidiary Meli Participaciones S.L., completed the acquisition of 100% of the equity interest of Kiserty S.A. and its subsidiaries, which is a software development company located and organized under the law of Uruguay. The objective of the acquisition was to enhance the capabilities of the Company in terms of software development.
The aggregate purchase price for the acquisition was $10,904 thousands, measured at its fair value amount, which included: (i) the total cash payment of $8,500 thousands at the time of closing; (ii) an escrow of $230 thousands and (iii) a contingent additional cash consideration up to $2,174 thousands.
The Company’s consolidated statement of income includes the results of operations of the acquired business as of March 9, 2020. The net income before intercompany eliminations of the acquired Company included in the Company’s consolidated statement of income since the acquisition amounted to $490 thousands for the period ended March 31, 2020.
In addition, the Company incurred in certain direct costs of the business combination which were expensed as incurred
The purchase price was allocated based on the provisional measurement of the fair value of assets acquired and liabilities assumed considering the information available as of the initial accounting date. The valuation of identifiable intangible assets acquired reflects Management’s estimates based on the use of established valuation methods.
The Company recognized goodwill for this acquisition based on Management’s expectation that the acquired business will improve the Company’s business. Arising goodwill was allocated to each of the segments identified by the Company’s Management, considering the synergies expected from this acquisition and it is expected that the acquisition will contribute to the earnings generation process of such segments. Goodwill arising from this acquisition is not deductible for tax purposes.
The results of operations for periods prior to the acquisitions, individually and in the aggregate, were not material to the Company’s consolidated statements of income and, accordingly, pro forma information has not been presented.
Goodwill and intangible assets
The composition of goodwill and intangible assets is as follows:
March 31, | December 31, | |||
2020 | 2019 | |||
(In thousands) | ||||
Goodwill | $ 82,283 | $ 87,609 | ||
Intangible assets with indefinite lives | ||||
- Trademarks | 7,083 | 8,366 | ||
Amortizable intangible assets | ||||
- Licenses and others | 4,693 | 5,320 | ||
- Non-compete agreement | 3,308 | 2,703 | ||
- Customer list | 13,137 | 13,900 | ||
- Trademarks | 7,200 | 4,723 | ||
Total intangible assets | $ 35,421 | $ 35,012 | ||
Accumulated amortization | (18,288) | (20,737) | ||
Total intangible assets, net | $ 17,133 | $ 14,275 | ||
Goodwill
The changes in the carrying amount of goodwill for the three-month period ended March 31, 2020 and the year ended December 31, 2019 are as follows:
Three Months Ended March 31, 2020 | |||||||||||||||
Brazil | Argentina | Mexico | Chile | Colombia | Other Countries | Total | |||||||||
(In thousands) | |||||||||||||||
Balance, beginning of the period | $ 29,072 | $ 6,991 | $ 32,196 | $ 14,872 | $ 3,312 | $ 1,166 | $ 87,609 | ||||||||
Business Acquisitions | — | 3,622 | 1,209 | 1,244 | 1,430 | 997 | 8,502 | ||||||||
Effect of exchange rates changes | (5,570) | — | (5,804) | (1,785) | (617) | (52) | (13,828) | ||||||||
Balance, end of the period | $ 23,502 | $ 10,613 | $ 27,601 | $ 14,331 | $ 4,125 | $ 2,111 | $ 82,283 | ||||||||
Year Ended December 31, 2019 | |||||||||||||||
Brazil | Argentina | Mexico | Chile | Colombia | Other Countries | Total | |||||||||
(In thousands) | |||||||||||||||
Balance, beginning of the year | $ 30,069 | $ 6,946 | $ 31,340 | $ 16,014 | $ 3,339 | $ 1,175 | $ 88,883 | ||||||||
Purchase price allocations adjustments | — | 45 | — | — | — | — | 45 | ||||||||
Effect of exchange rates changes | (997) | — | 856 | (1,142) | (27) | (9) | (1,319) | ||||||||
Balance, end of the year | $ 29,072 | $ 6,991 | $ 32,196 | $ 14,872 | $ 3,312 | $ 1,166 | $ 87,609 | ||||||||
Intangible assets with definite useful life
Intangible assets with definite useful life are comprised of customer lists, non-compete and non-solicitation agreements, acquired software licenses, and other acquired intangible assets including developed technologies and trademarks. Aggregate amortization expense for intangible assets totaled $896$808 thousands and $1,368$1,230 thousands for the three-month periods ended September 30,March 31, 2020 and 2019, and 2018, respectively, while aggregate amortization expense for intangible assets for the nine-month periods ended September 30, 2019 and 2018 amounted to $3,045 thousands and $4,696 thousands, respectively.
The following table summarizes the remaining amortization of intangible assets (in thousands of U.S. dollars) with definite useful life as of September 30, 2019March 31, 2020:
For year ended 12/31/ | $ | |
|
| |
For year ended 12/31/2021 |
| |
For year ended 12/31/2022 |
| |
For year ended 12/31/2023 | 952 | |
Thereafter |
| |
$ | ||
7. Segment reporting
Reporting segments are based upon the Company’s internal organizational structure, the manner in which the Company’s operations are managed and resources are assigned, the criteria used by Management to evaluate the Company’s performance, the availability of separate financial information and overall materiality considerations.
Segment reporting is based on geography as the main basis of segment breakdown in accordance with the criteria, used for evaluation of the Company’s performance as determined by Management.Management, used to evaluate the Company’s performance. The Company’s segments include Brazil, Argentina, Mexico and other countries (which includes Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Honduras, Nicaragua, El Salvador, Bolivia, Guatemala, Panama, Paraguay, Peru, Uruguay and the United States of America).
Direct contribution consists of net revenues from external customers less direct costs, which include costs of net revenues, product and technology development expenses, sales and marketing expenses and general and administrative expenses over which segment managers have direct discretionary control, such as advertising and marketing programs, customer support expenses, allowances for doubtful accounts, payroll and third-party fees. All corporate related costs have been excluded from the Company’s direct contribution.
Expenses over which segment managers do not currently have discretionary control, such as certain technology and general and administrative costs are monitored by Management through shared cost centers and are not evaluated in the measurement of segment performance.
The Company has re-named and grouped by nature its Revenue streams breakdown, given the increasing importance of its financial business in current and expected future revenue composition, which Management considers shows more meaningful information about the business. As such, the breakdown by revenue stream previously labeled as “Enhanced Marketplace” and “Non-marketplace”, is now presented under the titles of “Commerce” and “Fintech”, respectively. Also, as a result, a group of other services, including classifieds fees, ad sales and other ancillary services, which had historically been included in the “Non-marketplace” line, have, as of January 1, 2020, been included as a part of the “Commerce” revenue stream. Prior-period corresponding figures have been changed accordingly for comparative purposes.
The following tables summarize the financial performance of the Company’s reporting segments:
Three Months Ended September 30, 2019 | Three Months Ended March 31, 2020 | |||||||||||||||||||||
Brazil | Argentina | Mexico | Other Countries | Total | Brazil | Argentina | Mexico | Other Countries | Total | |||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||
Net revenues | Net revenues | $ 389,941 | $ 116,203 | $ 71,364 | $ 25,523 | $ 603,031 | $ 397,447 | $ 132,875 | $ 94,753 | $ 27,016 | $ 652,091 | |||||||||||
Direct costs | Direct costs | (370,704) | (88,542) | (103,517) | (25,845) | (588,608) | (322,628) | (101,025) | (114,762) | (27,604) | (566,019) | |||||||||||
Direct contribution | Direct contribution | 19,237 | 27,661 | (32,153) | (322) | 14,423 | 74,819 | 31,850 | (20,009) | (588) | 86,072 | |||||||||||
Operating expenses and indirect costs of net revenues | Operating expenses and indirect costs of net revenues | (96,348) | (115,766) | |||||||||||||||||||
Loss from operations | Loss from operations | (81,925) | (29,694) | |||||||||||||||||||
Other income (expenses): | Other income (expenses): | |||||||||||||||||||||
Interest income and other financial gains | 28,462 | |||||||||||||||||||||
Interest expense and other financial losses | (14,451) | |||||||||||||||||||||
Foreign currency gains | 987 | |||||||||||||||||||||
Net loss before income tax loss | $ (66,927) | |||||||||||||||||||||
Interest income and other financial gains | 36,784 | |||||||||||||||||||||
Interest expense and other financial losses | (23,584) | |||||||||||||||||||||
Foreign currency losses | (186) | |||||||||||||||||||||
Net loss before income tax expense | $ (16,680) | |||||||||||||||||||||
Three Months Ended September 30, 2018 | Three Months Ended March 31, 2019 | |||||||||||||||||||||
Brazil | Argentina | Mexico | Other Countries | Total | Brazil | Argentina | Mexico | Other Countries | Total | |||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||
Net revenues | Net revenues | $ 220,828 | $ 83,714 | $ 28,962 | $ 21,777 | $ 355,281 | $ 302,384 | $ 93,776 | $ 54,561 | $ 23,049 | $ 473,770 | |||||||||||
Direct costs | Direct costs | (190,172) | (60,409) | (35,229) | (18,822) | (304,632) | (225,343) | (67,492) | (65,585) | (20,447) | (378,867) | |||||||||||
Direct contribution | Direct contribution | 30,656 | 23,305 | (6,267) | 2,955 | 50,649 | 77,041 | 26,284 | (11,024) | 2,602 | 94,903 | |||||||||||
Operating expenses and indirect costs of net revenues | Operating expenses and indirect costs of net revenues | (61,652) | (84,764) | |||||||||||||||||||
Loss from operations | (11,003) | |||||||||||||||||||||
Income from operations | 10,139 | |||||||||||||||||||||
Other income (expenses): | Other income (expenses): | |||||||||||||||||||||
Interest income and other financial gains | 8,636 | |||||||||||||||||||||
Interest expense and other financial losses | (15,869) | |||||||||||||||||||||
Foreign currency gains | 3,924 | |||||||||||||||||||||
Net loss before income tax gain | $ (14,312) | |||||||||||||||||||||
Interest income and other financial gains | 24,444 | |||||||||||||||||||||
Interest expense and other financial losses | (15,559) | |||||||||||||||||||||
Foreign currency losses | (3,669) | |||||||||||||||||||||
Net income before income tax expense | $ 15,355 | |||||||||||||||||||||
Nine Months Ended September 30, 2019 | |||||||||||
Brazil | Argentina | Mexico | Other Countries | Total | |||||||
(In thousands) | |||||||||||
Net revenues | $ 1,033,183 | $ 323,892 | $ 190,308 | $ 74,660 | $ 1,622,043 | ||||||
Direct costs | (871,964) | (239,943) | (254,318) | (70,733) | (1,436,958) | ||||||
Direct contribution | 161,219 | 83,949 | (64,010) | 3,927 | 185,085 | ||||||
Operating expenses and indirect costs of net revenues | (269,359) | ||||||||||
Loss from operations | (84,274) | ||||||||||
Other income (expenses): | |||||||||||
Interest income and other financial gains | 86,590 | ||||||||||
Interest expense and other financial losses | (44,689) | ||||||||||
Foreign currency losses | (1,899) | ||||||||||
Net loss before income tax loss | $ (44,272) | ||||||||||
Nine Months Ended September 30, 2018 | |||||||||||
Brazil | Argentina | Mexico | Other Countries | Total | |||||||
(In thousands) | |||||||||||
Net revenues | $ 600,822 | $ 285,763 | $ 63,567 | $ 61,482 | $ 1,011,634 | ||||||
Direct costs | (544,139) | (185,755) | (101,086) | (57,183) | (888,163) | ||||||
Direct contribution | 56,683 | 100,008 | (37,519) | 4,299 | 123,471 | ||||||
Operating expenses and indirect costs of net revenues | (192,135) | ||||||||||
Loss from operations | (68,664) | ||||||||||
Other income (expenses): | |||||||||||
Interest income and other financial gains | 27,746 | ||||||||||
Interest expense and other financial losses | (39,805) | ||||||||||
Foreign currency gains | 22,102 | ||||||||||
Net loss before income tax gain | $ (58,621) | ||||||||||
The following table summarizes the allocation of property and equipment, net based on geography:
September 30, | December 31, | March 31, | December 31, | |||||
2019 | 2018 | 2020 | 2019 | |||||
(In thousands) | (In thousands) | |||||||
US property and equipment, net | $ 1,249 | $ 2,959 | $ 735 | $ 937 | ||||
Other countries | ||||||||
Argentina | 96,180 | 58,358 | 108,266 | 100,536 | ||||
Brazil | 89,551 | 78,227 | 92,779 | 103,571 | ||||
Mexico | 25,422 | 16,497 | 27,569 | 30,131 | ||||
Other countries | 8,452 | 9,573 | 9,900 | 9,082 | ||||
$ 219,605 | $ 162,655 | $ 238,514 | $ 243,320 | |||||
Total property and equipment, net | $ 220,854 | $ 165,614 | $ 239,249 | $ 244,257 | ||||
The following table summarizes the allocation of the goodwill and intangible assets based on geography:
September 30, | December 31, | March 31, | December 31, | |||||
2019 | 2018 | 2020 | 2019 | |||||
(In thousands) | (In thousands) | |||||||
US intangible assets | $ 8 | $ 46 | ||||||
Other countries goodwill and intangible assets | ||||||||
Argentina | 8,586 | 9,050 | $ 14,484 | $ 8,632 | ||||
Brazil | 29,650 | 32,955 | 24,492 | 30,142 | ||||
Mexico | 35,086 | 35,993 | 31,166 | 36,003 | ||||
Chile | 23,042 | 24,638 | 21,621 | 22,237 | ||||
Other countries | 4,856 | 4,782 | 7,653 | 4,870 | ||||
$ 101,220 | $ 107,418 | |||||||
Total goodwill and intangible assets | $ 101,228 | $ 107,464 | $ 99,416 | $ 101,884 | ||||
Consolidated net revenues by similar products and services for the nine and three-month periods ended September 30,March 31, 2020 and 2019 and 2018 were as follows:
Nine months Ended September 30, | Three months Ended September 30, | Three Months Ended March 31, | |||||||||||
Consolidated Net Revenues | 2019 | 2018 | 2019 | 2018 | 2020 | 2019 | |||||||
(In thousands) | (In thousands) | (In thousands) | |||||||||||
Enhanced Marketplace (*) | $ 849,426 | $ 477,216 | $ 308,093 | $ 180,319 | |||||||||
Non-marketplace (**) (***) | 772,617 | 534,418 | 294,938 | 174,962 | |||||||||
Commerce (*) | $ 380,710 | $ 286,805 | |||||||||||
Fintech | 271,381 | 186,965 | |||||||||||
Total | $ 1,622,043 | $ 1,011,634 | $ 603,031 | $ 355,281 | $ 652,091 | $ 473,770 | |||||||
(*) Includes Final Value Fees and Shipping fees.
(**) Includes, among other things, Ad Sales, Classifieds Fees, Payment Feesmarketplace fees, shipping fees, ad sales, classified fees and other ancillary services.
(***) Includes $665,014 thousands and $432,603 thousands of Payment Fees for the nine-month periods ended September 30, 2019 and 2018, respectively. Includes an amount of $256,823 thousands and $143,925 thousands of Payment Fees for the three-month periods ended September 30, 2019 and 2018, respectively.
6.8. Fair value measurement of assets and liabilities
The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2019March 31, 2020 and December 31, 2018:
2019:
Quoted Prices in | Quoted Prices in | Quoted Prices in | Quoted Prices in | |||||||||||||||||||||||||||||
Balances as of | active markets for | Significant other | Unobservable | Balances as of | active markets for | Significant other | Unobservable | Balances as of | active markets for | Significant other | Unobservable | Balances as of | active markets for | Significant other | Unobservable | |||||||||||||||||
September 30, | identical Assets | observable inputs | inputs | December 31, | identical Assets | observable inputs | inputs | March 31, | identical Assets | observable inputs | inputs | December 31, | identical Assets | observable inputs | inputs | |||||||||||||||||
Description | 2019 | (Level 1) | (Level 2) | (Level 3) | 2018 | (Level 1) | (Level 2) | (Level 3) | 2020 | (Level 1) | (Level 2) | (Level 3) | 2019 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||
Cash and Cash Equivalents: | ||||||||||||||||||||||||||||||||
Money Market Funds | $ 130,713 | $ 130,713 | $ — | $ — | $ 179,252 | $ 179,252 | $ — | $ — | $ 484,026 | $ 484,026 | $ — | $ — | $ 688,760 | $ 688,760 | $ — | $ — | ||||||||||||||||
Sovereign Debt Securities | 3,934 | 3,934 | — | — | 32,874 | 32,874 | — | — | ||||||||||||||||||||||||
Restricted Cash and cash equivalents: | ||||||||||||||||||||||||||||||||
Money Market Funds | 11,666 | 11,666 | — | 24,363 | 24,363 | — | — | 32,811 | 32,811 | — | 32,829 | 32,829 | — | — | ||||||||||||||||||
Sovereign Debt Securities | 25,240 | 25,240 | — | — | — | — | — | — | 19,538 | 19,538 | — | — | 29,260 | 29,260 | — | — | ||||||||||||||||
Investments: | ||||||||||||||||||||||||||||||||
Sovereign Debt Securities (Central Bank of Brazil mandatory guarantee) | 371,572 | 371,572 | — | — | 284,317 | 284,317 | — | — | 326,699 | 326,699 | — | — | 506,175 | 506,175 | — | — | ||||||||||||||||
Sovereign Debt Securities | 1,230,926 | 1,230,926 | — | — | 429,602 | 429,602 | — | — | 1,176,988 | 1,176,988 | — | — | 1,161,663 | 1,161,663 | — | — | ||||||||||||||||
Corporate Debt Securities | 253 | 253 | — | — | 262 | 237 | 25 | — | 206 | 186 | 20 | — | 236 | 178 | 58 | — | ||||||||||||||||
Other Assets: | ||||||||||||||||||||||||||||||||
Derivative Instruments | 4,766 | — | — | 4,766 | — | — | — | — | 18,711 | — | — | 18,711 | 1,249 | — | — | 1,249 | ||||||||||||||||
Total Financial Assets | $ 1,775,136 | $ 1,770,370 | $ — | $ 4,766 | $ 917,796 | $ 917,771 | $ 25 | $ — | $ 2,062,913 | $ 2,044,182 | $ 20 | $ 18,711 | $ 2,453,046 | $ 2,451,739 | $ 58 | $ 1,249 | ||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||||
Contingent considerations | $ 2,178 | $ — | $ — | $ 2,178 | $ 2,097 | $ — | $ — | $ 2,097 | $ 4,396 | $ — | $ — | $ 4,396 | $ 2,201 | $ — | $ — | $ 2,201 | ||||||||||||||||
Long-term retention plan | 60,766 | — | 60,766 | — | 42,625 | — | 42,625 | — | 39,763 | — | 39,763 | — | 60,958 | — | 60,958 | — | ||||||||||||||||
Firm commitments | 435 | — | — | 435 | — | — | — | — | ||||||||||||||||||||||||
Derivative Instruments | — | — | — | — | 251 | — | — | 251 | ||||||||||||||||||||||||
Total Financial Liabilities | $ 63,379 | $ — | $ 60,766 | $ 2,613 | $ 44,722 | $ — | $ 42,625 | $ 2,097 | $ 44,159 | $ — | $ 39,763 | $ 4,396 | $ 63,410 | $ — | $ 60,958 | $ 2,452 | ||||||||||||||||
As of September 30, 2019March 31, 2020 and December 31, 2018,2019, the Company’s financial assets valued at fair value consisted of assets valued using i) Level 1 inputs: unadjusted quoted prices in active markets (Level 1 instrument valuations are obtained from observable inputs that reflect quoted prices (unadjusted) for identical assets in active markets); ii) Level 2 inputs: obtained from readily-available pricing sources for comparable instruments as well as instruments with inactive markets at the measurement date; and iii) Level 3 inputs: valuations based on unobservable inputs reflecting Company assumptions. Fair value of firm commitments and derivative instruments are determined considering the prevailing risk free interest rate and spot exchange rate.
As of September 30, 2019March 31, 2020 and December 31, 20182019, the Company’s liabilities were valued at fair value using Level 2 inputs and level 3 inputs (valuations based on unobservable inputs reflecting Company assumptions). Fair value of contingent considerations are determined based on the probability of achievement of the performance targets arising from each acquisition, as well as the Company’s historical experience with similar arrangements. Fair value of derivative instruments are determined considering the prevailing risk free interest rate and spot exchange rate.
The unrealized net gains or losses on short-term and long-term investments for which the Company has not elected the fair value option are reported as a component of other comprehensive (loss) income. The Company does not anticipate any significant realized losses associated with those investments in excess of the Company’s historical cost.
As of September 30, 2019March 31, 2020 and December 31, 2018,2019, the carrying value of the Company’s financial assets and liabilities measured at amortized cost approximated their fair value mainly because of their short-term maturity. These assets and liabilities included cash, cash equivalents, restricted cash and cash equivalents and short-term investments (excluding money markets funds and debt securities), accounts receivable, credit cards receivable, loans receivable, funds payable to customers, other assets (excluding firm commitments and derivative instruments), accounts payable, salaries and social security payable (excluding variable LTRP), taxes payable, provisions and other liabilities (excluding contingent considerations and derivative instruments). TheAs of March 31, 2020 and December 31, 2019, the estimated fair value of the 2028 Notes (liability component), which is based on Level 2 inputs, is $651,085$527,031 thousands and was$686,366 thousands, respectively, and were determined based on market interest rates. The rest of the loans payable and other financial liabilities and operating lease liabilities approximate their fair value because the effective interest rates are not materially different from market interest rates.
The following table summarizes the fair value level for those financial assets and liabilities of the Company measured at amortized cost as of September 30, 2019March 31, 2020 and December 31, 2018:2019:
Balances as of | Significant other | Balances as of | Significant other | Balances as of | Significant other | Balances as of | Significant other | |||||||||
September 30, | observable inputs | December 31, | observable inputs | March 31, | observable inputs | December 31, | observable inputs | |||||||||
2019 | (Level 2) | 2018 | (Level 2) | 2020 | (Level 2) | 2019 | (Level 2) | |||||||||
(In thousands) | (In thousands) | |||||||||||||||
Assets | ||||||||||||||||
Time Deposits | $ 123,843 | $ 123,843 | $ 20,056 | $ 20,056 | $ 320,747 | $ 320,747 | $ 189,660 | $ 189,660 | ||||||||
Accounts receivable | 35,791 | 35,791 | 35,153 | 35,153 | 34,060 | 34,060 | 35,446 | 35,446 | ||||||||
Credit Cards receivable | 288,588 | 288,588 | 360,298 | 360,298 | 366,803 | 366,803 | 379,969 | 379,969 | ||||||||
Loans receivable, net | 176,074 | 176,074 | 95,778 | 95,778 | 148,298 | 148,298 | 188,544 | 188,544 | ||||||||
Other assets | 116,878 | 116,878 | 102,753 | 102,753 | 128,282 | 128,282 | 149,218 | 149,218 | ||||||||
Total Assets | $ 741,174 | $ 741,174 | $ 614,038 | $ 614,038 | $ 998,190 | $ 998,190 | $ 942,837 | $ 942,837 | ||||||||
Liabilities | ||||||||||||||||
Accounts payable and accrued expenses | $ 342,433 | $ 342,433 | $ 266,759 | $ 266,759 | $ 295,500 | $ 295,500 | $ 372,309 | $ 372,309 | ||||||||
Funds payable to customers | 708,716 | 708,716 | 640,954 | 640,954 | 718,454 | 718,454 | 894,057 | 894,057 | ||||||||
Salaries and social security payable | 59,079 | 59,079 | 40,942 | 40,942 | 76,461 | 76,461 | 67,686 | 67,686 | ||||||||
Taxes payable | 39,230 | 39,230 | 31,058 | 31,058 | 46,394 | 46,394 | 60,247 | 60,247 | ||||||||
Loans payable and other financial liabilities (*) | 732,022 | 817,871 | 735,177 | 735,177 | 932,803 | 881,838 | 817,491 | 927,903 | ||||||||
Other liabilities | 84,098 | 84,098 | 51,509 | 51,509 | 88,679 | 88,679 | 124,644 | 124,644 | ||||||||
Total Liabilities | $ 1,965,578 | $ 2,051,427 | $ 1,766,399 | $ 1,766,399 | $ 2,158,291 | $ 2,107,326 | $ 2,336,434 | $ 2,446,846 | ||||||||
(*) The fair value of the 2028 Notes (including the equity component) is disclosed in Note 9.11.
As of September 30, 2019March 31, 2020 and December 31, 20182019, the Company held 0 direct investments in auction rate securities and does not have any non-financial assets or liabilities measured at fair value.
As of September 30, 2019March 31, 2020 and December 31, 2018,2019, the fair value of money market funds, sovereign and corporate debt securities classified as available for sale securities are as follows:
September 30, 2019 | March 31, 2020 | |||||||||||||||||
Cost | Gross Unrealized Gains (1) | Gross Unrealized Losses (1) | Financial Gains | Estimated Fair Value | Cost | Gross Unrealized Gains (1) | Gross Unrealized Losses (1) | Financial Gains | Estimated Fair Value | |||||||||
(In thousands) | (In thousands) | |||||||||||||||||
Cash and cash equivalents | ||||||||||||||||||
Money Market Funds | $ 130,713 | $ — | $ — | $ — | $ 130,713 | $ 484,026 | $ — | $ — | $ — | $ 484,026 | ||||||||
Sovereign Debt Securities | 3,921 | — | — | 13 | 3,934 | |||||||||||||
Total Cash and cash equivalents | $ 130,713 | $ — | $ — | $ — | $ 130,713 | $ 487,947 | $ — | $ — | $ 13 | $ 487,960 | ||||||||
Restricted cash and cash equivalents | ||||||||||||||||||
Money Market Funds | $ 11,666 | $ — | $ — | $ — | $ 11,666 | $ 32,811 | $ �� — | $ — | $ — | $ 32,811 | ||||||||
Sovereign Debt Securities (*) | 25,223 | — | — | 17 | 25,240 | |||||||||||||
Sovereign Debt Securities (2) | 19,485 | — | — | 53 | 19,538 | |||||||||||||
Total Restricted cash and cash equivalents | $ 36,889 | $ — | $ — | $ 17 | $ 36,906 | $ 52,296 | $ — | $ — | $ 53 | $ 52,349 | ||||||||
Short-term investments | ||||||||||||||||||
Sovereign Debt Securities (Central Bank of Brazil mandatory guarantee) (**) | $ 369,826 | $ — | $ — | $ 1,746 | $ 371,572 | |||||||||||||
Sovereign Debt Securities (***) | 1,226,850 | 2,486 | — | 1,393 | 1,230,729 | |||||||||||||
Sovereign Debt Securities (Central Bank of Brazil mandatory guarantee) (3) | $ 324,813 | $ — | $ — | $ 1,886 | $ 326,699 | |||||||||||||
Sovereign Debt Securities (4) | 902,593 | 2,911 | — | 5,325 | 910,829 | |||||||||||||
Corporate Debt Securities | 45 | — | — | — | 45 | 50 | — | — | — | 50 | ||||||||
Total Short-term investments | $ 1,596,721 | $ 2,486 | $ — | $ 3,139 | $ 1,602,346 | $ 1,227,456 | $ 2,911 | $ — | $ 7,211 | $ 1,237,578 | ||||||||
Long-term investments | ||||||||||||||||||
Sovereign Debt Securities | $ 194 | $ 2 | $ — | $ 1 | $ 197 | |||||||||||||
Sovereign Debt Securities (5) | $ 261,429 | $ 3 | $ — | $ 4,727 | $ 266,159 | |||||||||||||
Corporate Debt Securities | 205 | 3 | — | — | 208 | 155 | 2 | (1) | — | 156 | ||||||||
Total Long-term investments | $ 399 | $ 5 | $ — | $ 1 | $ 405 | $ 261,584 | $ 5 | $ (1) | $ 4,727 | $ 266,315 | ||||||||
Total | $ 1,764,722 | $ 2,491 | $ — | $ 3,157 | $ 1,770,370 | $ 2,029,283 | $ 2,916 | $ (1) | $ 12,004 | $ 2,044,202 | ||||||||
(1) Unrealized gains (losses) from securities are attributable to market price movements, net foreign exchange losses and foreign currency translation. Management does not believe any remaining significant unrealized losses represent other-than-temporary impairmentscredit losses based on the evaluation of available evidence including the credit rating of the investments, as of September 30, 2019.March 31, 2020.
(*)(2) Held by the Company’s Argentine subsidiary in guarantee for secured lines of credit. (See Note 911 – Loans payable and other financial liabilities.)
(**)(3) Brazilian government bonds measured at fair value with impact on the consolidated statement of income for the application of the fair value option. (See Note 2 – Fair value option applied to certain financial instruments.)
(***)(4) Includes $806,641$590,582 thousands of U.S treasury notes measured at fair value with impact on the consolidated statement of income for the application of the fair value option (See Note 2 – Fair value option applied to certain financial instruments.) and $26,463 thousands are held by the Company’s Argentine subsidiary in guarantee for secured lines of credit. (See Note 11 – Loans payable and other financial liabilities.)
(5) Includes $266,083 thousands of U.S. treasury notes measured at fair value with impact on the consolidated statement of income for the application of the fair value option. (See Note 2 – Fair value option applied to certain financial instruments.)
December 31, 2018 | December 31, 2019 | |||||||||||||||||
Cost | Gross Unrealized Gains (1) | Gross Unrealized Losses (1) | Estimated Fair Value | Cost | Gross Unrealized Gains (1) | Gross Unrealized Losses (1) | Financial Gains | Financial Losses | Estimated Fair Value | |||||||||
(In thousands) | (In thousands) | |||||||||||||||||
Cash and cash equivalents | ||||||||||||||||||
Money Market Funds | $ 179,252 | $ — | $ — | $ 179,252 | $ 688,760 | $ — | $ — | $ — | $ — | $ 688,760 | ||||||||
Sovereign Debt Securities | 32,851 | — | — | 23 | — | 32,874 | ||||||||||||
Total Cash and cash equivalents | $ 179,252 | $ — | $ — | $ 179,252 | $ 721,611 | $ — | $ — | $ 23 | $ — | $ 721,634 | ||||||||
Restricted Cash and cash equivalents | ||||||||||||||||||
Money Market Funds | $ 24,363 | $ — | $ — | $ 24,363 | $ 32,829 | $ — | $ — | $ — | $ — | $ 32,829 | ||||||||
Sovereign Debt Securities (2) | 29,227 | — | — | 33 | — | 29,260 | ||||||||||||
Total Restricted Cash and cash equivalents | $ 24,363 | $ — | $ — | $ 24,363 | $ 62,056 | $ — | $ — | $ 33 | $ — | $ 62,089 | ||||||||
Short-term investments | ||||||||||||||||||
Sovereign Debt Securities (Central Bank of Brazil mandatory guarantee) | $ 282,752 | $ 1,565 | $ — | $ 284,317 | ||||||||||||||
Sovereign Debt Securities | 156,910 | 237 | — | 157,147 | ||||||||||||||
Sovereign Debt Securities (Central Bank of Brazil mandatory guarantee)(3) | $ 504,195 | $ — | $ — | $ 1,980 | $ — | $ 506,175 | ||||||||||||
Sovereign Debt Securities (4) | 898,922 | 2,080 | — | 400 | (59) | 901,343 | ||||||||||||
Corporate Debt Securities | 21 | — | — | 21 | 63 | — | — | — | — | 63 | ||||||||
Total Short-term investments | $ 439,683 | $ 1,802 | $ — | $ 441,485 | $ 1,403,180 | $ 2,080 | $ — | $ 2,380 | $ (59) | $ 1,407,581 | ||||||||
Long-term investments | ||||||||||||||||||
Sovereign Debt Securities | $ 271,024 | $ 1,431 | $ — | $ 272,455 | ||||||||||||||
Sovereign Debt Securities (5) | $ 260,400 | $ 2 | $ — | $ 1 | $ (83) | $ 260,320 | ||||||||||||
Corporate Debt Securities | 244 | — | (3) | 241 | 170 | 3 | — | — | — | 173 | ||||||||
Total Long-term investments | $ 271,268 | $ 1,431 | $ (3) | $ 272,696 | $ 260,570 | $ 5 | $ — | $ 1 | $ (83) | $ 260,493 | ||||||||
Total | $ 914,566 | $ �� 3,233 | $ (3) | $ 917,796 | $ 2,447,417 | $ 2,085 | $ — | $ 2,437 | $ (142) | $ 2,451,797 | ||||||||
(1)Unrealized gains (losses) from securities are attributable to market price movements, net foreign exchange losses and foreign currency translation. Management does not believe any remaining significant unrealized losses represent other-than-temporary impairments based on the evaluation of available evidence including the credit rating of the investments, as of December 31, 2018.2019.
(2)Held by the Company’s Argentine subsidiary in guarantee for secured lines of credit. (See Note 11 – Loans payable and other financial liabilities.)
(3)Brazilian government bonds measured at fair value with impact on the consolidated statement of income for the application of the fair value option. (See Note 2 – Investments - Fair value option applied to certain financial instruments.)
(4)Includes $627,842 thousands of U.S treasury notes measured at fair value with impact on the consolidated statement of income for the application of the fair value option (See Note 2 – Investments - Fair value option applied to certain financial instruments.) and $16,623 thousands held by the Company’s Argentine subsidiary in guarantee for secured lines of credit. (See Note 11 – Loans payable and other financial liabilities.)
(5)Includes $260,230 thousands of U.S treasury notes measured at fair value with impact on the consolidated statement of income for the application of the fair value option. (See Note 2 –Investments - Fair value option applied to certain financial instruments.)
The material portion of the Sovereign Debt Securities consists of U.S. Treasury Notes, which carry no significant risk.
Sovereign Debt Securities (Central Bank of Brazil mandatory guarantee)
On November 1, 2018, the Company obtained approval from the Central Bank of Brazil to operate as an authorized payment institution. With this authorization, Mercado Pago in Brazil is subject to the supervision of the Central Bank of Brazil and must fully comply with all obligations established by current regulations. Among other obligations, the regulations require authorized payment institutions to hold any electronic balance in a payment institution account in either a specific account of the Central Bank of Brazil that does not pay interest or Brazilian federal government bonds registered with the “Sistema Especial de Liquidacao e Custodia.” The percentage of electronic funds that were required to be deposited was 100% and 80% as of September 30, 2019 and December 31, 2018, respectively. As of September 30, 2019 and DecemberMarch 31, 2018, in accordance with the regulation, the Company held $371,572 thousands and $284,317 thousands deposited in Brazilian federal government bonds, respectively, as a mandatory guarantee.
As of September 30, 2019,2020, the estimated fair values (in thousands of U.S. dollars) of money market funds, sovereign and corporate debt securities classified by their effective maturities are as follows:
One year or less |
| |
One year to two years |
| |
Two years to three years |
| |
Three years to four years |
| |
Four years to five years |
| |
Total | $ |
7.
9. Commitments and Contingencies
Litigation and Other Legal Matters
The Company is subject to certain contingent liabilities with respect to existing or potential claims, lawsuits and other proceedings. The Company accrues liabilities when it considers probable that future costs will be incurred and such costs can be reasonably estimated. Proceeding-related liabilities are based on developments to date and historical information related to actions filed against the Company. As of September 30, 2019,March 31, 2020, the Company had accounted for estimated liabilities involving proceeding-related contingencies and other estimated contingencies of $6,484$8,246 thousands to cover legal actions against the Company in which its Management has assessed the likelihood of a final adverse outcome as probable. Expected legal costs related to litigations are accrued when the legal service is actually provided.
In addition, as of September 30, 2019,March 31, 2020, the Company and its subsidiaries are subject to certain legal actions considered by the Company’s Management and its legal counsels to be reasonably possible for an estimated aggregate amount up to $13,473$18,425 thousands. NaN loss amounts have been accrued for such reasonably possible legal actions.
Other third parties have from time to time claimed, and others may claim in the future, that the Company was responsible for fraud committed against them, or that the Company has infringed their intellectual property rights. The underlying laws with respect to the potential liability of online intermediaries like the Company are unclear in the jurisdictions where the Company operates. Management believes that additional lawsuits alleging that the Company has violated copyright or trademark laws will be filed against the Company in the future.
Intellectual property and regulatory claims, whether meritorious or not, are time consuming and costly to resolve, require significant amounts of management time, could require expensive changes in the Company’s methods of doing business, or could require the Company to enter into costly royalty or licensing agreements. The Company may be subject to patent disputes, and be subject to patent infringement claims as the Company’s services expand in scope and complexity. In particular, the Company may face additional patent infringement claims involving various aspects of the payments businesses.
From time to time, the Company is involved in other disputes or regulatory inquiries that arise in the ordinary course of business. The number and significance of these disputes and inquiries are increasing as the Company’s business expands and the Company grows larger.
Buyer protection program
The Company provides consumers with a buyer protection program (“BPP”) for all transactions completed through the Company’s online payment solution (“Mercado Pago”). This program is designed to protect buyers in the Marketplace from losses due primarily to fraud or counterparty non-performance. The Company’s BPP provides protection to consumers by reimbursing them for the total value of a purchased item and the value of any shipping service paid if it does not arrive or does not match the seller’s description. The Company is entitled to recover from the third-party carrier companies performing the shipping service certain amounts paid under the BPP. Furthermore, in some specific circumstances (i.e. Black Friday, Hot Sale), the Company enters into insurance contracts with third-party insurance companies in order to cover contingencies that may arise from the BPP.
The maximum potential exposure under this program is estimated to be the volume of payments on the Marketplace, for which claims may be made under the terms and conditions of the Company’s BPP. Based on historical losses to date, the Company does not believe that the maximum potential exposure is representative of the actual potential exposure. The Company records a liability with respect to losses under this program when they are probable and the amount can be reasonably estimated.
As of September 30, 2019March 31, 2020 and December 31, 2018,2019, Management’s estimate of the maximum potential exposure related to the Company’s buyer protection program is $1,058,292$1,130,212 thousands and $988,664$1,365,815 thousands, respectively, for which the Company recorded an allowance of $3,811$3,020 thousands and $4,146$3,808 thousands, respectively.
Commitments
As of September 30, 2019, theThe Company entered into a purchase commitment with:
- a Brazilian supplier in relation to the purchase of mobile point of sale devices for a total amount of $54,720 thousands with partial deliveries between May and October 2019. As of September 30, 2019 the remaining balance of the agreement is for a total amount of $11,927 thousands with delivery in October 2019.
- a U.S. supplier in relation to the purchase of cloud platform services for a total amount of $30,000 thousands to be fully paid off between November 24, 2019 and March 23, 2023.
8. Long term retention plan (“LTRP”)
The following table summarizes As of March 31, 2020, the 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018 and 2019 long term retention plan accrued compensation expense for the nine and three-month periods ended September 30, 2019 and 2018, which are payableCompany paid $214 thousands in cash accordingrelation to the decisions made by the Board of Directors:aforementioned contract.
Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||
(In thousands) | (In thousands) | |||||||||||
LTRP 2010 | — | 24 | — | — | ||||||||
LTRP 2011 | 26 | 806 | — | 318 | ||||||||
LTRP 2012 | 1,827 | 1,325 | 411 | 526 | ||||||||
LTRP 2013 | 97 | 2,268 | — | 846 | ||||||||
LTRP 2014 | 3,726 | 2,768 | 903 | 1,056 | ||||||||
LTRP 2015 | 6,410 | 3,790 | 1,548 | 1,474 | ||||||||
LTRP 2016 | 10,063 | 5,547 | 2,456 | 2,131 | ||||||||
LTRP 2017 | 9,530 | 5,587 | 2,554 | 2,074 | ||||||||
LTRP 2018 | 4,708 | 5,591 | 1,385 | 2,489 | ||||||||
LTRP 2019 | 11,926 | — | 6,848 | — | ||||||||
Total LTRP | $ | 48,313 | $ | 27,706 | $ | 16,105 | $ | 10,914 | ||||
10. Long term retention plan (“LTRP”)
9.The following table summarizes the 2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018, 2019 and 2020 long term retention plan accrued compensation expense for the three-month periods ended March 31, 2020 and 2019, which are payable in cash according to the decisions made by the Board of Directors:
Three Months Ended March 31, | ||||||
2020 | 2019 | |||||
(In thousands) | ||||||
LTRP 2011 | — | 55 | ||||
LTRP 2012 | 69 | 559 | ||||
LTRP 2013 | — | 193 | ||||
LTRP 2014 | 126 | 1,220 | ||||
LTRP 2015 | 1,272 | 1,982 | ||||
LTRP 2016 | 2,435 | 3,038 | ||||
LTRP 2017 | 2,706 | 2,813 | ||||
LTRP 2018 | 1,556 | 1,455 | ||||
LTRP 2019 | 3,663 | 2,126 | ||||
LTRP 2020 | 3,837 | — | ||||
Total LTRP | $ | 15,664 | $ | 13,441 | ||
11. Loans payable and other financial liabilities
The following table summarizes the Company’s Loans payable and other financial liabilities as of September 30,March 31, 2020 and December 31, 2019:
Book value as of | |||||||||||||||||||
Type of instrument | Currency | Interest | Weighted Average Interest | Maturity | Book value as of September 30, 2019 | Currency | Interest | Weighted Average Interest | Maturity | March 31, 2020 | December 31, 2019 | ||||||||
(In thousands) | (In thousands) | ||||||||||||||||||
Current loans payable and other financial liabilities: | |||||||||||||||||||
Loans from banks | |||||||||||||||||||
Chilean Subsidiary | Chilean Pesos | Fixed | 2.73 | % | October 2019 | $ | 35,758 | Chilean Pesos | Fixed | 2.96 | % | April - May 2020 | $ | 31,736 | $ | 38,780 | |||
Brazilian Subsidiary | Brazilian Reais | Variable | CDI + 3.3504 | % | March 2021 | 69,306 | - | ||||||||||||
Brazilian Subsidiary | Brazilian Reais | Variable | CDI + 2.30 | % | September 2020 | 38,552 | - | ||||||||||||
Argentine Subsidiary | Argentine Pesos | Variable | Badlar + 9.00 | % | June 2020 | 15,739 | - | ||||||||||||
Secured lines of credit | |||||||||||||||||||
Argentine Subsidiary | Argentine Pesos | Fixed | 55.17 | % | October 2019 | 22,718 | Argentine Pesos | Fixed | 26.11 | % | April 2020 | 51,016 | 49,499 | ||||||
Unsecured lines of credit | |||||||||||||||||||
Uruguayan Subsidiary | Uruguayan Pesos | Fixed | 9.11 | % | October 2019 | 11,110 | Uruguayan Pesos | Fixed | 9.11 | % | April 2020 | 11,917 | 16,435 | ||||||
Argentine Subsidiary | Argentine Pesos | Fixed | 82.30 | % | October - November 2019 | 4,513 | Argentine Pesos | Fixed | 30.81 | % | April 2020 | 26,975 | 9,645 | ||||||
Argentine Subsidiary | Argentine Pesos | Fixed | 93.00 | % | October 2019 | 21,918 | |||||||||||||
Chilean Subsidiary | Chilean Pesos | Variable | 1.72 | % | April 2020 | 1,605 | 1,951 | ||||||||||||
Mexican Subsidiary | Mexican Pesos | Fixed | 30.75 | % | April 2020 | 1,306 | - | ||||||||||||
Convertible notes | 2,249 | 2,249 | 6,649 | ||||||||||||||||
Finance lease obligations | 2,006 | 1,742 | 2,008 | ||||||||||||||||
Credit card collateralized debt | 22,364 | 17,309 | |||||||||||||||||
Collateralized debt | 8,481 | 41,637 | 43,862 | ||||||||||||||||
Other lines of credit | 155 | 364 | - | ||||||||||||||||
$ | 108,908 | $ | 316,508 | $ | 186,138 | ||||||||||||||
Non Current loans payable and other financial liabilities: | |||||||||||||||||||
Convertible notes | 562,987 | 575,747 | 569,305 | ||||||||||||||||
Finance lease obligations | 7,413 | 6,316 | 7,368 | ||||||||||||||||
Collateralized debt | 52,714 | 34,215 | 54,680 | ||||||||||||||||
Other lines of credit | 17 | - | |||||||||||||||||
$ | 623,114 | $ | 616,295 | $ | 631,353 | ||||||||||||||
See Notes 1113 and 1214 to these interim condensed consolidated financial statements for details regarding the Company’s collateralized debt securitization transactions and finance lease obligations, respectively.
Convertible Senior Notes
2.00% Convertible Senior Notes Due 2028
On August 24, 2018, the Company issued $800,000 thousands of 2.00% Convertible Senior Notes due 2028 and issued an additional $80,000 thousand of notes on August 31, 2018 pursuant to the partial exercise of the initial purchasers’ option to purchase such additional notes, for an aggregate principal amount of $880,000 thousands of 2.00% Convertible Senior Notes due 2028 (collectively, the “2028 Notes”). The 2028 Notes are unsecured, unsubordinated obligations of the Company, which pay interest in cash semi-annually, on February 15 and August 15 of each year, at a rate of 2.00% per annum. The 2028 Notes will mature on August 15, 2028 unless earlier redeemed, repurchased or converted in accordance with their terms prior to such date. The 2028 Notes may be converted, under specific conditions, based on an initial conversion rate of 2.2553 shares of common stock per $1,000 principal amount of the 2028 Notes (equivalent to an initial conversion price of $443.40 per share of common stock), subject to adjustment as described in the indenture governing the 2028 Notes. For additional information regarding the 2028 Notes please refer to Note 2 and Note 1715 to the audited consolidated financial statements for the year ended December 31, 2018,2019, contained in the Company’s Annual Report on Form 10-K filed with the SEC.
During the thirdfirst quarter of 2019,2020, the conversion threshold was not met and the Notes do not become convertible between OctoberApril 1, 20192020 and December 31, 2019.June 30, 2020. The determination of whether or not the Notes are convertible must continue to be performed on a quarterly basis. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election. The intention of the Company is to share-settle the total amount due upon conversion of the Notes.
In connection with the issuance of the 2028 Notes, the Company paid $91,784 thousands, $11,472 thousands, and $88,362 thousands (including transaction expenses) in August 2018, November 2018 and June 2019, respectively, to enter into capped call transactions with respect to shares of the common stock with certain financial institutions (the “2028 Notes Capped Call Transactions”). In addition, the Company paid $8,005 thousands in November 2019 to amend the strike and cap prices of the capped call transaction purchased in November 2018. The 2028 Notes Capped Call Transactions are expected generally to reduce the potential dilution upon conversion of the 2028 Notes in the event that the market price of the Company’s common stock is greater than the strike price of the 2028 Notes Capped Call Transactions. Therefore, as a result of executing the 2028 Notes Capped Call Transactions, the Company will reduce its exposure to potential dilution once the market price of its common shares exceeds the strike price of $443.41, $633.87 and $703.64 with a cap price of approximately $656.90, $666.72, $846.86 per common share for the capped calls entered into in August 2018, November 2018 and June 2019, respectively. The cost of the 2028 Notes Capped Call Transactions is included as a net reduction to additional paid-in capital in the stockholders’ equity section of the consolidated balance sheets.
The total estimated fair value of the 2028 Notes was $1,284,3161,118,216 thousands and $787,2661,338,014 thousands as of September 30, 2019March 31, 2020 and December 31, 2018,2019, respectively. The fair value was determined based on the closing trading price per $100 principal amount of the 2028 Notes as of the last day of trading for the period. The Company considered the fair value of the 2028 Notes as of September 30, 2019March 31, 2020 and December 31, 20182019 to be a Level 2 measurement. The fair value of the 2028 Notes is primarily affected by the trading price of the Company’s common stock and market interest rates. Based on the $551.23$488.58 closing price of the Company’s common stock on September 30, 2019March 31, 2020, the if-converted value of the 2028 Notes exceeded their principal amount by $214,006$89,667 thousands.
The following table presents the carrying amounts of the liability and equity components related to the 2028 Notes as of September 30, 2019March 31, 2020 and December 31, 20182019:
September 30, 2019 | December 31, 2018 | March 31, 2020 | December 31, 2019 | |||||||
(In thousands) | (In thousands) | |||||||||
Amount of the equity component (1) | $ | 327,305 | $ | 327,305 | $ | 327,305 | $ | 327,305 | ||
2.00% Convertible Senior Notes due 2028 | $ | 880,000 | $ | 880,000 | $ | 880,000 | $ | 880,000 | ||
Unamortized debt discount (2) | (307,417) | (325,783) | (294,920) | (301,227) | ||||||
Unamortized transaction costs related to the debt component | (9,596) | (9,958) | (9,333) | (9,468) | ||||||
Contractual coupon interest accrual | 19,409 | 5,867 | 28,209 | 23,809 | ||||||
Contractual coupon interest payment | (17,160) | — | (25,960) | (17,160) | ||||||
Net carrying amount | $ | 565,236 | $ | 550,126 | $ | 577,996 | $ | 575,954 | ||
(1)Net of $6,163 thousands of transaction costs related to the equity component of the 2028 Notes.
(2)As of September 30, 2019,March 31, 2020, the remaining period over which the unamortized debt discount will be amortized is 9.08.5 years.
The following table presents the interest expense for the contractual interest, the accretion of debt discount and the amortization of debt issuance costs:
Nine month periods ended September 30, | Three month periods ended September 30, | Three month periods ended March 31, | ||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | |||||||||||||
(In thousands) | (In thousands) | (In thousands) | ||||||||||||||||
Contractual coupon interest expense | $ | 13,542 | $ | 1,467 | $ | 4,400 | $ | 1,467 | $ | 4,400 | $ | 4,742 | ||||||
Amortization of debt discount | 18,366 | 1,921 | 6,081 | 1,921 | 6,307 | 6,317 | ||||||||||||
Amortization of debt issuance costs | 362 | 36 | 123 | 36 | 135 | 121 | ||||||||||||
Total interest expense related to the 2028 Notes | $ | 32,270 | $ | 3,424 | $ | 10,604 | $ | 3,424 | $ | 10,842 | $ | 11,180 | ||||||
2.25% Convertible Senior Notes Due 2019
On June 30, 2014, the Company issued $330,000 thousands of 2.25% Convertible Senior Notes due 2019 (the “2019 Notes”). The 2019 Notes were unsecured, unsubordinated obligations of the Company, which paid interest in cash semi-annually, on January 1 and July 1, at a rate of 2.25% per annum.
The 2019 Notes were convertible, under specific conditions, based on an initial conversion rate of 7.9353 shares of common stock per $1,000 principal amount of the 2019 Notes (equivalent to an initial conversion price of $126.02 per share of common stock), subject to adjustment as described in the indenture governing the 2019 Notes. For additional information regarding the 2019 Notes please refer to Note 2 and Note 17 to the audited consolidated financial statements for the year ended December 31, 2018, contained in the Company’s Annual Report on Form 10-K filed with the SEC.
In connection with the issuance of the 2019 Notes, the Company paid $19,668 thousands, $67,308 thousands and $45,692 thousands (including transaction expenses) in June 2014, September 2017 and March 2018, respectively, to enter into capped call transactions with respect to shares of the common stock (the “2019 Notes Capped Call Transactions” and together with the 2028 Notes Capped Call Transactions, the “Capped Call Transactions”), with certain financial institutions.
On August 24, 2018, the Company used a portion of the net proceeds from the 2028 Notes to repurchase or exchange and retire $263,724 thousands principal amount of its outstanding 2019 Notes. The consideration paid included $348,123 thousands in cash and 1,044,298 shares of the Company’s common stock. Additionally, the Company entered into agreements with certain financial institutions who were counterparties to the 2019 Notes Capped Call Transactions entered into in June 2014 and September 2017 to terminate a portion of those transactions, in each case, in a notional amount corresponding to the amount of 2019 Notes repurchased or exchanged and retired. In connection with the termination of existing 2019 Capped Call Transactions and the related unwinding of the existing hedge position, the Company received from certain financial institutions the amount of $121,703 thousands and $14,405 thousands in August 2018 and November 2018, respectively.
The 2019 Notes matured on July 1, 2019. Holders of $65,961 thousands principal amount of the 2019 Notes elected to convert their 2019 Notes at maturity, and the Company issued 523,407 shares of common stock and paid $8 thousands in cash (because of the fraction of shares) in settlement of such conversions. $17 thousands of the principal amount of the 2019 Notes was not converted, and was repaid by the Company in cash at maturity. Also on July 1, 2019, the Company received and retired 131,994 shares of common stock in settlement of capped call agreements that the Company had previously entered into in relation to the 2019 Notes.
The following table presents the carrying amounts of the liability and equity components related to the 2019 Notes as of September 30, 2019 and December 31, 2018:
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(1)Net of $236 thousands of transaction costs related to the equity component of the 2019 Notes.
The following table presents the interest expense for the contractual interest, the accretion of debt discount and the amortization of debt issuance costs:
Nine month periods ended September 30, | Three month periods ended September 30, | |||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||
(In thousands) | (In thousands) | |||||||||||
Contractual coupon interest expense | $ | 745 | $ | 5,074 | $ | — | $ | 1,361 | ||||
Amortization of debt discount | 1,063 | 6,907 | — | 1,891 | ||||||||
Amortization of debt issuance costs | 176 | 1,104 | — | 307 | ||||||||
Total interest expense related to the 2019 Notes | $ | 1,984 | $ | 13,085 | $ | — | $ | 3,559 | ||||
10.12. Equity Offerings
On March 15, 2019, the Company closed a public equity offering of approximately $1,150,000 thousands of common stock at a public offering price of $480 per share (the “Offering”). Pursuant to the Offering, the Company issued 2,395,834 shares of common stock, par value $0.001 per share (the “Common Stock”) which includes the exercise in full of the underwriters’ option to purchase $150 million of additional shares of common stock.
In addition, on March 15, 2019 the Company closed its $750,000 thousands concurrent private placement of common stock to PayPal, Inc (“PayPal”). PayPal purchased 1,719,790 shares of Common Stock at a price of $436.10 per share.
On March 29, 2019, in a separate private placement, an affiliate of Dragoneer Investment Group purchased 100,000 shares of perpetual convertible preferred stock designated as Series A Perpetual Preferred Stock, par value $0.001 per share (the “Preferred Stock”) of the Company for $100,000 thousands in the aggregate. The Preferred Stock is a class of equity security that ranks senior to the Common Stock with respect to dividend rights or rights upon liquidation.
Each share of Preferred Stock has a stated value of $1,000, is entitled to a cash dividend of 4% per annum, and is convertible into shares of the Company’s Common Stock at an initial conversion price of $479.71 (subject to adjustment). The Company may require the conversion of any or all of the Preferred Stock beginning on March 29, 2023 if certain conditions set forth in the Certificate of Designation are met. The Company may redeem any or all of the Preferred Stock for cash, shares of its Common Stock or a combination thereof (at its election, subject to certain conditions) at any time beginning on March 29, 2026 for a percentage of the stated value of each share of Preferred Stock, plus any accrued and unpaid dividends at such time. On March 15, 2026, September 15, 2026 and March 15, 2027, the holders of the Preferred Stock shall have the right to redeem all of the outstanding shares of Preferred Stock for cash, shares of the Company’s Common Stock or a combination thereof (at the Company’s election, subject to certain conditions) to be determined by the formula set forth in the Certificate of Designation. Upon the occurrence of a change of control, the holders will have the right to redeem their shares of Preferred Stock for cash at a price set forth in the Certificate of Designation. The holders of the Preferred Stock have the right to vote on matters submitted to a vote of the holders of Common Stock on an as-converted basis unless required by applicable law.
In the aggregate, the Company raised funds in the amount of $1,965,903 thousands net of issuance costs paid in the amount of $34,097 thousands.
11.13. Securitization Transactions
The process of securitization consists of the issuance of securities collateralized by a pool of assets through a special purpose entity, often under a VIE.
The Company securitizes financial assets associated with its credit cards and loans receivable portfolio. The Company’s securitization transactions typically involve the legal transfer of financial assets to bankruptcy remote special purpose entities (“SPEs”) or the acquisition of loans receivable portfolios through SPEs. The Company generally retains economic interests in the collateralized securitization transactions, which are retained in the form of subordinated interests. For accounting purposes, the Company is precluded from recording the transfers of assets in securitization transactions as sales or is required to consolidate the SPE.
Additionally, the Company securitizes certain credit cards receivable related to user’s purchases through Argentine SPEs. According to the SPE contracts, the Company has determined that it has no obligation to absorb losses or the right to receive benefits of the SPE that could be significant because it does not retain any equity certificate of participation or subordinated interest in the SPEs. As the Company does not control the vehicle, its assets, liabilities, and related results are not consolidated in the Company’s financial statements.
The Company securitizes certain loans receivable through Brazilian, Argentine and ArgentineMexican SPEs, formed to securitize loans receivable provided by the Company to its users or purchased from financial institutions that grant loans to the Company’s users through Mercado Pago. According to the SPE contracts, the Company has determined that it has both the power to direct the activities of the entity that most significantly impact the entity’s performance and the obligation to absorb losses or the right to receive benefits of the entity that could be significant because it retains the equity certificates of participation, and would therefore also be consolidated. When the Company controls the vehicle, it accounts the securitization transactions as if they were secured financing and therefore the assets, liabilities, and related results are consolidated in its financial statements.
As of September 30, 2019,March 31, 2020, the carrying value of the Brazilian collateralized debt was $54,562$47,440 thousands, composed of:by: 1) $14,590$11,660 thousands which bearsbearing interest at a rate of Brazilian DI plus 3.5% per annum for a term of 36 months, due in June 2021 and 2) $39,972$35,780 thousands which bearsbearing interest at a rate of Brazilian DI plus 3.25% per annum for a term of 30 months, due in May 2021. The carrying value of the Argentine collateralized debt was $6,633$5,658 thousands, composed of: 1) $693 thousands bearing interest at a variable rate equivalent to the BADLAR rate plus 200 basis points with a minimum 33% and a maximum 48% nominal rate per annum for a term of 8 months, due in October 2019, 2) $3,558$276 thousands bearing interest at a variable rate equivalent to the BADLAR rate plus 200 basis points with a minimum 36% and a maximum 51% nominal rate per annum for a term of 9 months, due in April 2020 and 3) $2,382(fully paid off in April 2020); 2) $1,340 thousands bearing interest at a variable rate equivalent to the BADLAR rate plus 200 basis points with a minimum 37%33% and a maximum 52%48% nominal rate per annum for a term of 85 months, due in JanuaryMay 2020 and 3) $4,042 thousands bearing interest at a variable rate equivalent to the BADLAR rate plus 200 basis points with a minimum 40% and a maximum 50% nominal rate per annum for a term of 9 months, due in August 2020. The carrying value of the Mexican collateralized debt was $22,754 thousands bearing interest at a variable rate equivalent to the equilibrium interbank interest rate published by Banco de Mexico in the Diario Oficial plus 3.34% per annum for term of 36 months, due in November 2022.
This secured debt is issued by the SPEs and includes collateralized securities used to fund Mercado Credito business. The third-party investors in the securitization transactions have legal recourse only to the assets securing the debt and do not have recourse to the Company. Additionally, the cash flows generated by the SPEs are restricted to the payment of amounts due to third-party investors, but the Company retains the right to residual cash flows.
The assets and liabilities of the SPEs are included in the Company’s interim condensed consolidated financial statements as of September 30, 2019March 31, 2020 and December 31, 20182019 as follows:
September 30, | December 31, | March 31, | December 31, | |||||||
2019 | 2018 | 2020 | 2019 | |||||||
Assets | (in thousands) | (in thousands) | (In thousands) | |||||||
Current assets: | ||||||||||
Restricted cash and cash equivalents | $ | 11,791 | $ | 24,363 | $ | 47,010 | $ | 37,424 | ||
Loans receivable, net | 83,396 | 51,471 | 67,352 | 104,419 | ||||||
Total current assets | 95,187 | 75,834 | 114,362 | 141,843 | ||||||
Non-current assets: | ||||||||||
Loans receivable, net | 3,726 | 4,395 | ||||||||
Total non-current assets | 3,726 | 4,395 | ||||||||
Total assets | $ | 95,187 | $ | 75,834 | $ | 118,088 | $ | 146,238 | ||
Liabilities | ||||||||||
Current liabilities: | ||||||||||
Accounts payable and accrued expenses | $ | 92 | $ | 113 | $ | 91 | $ | 128 | ||
Loans payable and other financial liabilities | 8,481 | 7,539 | 41,637 | 43,862 | ||||||
Total current liabilities | 8,573 | 7,652 | 41,728 | 43,990 | ||||||
Non-current liabilities: | ||||||||||
Loans payable and other financial liabilities | 52,714 | 46,441 | 34,215 | 54,680 | ||||||
Total non-current liabilities | 52,714 | 46,441 | 34,215 | 54,680 | ||||||
Total liabilities | $ | 61,287 | $ | 54,093 | $ | 75,943 | $ | 98,670 | ||
14. Leases
The Company leases certain fulfillment centers, office space and vehicles in the various countries in which it operates. The lease agreements do not contain any residual value guarantees or material restrictive covenants.
Supplemental balance sheet information related to leases was as follows (in thousands):
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March 31, | December 31, | ||||
2020 | 2019 | ||||
Operating Leases | |||||
Operating lease right-of-use assets | $ | 183,534 | $ | 200,449 | |
Operating lease liabilities | $ | 192,172 | $ | 199,932 | |
Finance Leases | |||||
Property and equipment, at cost | 11,626 | 10,952 | |||
Accumulated depreciation | (2,156) | (1,563) | |||
Property and equipment, net | $ | 9,470 | $ | 9,389 | |
Loans payable and other financial liabilities | $ | 8,058 | $ | 9,376 | |
The following table summarizes the weighted average remaining lease term and the weighted average incremental borrowing rate for operating leases and the weighted average discount rate for finance leases at September 30, 2019:March 31, 2020:
Weighted average remaining lease term | |||
Operating leases |
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Finance leases | 4 | Years | |
Weighted average discount rate (*) | |||
Operating leases |
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Finance leases |
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(*) Includes discount rates of leases in local currency and U.S dollar.dollar.
The components of lease expense were as follows (in thousands):
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Operating lease cost | $ | 9,051 | $ | 6,477 | |
Finance lease cost: | |||||
Depreciation of property and equipment | 512 | 235 | |||
Interest on lease liabilities | 508 | 152 | |||
Total finance lease cost | $ | 1,020 | $ | 387 | |
Supplemental cash flow information related to leases was as follows (in thousands):
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2020 | 2019 | ||||
Cash paid for amounts included in the measurement of lease liabilities: | |||||
Operating cash flows from operating leases | $ | 8,590 | $ | 4,124 | |
Financing cash flows from finance leases | 564 | 662 | |||
Right-of-use assets obtained in exchange for lease obligations: | |||||
Operating leases | $ | 14,580 | $ | 35,926 | |
Finance leases | 663 | 177 | |||
The following table summarizes the fixed, future minimum rental payments, excluding variable costs, which are discounted by the Company’s incremental borrowing rates to calculate the lease liabilities for the operating and finance leases (in thousands):
Period Ending September 30, 2019 | Operating Leases | Finance Leases | ||||||||||
Period Ending March 31, 2020 | Operating Leases | Finance Leases | ||||||||||
One year or less | $ | 30,795 | $ | 4,353 | $ | 37,813 | $ | 3,875 | ||||
One year to two years | 30,470 | 4,029 | 37,202 | 3,605 | ||||||||
Two years to three years | 30,009 | 4,029 | 35,520 | 3,605 | ||||||||
Three years to four years | 28,485 | 3,262 | 33,569 | 2,040 | ||||||||
Four years to five years | 26,989 | 1,034 | 31,208 | 278 | ||||||||
Thereafter | 120,764 | — | 115,601 | — | ||||||||
Total lease payments | $ | 267,512 | $ | 16,707 | $ | 290,913 | $ | 13,403 | ||||
Less imputed interest | (91,070) | (7,288) | (98,741) | (5,345) | ||||||||
Total | $ | 176,442 | $ | 9,419 | $ | 192,172 | $ | 8,058 | ||||
13.15. Derivative instruments
The Company designates certain derivatives as hedges of particular risks associated with forecasted purchases (firm commitments).purchases. These transactions, mainly currency forward contracts, on firm commitments, are classified as fair valuecash flow hedges.
As of September 30, 2019March 31, 2020 the Company used foreign currency exchange contracts to hedge the fair valueforeign currency effects related to the forecasted purchase of certain firm commitments entered into with certain suppliers denominatedMPOS devices in U.S. dollars and owed by a Brazilian subsidiary whose functional currency is the Brazilian Reais. Pursuant to these contracts, the Company will buy a notional amount of $7,948$5,394 thousands in October 2019,April 2020, $7,764 thousands in May 2020, $7,272 thousands in June 2020, $ 6,091 thousands in July 2020, $6,193 thousands in August 2020 and $ 3,433 in September 2020, at fixed currency rates. The Company designated the foreign currency exchange contracts as cash flow hedges, the derivative’s gain or loss is initially reported as a component of accumulated other comprehensive income and subsequently reclassified into earnings in the same period the forecasted transaction affects earnings. As of March 31, 2020, the Company estimated that the whole amount of net derivative gains related to its cash flow hedges included in accumulated other comprehensive income will be reclassified into earnings within the next 12 months.
In addition, as of September 30, 2019,March 31, 2020, the Company entered into a foreign currency exchange contracts to hedge the foreign currency fluctuations related to certain transactions denominated in U.S. dollars of a Brazilian subsidiary, whose functional currency is the Brazilian Reais, which were not designated as hedgehedges for accounting purposes. Pursuant to this contract, the Company will buy a notional amount of $2,988$7,000 thousands in November 2019, $2,042 thousands in December 2019, $10,000 thousands in JanuaryMay 2020, $23,300 thousands in February 2020, $6,200 thousands in March 2020, $10,000$36,000 thousands in June 2020, and $18,600 thousands in July 2020 and $24,000 thousands in August 2020, at fixed currency rates.
Foreign exchange contracts
The fair values of the Company’s outstanding derivative instruments as of September 30,March 31, 2020 and December 31, 2019 were as follows:
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Balance sheet location | 2020 | 2019 | ||||||
(In thousands) | ||||||||
Derivatives | ||||||||
Foreign exchange contracts not designated as hedging instruments | Other current assets | $ | 13,488 | $ | 1,249 | |||
Foreign exchange contracts designated as cash flow hedges | Other current assets | 5,223 | — | |||||
Foreign exchange contracts designated as cash flow hedges | Other current liabilities | — | 251 | |||||
EffectAs of Derivative Contracts and firm commitmentsMarch 31, 2019, the Company did not enter into foreign exchange contracts designated as cash flow hedges. The effects of derivative contracts on Condensed Consolidated Statementunaudited interim condensed consolidated of Incomecomprehensive income as of September 30,March 31, 2020 were as follows:
Amount of | Less: Amount of gain reclassified | |||||||||||
December 31, | Gain (Loss) recognized | from accumulated | March 31, | |||||||||
2019 | in other comprehensive loss | other comprehensive (loss) income | 2020 | |||||||||
(In thousands) | ||||||||||||
Foreign exchange contracts designated as cash flow hedges | $ (250) | $ 5,852 | $ (41) | $ 5,561 | ||||||||
The effects of derivative contracts on unaudited interim condensed consolidated statement of income as of March 31, 2020 and 2019 were as follows:
Nine month periods ended September 30, | Three month periods ended September 30, | |||||||
(In thousands) | ||||||||
Gain from foreign exchange contracts designated as fair value hedges | $ | 442 | $ | 1,472 | ||||
Loss from hedged items attributable to hedged risk | (442) | (1,472) | ||||||
Foreign exchange contracts not designated as hedging instruments | 3,308 | 3,239 | ||||||
$ | 3,308 | $ | 3,239 | |||||
Three month periods ended March 31, | ||||||||
2020 | 2019 | |||||||
(In thousands) | ||||||||
Foreign exchange contracts not designated as hedging instruments | $ | 16,767 | $ | — | ||||
16. Impact of COVID-19 pandemic
In March 2020, the outbreak of a novel strain of the coronavirus, COVID-19 was recognized as a pandemic by the World Health Organization, and the outbreak has become increasingly widespread around the world. Government-imposed total or partial lockdowns instituted throughout Latin America in late March have led to a weakening of the macroeconomic environment, generating recession conditions and a devaluation of the local currencies across the countries in which the Company operates.
The Company has thus far not been required to suspend its operations in any country, but the Company’s business has been negatively affected this quarter in terms of operations, consumers buying trends, and consequently, net revenues. Consumers have pulled back on purchases of non-essential items. This led to a shift in sales, where categories such as health, consumer packaged goods and toys and games have shown greater growth, while categories such as auto parts and consumer electronics have seen marked declines in growth rates.
In the logistics business, widespread lockdowns, when imposed in ways that inhibit merchants from operating, have led to order backlogs and cancellations of orders delivered through drop ship and cross-docking networks. The Company’s managed logistics network has continued operating, maintaining deliveries for orders shipped through Mercado Envios. As of the date of issuance of these interim condensed consolidated financial statements, the Company’s warehouses remain operational consistent with past practice.
The Fintech business also experienced deceleration in the number of payments processed in the last two weeks of March, as a consequence of lower foot traffic in physical retail, which has had a direct impact on lower mobile point of sale and QR total payment volume growth partially offset by the performance of merchant services on-line business.
The geographical segments have been negatively impacted as a result of varying drivers across countries. The magnitude of the negative impact was greater in the initial weeks following government-mandated lock-downs, with gradual improvements as time passed. Brazilian and Argentine operations observed a more pronounced slow down during the last two weeks of March than other segments, but in April 2020 gross merchandise volume rebounded to levels representing higher year-over-year growth compared to the average for the first quarter of 2020. With respect to total payment volume in April 2020, Argentina segment is showing year-over-year growth that is higher than the average for the first quarter of 2020, and the total payment volume growth in the Brazil segment has picked up relative to the through of the slowdown in mid-March 2020 but has not returned to pre-COVID-19 levels. Mexican operations were less negatively impacted by COVID-19 compared to operations in Brazil and Argentina but similarly showed a rebound in April 2020 with higher growth rates when compared to the average for the first quarter of 2020.
Management believes that, given the uncertain progress of the COVID-19 pandemic and the related macroeconomic impact in the countries where the Company operates, it is not possible to have certainty around business development and its cash generation for the remainder of 2020. In terms of liquidity and cash management, relevant funding sources remain available and new credit facilities have been obtained at the geographical segment level. As of March 31, 2020, the Company’s main source of liquidity was $2,276,380 thousands of cash and cash equivalents and short-term investments, which excludes a $326,699 thousands investment related to the Central Bank of Brazil Mandatory Guarantee and $26,463 thousands related to guarantee for secured lines of credit in Argentina; and $269,955 thousands of long-term investments.
Lastly, the revenues sources of the Company’s subsidiaries are denominated in local currency. As a result, the weak macro-economic environment in 2020 in certain countries in which the Company operates coupled with the devaluations of certain local currencies in those countries against the U.S. dollar could cause a decline in year-over-year net revenues as measured in U.S. dollars.
Management has made its best estimation of the potential scenarios for the rest of 2020. However it is not possible to predict at this time with certainty the impact that COVID-19 could have and its effects, including its impact on the economies of the countries in which we operate, and therefore the extent of the impact on the Company’s financial condition and results of operations if conditions persist or materially deviate from those currently used in our estimates.
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward-Looking Statements
Any statements made or implied in this report that are not statements of historical fact, including statements about our beliefs and expectations, are forward-looking statements within the meaning of Section 27 A of the Securities Exchange Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and should be evaluated as such. The words “anticipate,” “believe,” “expect,” “intend,” “plan,” “estimate,” “target,” “project,” “should,” “may,” “could,” “will” and similar words and expressions are intended to identify forward-looking statements. Forward-looking statements generally relate to information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities, future economic, political and social conditions in the countries in which we operate and their possible impact on our business, and the effects of future regulation and the effects of competition. Such forward-looking statements reflect, among other things, our current expectations, plans, projections and strategies, anticipated financial results, future events and financial trends affecting our business, all of which are subject to known and unknown risks, uncertainties and other important factors (in addition to those discussed elsewhere in this report) that may cause our actual results to differ materially from those expressed or implied by these forward-looking statements. These risks and uncertainties include, among other things:
our expectations regarding the continued growth of online commerce and Internet usage in Latin America;
our ability to expand our operations and adapt to rapidly changing technologies;
our ability to attract new customers, retain existing customers and increase revenues;
the impact of government and central bank regulations on our business;
litigation and legal liability;
systems interruptions or failures;
our ability to attract and retain qualified personnel;
consumer trends;
security breaches and illegal uses of our services;
competition;
reliance on third-party service providers;
enforcement of intellectual property rights;
seasonal fluctuations; and
political, social and economic conditions in Latin America.America; and
the current and potential impact of COVID-19 on our net revenues, gross profit margins, operating loss margins and liquidity due to future disruptions in operations as well as the macroeconomic instability caused by the pandemic.
Many of these risks are beyond our ability to control or predict. New risk factors emerge from time to time and it is not possible for Management to predict all such risk factors, nor can it assess the impact of all such risk factors on our company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
These statements are based on currently available information and our current assumptions, expectations and projections about future events. While we believe that our assumptions, expectations and projections are reasonable in view of the currently available information, you are cautioned not to place undue reliance on our forward-looking statements. These statements are not guarantees of future performance. They are subject to future events, risks and uncertainties–many of which are beyond our control– as well as potentially inaccurate assumptions that could cause actual results to differ materially from our expectations and projections. Some of the material risks and uncertainties that could cause actual results to differ materially from our expectations and projections are described in “Item 1A — Risk Factors” in Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 20182019 filed with the Securities and Exchange Commission (“SEC”) on February 28, 2019,14, 2020, as updated by those described in “Item 1A — Risk Factors” in Part II of this Form10-Q for the quarter ended March 31, 2020 and in other reports we file from time to time with the SEC.
You should read that information in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2 of Part I of this report, our unaudited interim condensed consolidated financial statements and related notes in Item 1 of Part I of this report and our audited consolidated financial statements and related notes in Item 8 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2018.2019. We note such information for investors as permitted by the Private Securities Litigation Reform Act of 1995. There also may be other factors that we cannot anticipate or that are not described in this report, generally because they are unknown to us or we do not perceive them to be material that could cause results to differ materially from our expectations.
Forward-looking statements speak only as of the date they are made, and we do not undertake to update these forward-looking statements except as may be required by law. You are advised, however, to review any further disclosures we make on related subjects in our periodic filings with the SEC.
The discussion and analysis of our financial condition and results of operations has been organized to present the following:
a brief overview of our company;
a review of our financial presentation and accounting policies, including our critical accounting policies;
a discussion of our principal trends and results of operations for the nine and three-month periods ended September 30,March 31, 2020 and 2019 and 2018;
a discussion of the principal factors that influence our results of operations, financial condition and liquidity;
a discussion of our liquidity and capital resources and a discussion of our capital expenditures; and
a description of our non-GAAP financial measures.
Other Information
We routinely post important information for investors on our Investor Relations website, http://investor.mercadolibre.com. We use this website as a means of disclosing material, non-public information and for complying with our disclosure obligations under SEC Regulation FD (Fair Disclosure). Accordingly, investors should monitor our Investor Relations website, in addition to following our press releases, SEC filings, public conference calls and webcasts. The information contained on, or that may be accessed through, our website is not incorporated by reference into, and is not a part of, this report.
Business Overview
MercadoLibre, Inc. (together with its subsidiaries “us”, “we”, “our” or the “Company”) is the largest online commerce ecosystem in Latin America. Our platform is designed to provide users with a complete portfolio of services to facilitate commercial transactions. We are a market leader in e-commerce in each of Argentina, Brazil, Chile, Colombia, Costa Rica, Ecuador, Mexico, Peru, Uruguay and Venezuela, based on the number of unique visitors and page views. We also operate online commerce platforms in the Dominican Republic, Honduras, Nicaragua, El Salvador, Panama, Bolivia, Guatemala and Paraguay.
Through our platform, we provide buyers and sellers with a robust environment that fosters the development of a large e-commerce community in Latin America, a region with a population of over 644 million people and with one of the fastest-growing Internet penetration rates in the world. We believe that we offer technological and commercial solutions that address the distinctive cultural and geographic challenges of operating an online commerce platform in Latin America.
We offer our users an ecosystem of six integrated e-commerce services: the MercadoLibreMercado Libre Marketplace, the Mercado Pago FinTech platform, the Mercado Envios logistics service, the MercadoLibre Classifieds service, the MercadoLibre advertising solution and the Mercado Shops online webstores solution.
The MercadoLibreMercado Libre Marketplace, which we sometimes refer to as our marketplace, is a fully-automated, topically-arranged and user-friendly online commerce platform, which can be accessed through our website and mobile app. This platform enables both businesses and individuals to list merchandise and conduct sales and purchases online.
Mercado Pago is our financial technology (FinTech) solution, designed to facilitate transactions both on and off our marketplaces by providing a mechanism that allows our users to securely, easily and promptly send and receive payments online. Outside of our marketplaces, Mercado Pago allows merchants to process transactions via their websites and mobile apps, as well as in their brick-and-mortar stores through QR codes and mobile points of sale (“MPOS”) devices. It also enables users to easily transfer money to each other. Through Mercado Fondo, our asset management product, our users are able to invest the outstanding balance on their Mercado Pago account at competitive rates and in a simple way. Mercado Credito, our lending solution, allows us to finance merchants’ working capital needs and consumers’ purchases.
To further enhance our suite of e-commerce services, we launched the Mercado Envios shipping program in Brazil, Argentina, Mexico, Colombia, Chile and Uruguay. Through Mercado Envios, we offer a cost-efficient way to utilize our existing distribution chain to fulfill sales on our platform. Sellers that opt into the program are able to offer a uniform and seamlessly integrated shipping experience to their buyers at competitive prices. As of September 30, 2019,March 31, 2020, we also offer free shipping to buyers in Brazil, Argentina, Mexico, Chile and Colombia.
Through MercadoLibre Classifieds, our online classified listing service, our users can also list and purchase motor vehicles, real estate and services in the countries where we operate. Classifieds listings differ from Marketplace listings as they only charge optional placement fees and not final value fees. Our classifieds pages are also a major source of traffic to our platform, benefitting both the Enhanced Marketplace and non-Marketplace businesses.platform.
Furthermore, we developed our MercadoLibre advertising platform to enable businesses to promote their products and services on the Internet. Through this platform, MercadoLibre’s sellers and large advertisers are able to display ads on our webpages.
Additionally, through Mercado Shops, our online store solution, users can set-up, manage and promote their own online store. These stores are hosted by MercadoLibre and offer integration with the marketplace, and payment and advertising services we offer. Users can pay monthly subscriptions for enhanced functionality and value added services on their store.
Reporting Segments and Geographic Information
Our segment reporting is based on geography, which is the current criterion our Management currently uses to evaluate our segment performance. Our geographic segments are Brazil, Argentina, Mexico and Other Countries (including Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Panama, Peru, Bolivia, Honduras, Nicaragua, El Salvador, Guatemala, Paraguay, Uruguay and the United States of America.America). Although we discuss long-term trends in our business, it is our policy not to provide earnings guidance in the traditional sense. We believe that uncertain conditions make the forecasting of near-term results difficult. Further, we seek to make decisions focused primarily on the long-term welfare of our company and believe focusing on short-term earnings does not best serve the interests of our stockholders. We believe that execution of key strategic initiatives as well as our expectations for long-term growth in our markets will best create stockholder value. A long-term focus may make it more difficult for industry analysts and the market to evaluate the value of our company,Company, which could reduce the value of our common stock or permit competitors with short-term tactics to grow more rapidly than us. We, therefore, encourage potential investors to consider this strategy before making an investment in our common stock.
The following table sets forth the percentage of our consolidated net revenues by segment for the nine and three-month periods ended September 30, 2019March 31, 2020 and 2018:2019:
Nine-month Periods Ended | Three-month Periods Ended | Three-month Periods Ended | ||||||||||||||||||
September 30, | September 30, | March 31, | ||||||||||||||||||
(% of total consolidated net revenues) (*) (**) | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||
(% of total consolidated net revenues) (*) | 2020 | 2019 | ||||||||||||||||||
Brazil | 63.7 | % | 59.4 | % | 64.7 | % | 62.2 | % | 60.9 | % | 63.8 | % | ||||||||
Argentina | 20.0 | 28.2 | 19.3 | 23.6 | 20.4 | 19.8 | ||||||||||||||
Mexico | 11.7 | 6.3 | 11.8 | 8.2 | 14.5 | 11.5 | ||||||||||||||
Other Countries | 4.6 | 6.1 | 4.2 | 6.1 | 4.1 | 4.9 | ||||||||||||||
(*) Percentages have been calculated using whole-dollar amounts rather than the rounded amounts that appear in the table. The table above may not total due to rounding.
(**) The amount incurred in shipping subsidies netted from revenues, when we act as an agent, was $204.4 million and $316.7 million for the nine-month periods ended September 30, 2019 and 2018, respectively. The amount incurred in shipping subsidies netted from revenues, when we act as an agent, was $69.9 million and $107.6 million for the three-month periods ended September 30, 2019 and 2018, respectively.
The following table summarizes the changes in our net revenues by segment for the nine and three-month periods ended September 30, 2019March 31, 2020 and 2018:2019:
Nine-month Periods Ended | Change from 2018 | Three-month Periods Ended | Change from 2018 | Three-month Periods Ended | Change from 2019 | ||||||||||||||||||||||||||
September 30, | to 2019 (*) (**) | September 30, | to 2019 (*) (**) | March 31, | to 2020 (*) | ||||||||||||||||||||||||||
2019 | 2018 | in Dollars | in % | 2019 | 2018 | in Dollars | in % | 2020 | 2019 | in Dollars | in % | ||||||||||||||||||||
(in millions, except percentages) | (in millions, except percentages) | (in millions, except percentages) | |||||||||||||||||||||||||||||
Net Revenues: | |||||||||||||||||||||||||||||||
Brazil | $ 1,033.2 | $ 600.8 | $ 432.4 | 72.0 | % | $ 389.9 | $ 220.8 | $ 169.1 | 76.6 | % | $ | 397.4 | $ | 302.4 | $ | 95.1 | 31.4 | % | |||||||||||||
Argentina | 323.9 | 285.8 | 38.1 | 13.3 | 116.2 | 83.7 | 32.5 | 38.8 | 132.9 | 93.8 | 39.1 | 41.7 | |||||||||||||||||||
Mexico | 190.3 | 63.6 | 126.7 | 199.4 | 71.4 | 29.0 | 42.4 | 146.4 | 94.8 | 54.6 | 40.2 | 73.7 | |||||||||||||||||||
Other Countries | 74.7 | 61.5 | 13.2 | 21.4 | 25.5 | 21.8 | 3.7 | 17.2 | 27.0 | 23.0 | 4.0 | 17.2 | |||||||||||||||||||
Total Net Revenues | $ 1,622.0 | $ 1,011.6 | $ 610.4 | 60.3 | % | $ 603.0 | $ 355.3 | $ 247.7 | 69.7 | % | $ | 652.1 | $ | 473.8 | $ | 178.3 | 37.6 | % | |||||||||||||
(*) Percentages have been calculated using whole-dollar amounts rather than the rounded amounts that appear in the table. The table above may not total due to rounding.
(**) The amount incurred in shipping subsidies netted from revenues, when we act as an agent, was $204.4 million and $316.7 million for the nine-month periods ended September 30, 2019 and 2018, respectively. The amount incurred in shipping subsidies netted from revenues, when we act as an agent, was $69.9 million and $107.6 million for the three-month periods ended September 30, 2019 and 2018, respectively.
Recent Developments
Impact of COVID-19 Pandemic
In March 2020, the outbreak of a novel strain of the coronavirus, COVID-19 was recognized as a pandemic by the World Health Organization, and the outbreak has become increasingly widespread around the world. Government-imposed total or partial lockdowns instituted throughout Latin America in late March have led to a weakening of the macroeconomic environment generating recession conditions and a devaluation of the local currencies across the countries in which we operate.
We have thus far not been required to suspend our operations in any country, but our business has been negatively affected this quarter in terms of operations, consumers buying trends, and consequently, net revenues. Consumers have pulled back on purchases of non-essential items. This led to a shift in sales, where categories such as health, consumer packaged goods and toys and games have shown greater growth, while categories such as auto parts and consumer electronics have seen marked declines in growth rates.
In our logistics business, widespread lockdowns, when imposed in ways that inhibit merchants from operating, have led to order backlogs and cancellations of orders delivered through drop ship and cross-docking networks. Our managed logistics network has continued operating, maintaining deliveries for orders shipped through Mercado Envios. As of the date of the issuance of this report, our warehouses remain operational consistent with past practice.
Our Fintech business also experienced a deceleration in the number of payments processed in the last two weeks of March, as a consequence of lower foot traffic in physical retail, which has had a direct impact on lower mobile point of sale and QR total payment volume growth partially offset by the performance of merchant services on-line business.
Our geographical segments have been negatively impacted as a result of varying drivers across countries. The magnitude of the negative impact was greater in the initial weeks following government-mandated lock-downs, with gradual improvements as time passed. Our Brazilian and Argentine operations observed a more pronounced slow down during the last two weeks of March 2020 than other segments, but in April 2020 gross merchandise volume rebounded to levels representing higher year-over-year growth compared to the average for the first quarter of 2020. With respect to total payment volume in April 2020, our Argentina segment is showing year-over-year growth that is higher than the average for the first quarter of 2020, and the total payment volume growth of our Brazil segment has picked up relative to the through of the slowdown in mid-March 2020 but has not returned to pre-COVID-19 levels. Our Mexican operation were less negatively impacted by COVID-19 compared to our operations in Brazil and Argentina but similarly showed a rebound in April 2020 with higher growth rates when compared to the average for the first quarter of 2020.
We believe that, given the uncertain progress of the COVID-19 pandemic and the related macroeconomic impacts in the countries where we operate, it is not possible to have certainty around business development and its cash generation for the remainder of 2020. In terms of liquidity and cash management, relevant funding sources remain available and new credit facilities have been obtained at the geographic segment level. As of March 31, 2020, our main source of liquidity was $2,276.4 million of cash and cash equivalents and short-term investments, which excludes a $326.7 million investment related to the Central Bank of Brazil Mandatory Guarantee and $26.5 million related to guarantee for secured lines of credit in Argentina; and $270.0 million of long-term investments.
Lastly, the revenues sources of our subsidiaries are denominated in local currency. As a result, the weak macro-economic environment in 2020 in certain countries in which we operate coupled with the devaluations of certain local currencies in those countries against the U.S. dollar could cause a decline in year-over-year net revenues, measured in U.S. dollars.
We have made our best estimation of the potential scenarios for the rest of 2020. However it is not possible to predict at this time with certainty the impact that COVID-19 could have and its effects, including its impact in the economies of the countries in which we operate, and therefore the extent of the impact on our financial condition and results of operation if conditions persist or materially deviate from those currently used in our estimates.
Description of Line Items
Net revenues
We recognize revenues in each of our four geographical reporting segments. Within each of our segments, the services we provide generally fall into two distinct revenue streams: “Commerce” and “Fintech.”
We have re-named and grouped by nature our Revenue streams breakdown, given the increasing importance of our financial business in current and expected future revenue composition, which our management considers shows more meaningful information about the business. As such, the breakdown by revenue stream previously labeled as “Enhanced Marketplace” and “Non-Marketplace.”“Non-marketplace”, is now presented under the titles of “Commerce” and “Fintech”, respectively. Also, as a result, a group of other services, including classifieds fees, ad sales and other ancillary services, which had historically been included in the “Non-marketplace” line, have as of January 01, 2020, been included as a part of the “Commerce” Revenue stream. Prior-period corresponding figures have been changed accordingly for comparative purposes.
The following table summarizes our consolidated net revenues by revenue stream for the nine and three-month periods ended September 30, 2019March 31, 2020 and 2018:2019:
Nine-month Periods Ended | Three-month Periods Ended | Three-month Periods Ended | |||||||||||||||
September 30, (*) | September 30, (*) | March 31, (*) | |||||||||||||||
Consolidated net revenues by revenue stream | 2019 | 2018 | 2019 | 2018 | 2020 | 2019 | |||||||||||
(in millions) | (in millions) | (in millions) | |||||||||||||||
Enhanced Marketplace (**) | $ | 849.4 | $ | 477.2 | $ | 308.1 | $ | 180.3 | |||||||||
Non-Marketplace (***) (****) | 772.6 | 534.4 | 294.9 | 175.0 | |||||||||||||
Commerce (**) | $ | 380.7 | $ | 286.8 | |||||||||||||
Fintech | 271.4 | 187.0 | |||||||||||||||
Total | $ | 1,622.0 | $ | 1,011.6 | $ | 603.0 | $ | 355.3 | $ | 652.1 | $ | 473.8 | |||||
(*) The table above may not total due to rounding.
(**) Includes final valuemarketplace fees, and shipping fees. The amount incurred in shipping subsidies netted from revenues, when we act as an agent, was $204.4 million and $316.7 million for the nine-month periods ended September 30, 2019 and 2018, respectively. The amount incurred in shipping subsidies netted from revenues, when we act as an agent, was $69.9 million and $107.6 million for the three-month periods ended September 30, 2019 and 2018, respectively.
(***) Includes, among other things,fees, ad sales, classified fees, payment fees and other ancillary services.
(****) Includes $665.0 million and $432.6 million of Payment Fees for the nine-month periods ended September 30, 2019 and 2018, respectively. Includes $256.8 million and $143.9 million of Payment Fees for the three-month periods ended September 30, 2019 and 2018, respectively.
Revenues from Enhanced MarketplaceCommerce transactions are mainly generated fromfrom:
marketplace fees that include final value fees and flat fees for transactions below a certain merchandise value;
shipping fees net of the third-party carrier costs.costs;
classifieds fees;
ad sales up-front fees;
sales of goods; and
fees from other ancillary businesses.
Final value fees represent a percentage of the sale value that is charged to the seller once an item is successfully sold. sold and flat fees represent a fixed charge for transactions below a certain merchandise value.
Shipping revenues are generated when a buyer elects to receive an item through our shipping service net of the third-party carrier costs.
Revenues for Non-MarketplaceThrough our classifieds offerings in motor vehicles, real estate and services, we generate revenues from up-front fees. These fees are charged to sellers who opt to give their listings greater exposure throughout our websites.
Our Advertising revenues are generated from:by selling either display product and/or text link ads throughout our websites to interested advertisers.
payments fees;
classifieds fees;
adRevenues from inventory sales up-front fees; and
fees from other ancillary businesses.are generated when control of the good is transferred to our customers.
Non-MarketplaceFintech revenues also comeare generated from payments fees. With respect to our Mercado Pago FinTech solution, whereMercadoPago service, we generate payment fees attributable to:
commissions representing a percentage of the payment volume processed that are charged to sellers in connection with off Marketplace-platform transactions;
commissions from additional fees we charge when a buyer elects to pay in installments through our Mercado Pago platform, for transactions that occur either on or off our Marketplace platform;
commissions from additional fees we charge when our sellers elect to withdraw cash;
interest, cash advances and fees from merchant and consumer credits granted under our Mercado Credito solution; and
revenues from the sale of mobile points of sale products.
Through our classifieds offerings of motor vehicles, vessels, aircraft, real estate and services,Although we generate revenues from up-front feesalso process payments on the Marketplace, we do not charge sellers an added commission for all classifieds offerings. We charge additional fees to sellers who opt to give their listings greater exposure throughout our websites.this service, as it is already included in the Marketplace final value fee that we charge.
Our AdvertisingWhen more than one service is included in one single arrangement with the same customer, we recognize revenue according to multiple element arrangements accounting, distinguishing between each of the services provided and allocating revenues are generated bybased on their respective estimated selling either display product and/or text link ads throughout our websites.prices.
We have a highly fragmented customer revenue base given the large numbers of sellers and buyers who use our platforms. For the nine-monththree-month periods ended September 30,March 31, 2020 and 2019, and 2018, no single customer accounted for more than 5.0% of our net revenues.
Our MercadoLibreMercado Libre Marketplace is available in 18 countries (Argentina, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Mexico, Panama, Peru, Uruguay, Venezuela (deconsolidated as of December 1, 2017), Bolivia, Honduras, Nicaragua, El Salvador, Guatemala and Paraguay), and Mercado Pago is available in 7 countries (Argentina, Brazil, Chile, Peru, Colombia, Mexico and Uruguay). Additionally, Mercado Envios is available in 6 countries (Argentina, Brazil, Mexico, Colombia, Chile Uruguay and Peru)Uruguay). The functional currency for each country’s operations is the country’s local currency, except for Argentina, where the functional currency is the U.S. dollar due to Argentina’s status as a highly inflationary economy. See—“Critical accounting policies and estimates—Foreign Currency Translation” included below and Note 2 to our unaudited interim condensed consolidated financial statements for highly inflationary economy details. Our net revenues are generated in multiple foreign currencies and then translated into U.S. dollars at the average monthly exchange rate.Please refer to “Critical Accounting Policies and Estimates” in Note 2 of our unaudited interim condensed consolidated financial statements for further detail on foreign currency translation.
Our subsidiaries in Brazil, Argentina and Colombia are subject to certain taxes on revenues, which are classified as a cost of net revenues. These taxes represented 8.3%5.9% of net revenues for the nine-monththree-month period ended September 30, 2019,March 31, 2020, as compared to 10.0%8.5% for the same period in 2018.2019. For the three-month period ended September 30, 2019, these taxes represented 8.1% of net revenues, as compared to the 9.7% for the same period in 2018.
Cost of net revenues
Cost of net revenues primarily representsincludes bank and credit card processing charges for transactions and fees paid with credit cards and other payment methods, shipping operation costs (including warehousing costs), carrier and other operating costs, fraud prevention fees, certain taxes on revenues, certain taxes on bank transactions, cost of mobile pointsales of sale products sold,goods, hosting and site operation fees, compensation for customer support personnel, ISP connectivity charges and depreciation and amortization, shipping operation costs (including warehousing costs), carrier and other operating costs.amortization.
Product and technology development expenses
Our product and technology development related expenses consist primarily of compensation for our engineering and web-development staff, depreciation and amortization costs related to product and technology development, telecommunications costs and payments to third-party suppliers who provide technology maintenance services to us.
Sales and marketing expenses
Our sales and marketing expenses consist primarily of costs related to marketing our platforms through online and offline advertising and agreements with portals, and search engines and other sales expenses related to strategic marketing initiatives, charges related to our buyer protection programs, the salaries of employees involved in these activities, chargebacks related to our Mercado Pago operations, bad debt charges, branding initiatives, marketing activities for our users and depreciation and amortization costs.
We carry out the majority of our marketing efforts on the Internet. We enter into agreements with portals, search engines, social networks, ad networks and other sites in order to attract Internet users to the MercadoLibreMercado Libre Marketplace and convert them into registered users and active traders on our platform.
We also work intensively on attracting, developing and growing our seller community through our customer support efforts. We have dedicated professionals in most of our operations that work with sellers through trade show participation, seminars and meetings to provide them with important tools and skills to become effective sellers on our platform.
General and administrative expenses
Our general and administrative expenses consist primarily of salaries for management and administrative staff, compensation of outside directors, long term retention plan compensation, expenses for legal, audit and other professional services, insurance expenses, office space rental expenses, travel and business expenses, as well as depreciation and amortization costs. Our general and administrative expenses include the costs of the following areas: general management, finance, treasury, internal audit, administration, accounting, tax, legal and human resources.
Other income (expenses), net
Other income (expenses) consists primarily of interest income derived from our investments and cash equivalents, interest expense and other financial charges related to financial liabilities and foreign currency gains or losses.
Income tax
We are subject to federal and state taxes in the United States, as well as foreign taxes in the multiple jurisdictions where we operate. Our tax obligations consist of current and deferred income taxes incurred in these jurisdictions. We account for income taxes following the liability method of accounting. A valuation allowance is recorded when, based on the available evidence, it is more likely than not that all or a portion of our deferred tax assets will not be realized. Therefore, our income tax expense consists of taxes currently payable, if any (given that in certain jurisdictions we still have net operating loss carry-forwards), plus the change in our deferred tax assets and liabilities during each period.
Critical Accounting Policies and Estimates
The preparation of our unaudited interim condensed consolidated financial statements and related notes requires us to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We have based our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our Management has discussed the development, selection and disclosure of these estimates with our audit committee and our board of directors. Actual results may differ from these estimates under different assumptions or conditions.
An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact our interim condensed consolidated financial statements. We believe that our critical accounting policies reflect the more significant estimates and assumptions used in the preparation of our interim condensed consolidated financial statements.
There have been no significant changes in our critical accounting policies, Management estimates or accounting policies since the year ended December 31, 20182019 and disclosed in the Form 10-K, see “Critical Accounting Policies and Estimates”, other than those discussed in Note 2 of our unaudited interim condensed consolidated financial statements in connection with the adoption of ASC 842 – New leasing accounting standard326 as of January 1, 2019 and the fair value option applied to certain financial instruments.2020.
Results of operations for the nine and three-month periods ended September 30, 2019March 31, 2020 compared to the nine and three-month periods ended September 30, 2018March 31, 2019
The selected financial data for the nine and three-month periods ended September 30,March 31, 2020 and 2019 and 2018 discussed herein is derived from our unaudited interim condensed consolidated financial statements included in Item 1 of Part I of this report. These statements include all normal recurring adjustments that Management believes are necessary to fairly state our financial position, results of operations and cash flows. The results of operations for the nine and three-month periods ended September 30, 2019March 31, 2020 are not necessarily indicative of the results that may be expected for the full year ending December 31, 20192020 or for any other period.
Statement of income data
Nine-month Periods Ended September 30, | Three-months Periods Ended September 30, | Three-months Periods Ended March 31, | ||||||||||||||||||||
(In millions) | 2019 (*) | 2018 (*) | 2019 (*) | 2018 (*) | 2020 (*) | 2019 (*) | ||||||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | ||||||||||||||||||||
Net revenues (**) | $ | 1,622.0 | $ | 1,011.6 | $ | 603.0 | $ | 355.3 | ||||||||||||||
Net revenues | $ | 652.1 | $ | 473.8 | ||||||||||||||||||
Cost of net revenues | (828.3) | (519.4) | (318.7) | (185.6) | (339.3) | (236.8) | ||||||||||||||||
Gross profit | 793.8 | 492.2 | 284.3 | 169.7 | 312.8 | 237.0 | ||||||||||||||||
Operating expenses: | ||||||||||||||||||||||
Product and technology development | (165.8) | (107.3) | (59.5) | (35.5) | (73.4) | (52.4) | ||||||||||||||||
Sales and marketing | (564.3) | (342.4) | (252.9) | (110.4) | (206.5) | (130.7) | ||||||||||||||||
General and administrative | (148.0) | (111.2) | (53.9) | (34.8) | (62.6) | (43.8) | ||||||||||||||||
Total operating expenses | (878.0) | (560.9) | (366.3) | (180.7) | (342.5) | (226.9) | ||||||||||||||||
Loss from operations | (84.3) | (68.7) | (81.9) | (11.0) | ||||||||||||||||||
(Loss)/income from operations | (29.7) | 10.1 | ||||||||||||||||||||
Other income (expenses): | ||||||||||||||||||||||
Interest income and other financial gains | 86.6 | 27.7 | 28.5 | 8.6 | 36.8 | 24.4 | ||||||||||||||||
Interest expense and other financial losses | (44.7) | (39.8) | (14.5) | (15.9) | (23.6) | (15.6) | ||||||||||||||||
Foreign currency (loss)/gain | (1.9) | 22.1 | 1.0 | 3.9 | ||||||||||||||||||
Net loss before income tax (loss)/gain | (44.3) | (58.6) | (66.9) | (14.3) | ||||||||||||||||||
Foreign currency loss | (0.2) | (3.7) | ||||||||||||||||||||
Net (loss)/income before income tax expense | (16.7) | 15.4 | ||||||||||||||||||||
Income tax (loss)/gain | (73.7) | 24.4 | (79.2) | 4.2 | ||||||||||||||||||
Net loss | $ | (118.0) | $ | (34.2) | $ | (146.1) | $ | (10.1) | ||||||||||||||
Income tax expense | (4.4) | (3.5) | ||||||||||||||||||||
Net (loss)/income | $ | (21.1) | $ | 11.9 | ||||||||||||||||||
(*) The table above may not total due to rounding.
(**Principal trends in results of operations
Net revenues
Our net revenues maintained its growth trajectory during the first quarter of 2020, specifically related to our Fintech solution services (off platform transactions through Mercado Pago, credits business, financing payment transactions, etc.) Theand the decrease in the amount incurred in shipping subsidies netted from revenues. Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of operations— Net Revenues” section in the current document for further detail on net revenues when we act as an agent, was $204.4 million and $316.7 milliontrends for the nine-month periodsperiod ended September 30, 2019 and 2018, respectively. The amount incurred in shipping subsidies netted from revenues, when we act as an agent, was $69.9 million and $107.6 million for the three-month periods ended September 30, 2019 and 2018, respectively.March 31, 2020.
The COVID-19 pandemic has affected many companies and industries in Latin America, our Company included. Governments across Latin America have taken varied quarantine measures, such as the lockdowns in Argentina where most business have been restricted in operations, while other countries, such as Brazil, have taken less restrictive measures.
Principal trends in results of operations
Growth in net revenues
SinceDespite our inception, we have consistently generated revenue growth from bothbelief that our Enhanced Marketplace and Non-Marketplace revenue streams, driven by the strong growth of our key operational metrics. Our net revenues grew 60.3% in the nine-month period ended September 30, 2019 as compared to the same period in 2018. Our net revenues grew as a result of increases in local currency gross merchandise volume in Argentina, Brazil and Mexico of 72%, 23% and 47%, respectively, and a 49.9% increase in our total payment volume in the nine-month period ended September 30, 2019 as compared to the same period in 2018. Additionally, ourlong-term growth in net revenues was boosted bywill continue in the decreasefuture, given our leadership in the region and the ongoing opportunities for e-commerce and Fintech solutions in Latin America, in the wake of COVID-19, our business has been negatively affected this quarter in terms of operations, consumer buying trends, and consequently, in our shipping subsidies nettednet revenues.
Consumers have pulled back on purchases of non-essential items. This led to a shift in sales, where categories such as health, consumer packaged goods and toys and games have shown greater growth, while categories such as auto parts and consumer electronics have seen marked declines in growth rates.
In the logistics business, widespread lockdowns, when imposed in ways that inhibit merchants from net revenues, when we act as an agent, from $316.7 millionoperating, have led to $204.4 millionorder backlogs and potential cancellations of orders delivered through drop ship and cross-docking networks. Our managed logistics network has continued operating, in the nine-month period ended September 30, 2018 as compared to the same period in 2019 and by the effectnormal course of business, maintaining deliveries for orders shipped through it. As of the flat fee we charge in Brazil, Argentina and Chile for transactions below a certain merchandise value. Finally,filing of this report, our growth in net revenues was partially offset by an average devaluation of the Argentine Peso and Brazilian Reais of approximately 43.6% and 7.3%, respectively, for the nine-month period ended September 30, 2019 as compared to the nine-month period ended September 30, 2018.warehouses remain operational with no operational disruptions.
Our net revenues grew 69.7%Fintech business has also experienced deceleration in number of payments processed in the three-month period ended September 30, 2019, as compared to the same period in 2018. Our net revenues grewlast two weeks of March, as a resultconsequence of increaseslower foot traffic in local currency gross merchandise volume in Argentina, Brazilphysical retail, which has had a direct impact on lower mobile point of sale and Mexico of 80%, 24% and 47% respectively, and a 66.2% increase in ourQR total payment volume in the three-month period ended September 30, 2019 as compared to the same period in 2018. Additionally, our growth in net revenues was boosted partially offset by the decrease in our shipping subsidies, which are netted from net revenues when we act as an agent, from $107.6 million to $69.9 million in the three-month period ended September 30, 2018 as compared to the same period in 2019, and by the effectperformance of the flat fee for transactions below a certain merchandise value in Brazil, Argentina and Chile. Finally, our growth in net revenues was partially offset by an average devaluation of the Argentina Peso of approximately 36.5% for the three-month period ended September 30, 2019 as compared to the three-month period ended September 30, 2018.merchant services on-line business.
We believe thatLastly, our growthrevenues sources are denominated in net revenues should continue inlocal currencies; therefore, the future. However, despite this positive historical trend, the current weak macro-economic environment in certain countries in Latin America,which we operate coupled with the devaluations of certain local currencies in those countries versusagainst the U.S. dollar, and high interest rates in those countries could cause a decline in year-over-year net revenues, particularly as measured in U.S. dollars. Moreover,
We continue to monitor the progress of the COVID-19 pandemic and will take additional measures to comply with the rapidly changing regulations of the countries where we operate and the related macroeconomic instability. However, we may continue to see lower net revenues growth until COVID-19 is contained in the future, net revenues could decline ifcountries where we continue offering free shipping and the costs of providing the service grow faster than our sales.operate.
Gross profit margins
Our gross profit margins remained stable at 48.9%margin is defined as total net revenues minus total cost of net revenues, as a percentage of net revenues.
Our gross profit trends are directly affected by our revenue, as stated above, and 48.7%our cost of net revenues. In this sense, our main cost of net revenue are composed of bank and credit card processing charges for transactions and fees paid with credit cards and other payment methods, fraud prevention fees, certain taxes on revenues, certain taxes on bank transactions, cost of mobile point of sale products sold, hosting and site operation fees, compensation for customer support personnel, ISP connectivity charges, depreciation and amortization, shipping operation costs (including warehousing costs), carrier and other operating costs. This cost structure is directly affected by the nine-month periods ended September 30, 2019level of operations of our services, and 2018, respectively.our strategic plan on gross profit is built on factors such as an ample liquidity to fund expenses and investments and a cost-effective capital structure with no significant short-term maturities.
However, in the future, our gross profit margin could decline if we are not able to apply appropriate measures regarding our business to prevent recent COVID-19 revenue trends, if we fail to maintain an appropriate relationship between our cost of revenue structure and our net revenues trend and we continue offering new shipping subsidies.
For the three-month periods ended September 30,March 31, 2020 and 2019, and 2018, our gross profit margins were 47.2%48.0% and 47.8%50.0%, respectively. The slight decrease in our gross profit margin resulted primarily from an increase in cost of net revenues of 71.7% for the three-month periods ended September 30, 2019 mainly related to shipping operating and carrier costs.
In the future, gross profit margins could decline if we offer new shipping subsidies or our shipping service grows faster than our marketplace sales.costs, as a percentage of net revenues, partially offset by a decrease in collection fees, as a percentage of revenues.
Operating loss margins
For the nine-month period ended September 30, 2019, as compared to the same period in 2018,Our operating margin is affected by our operating loss margin decreased from a negative marginexpenses structure, which mainly consists of 6.8% to a negative margin of 5.2%. This decrease is primarily a consequence of the increase in net revenues explained above.
For the three-month period ended September 30, 2019, as compared to the same period in 2018, our operating loss margin increased from a negative margin of 3.1% to a negative margin of 13.6%. This increase is primarily a consequence of the increase inemployees’s salaries, our sales and marketing expenses (mainly related to branding initiativesthose activities we incurred to promote our services, product development expenses, etc. As we continue to grow and bad debt expenses related to credit businessfocus on expanding our leadership in Brazil), calculated as a percentage of net revenues.
Asthe region, we will continue to invest in product development, sales and marketing and human resources in order to promote our services and capture long-term business opportunities,opportunities. As a result, we may experience decreases in our operating margins.
The COVID-19 pandemic and its aforementioned negative impacts on our business could also have negative impacts on our operating margins if we fail to closely monitor operating expenses on demand patterns and non-critical expenses are not adjusted in order to maintain an appropriate balance of such expenses with our actual rate of business development.
For the three-month period ended March 31, 2020, as compared to the same period in 2019, our operating loss margin increased from a positive margin of 2.1% to a negative margin of 4.6%. This increase is primarily a consequence of the increase in sales and marketing expenses (mainly related to branding and sales initiatives and bad debt expenses, partially due to the adoption of the ASC 326 effective January 1, 2020, related to credit business in Brazil and Mexico), calculated as a percentage of net revenues.
Other Data
| Nine-month Periods Ended |
| Three-month Periods Ended |
| Three-month Periods Ended | ||||||||||||
(in millions) |
| 2019 | 2018 | 2019 | 2018 |
| 2020 | 2019 | |||||||||
|
|
|
|
| |||||||||||||
Number of confirmed registered users at end of period (1) |
| 306.0 | 248.9 |
| 306.0 |
| 248.9 | ||||||||||
Unique active users (1) |
| 43.2 |
| 33.0 | |||||||||||||
Number of confirmed new registered users during period (2) |
| 38.6 | 36.7 |
| 13.8 |
| 14.0 |
| 13.0 |
| 12.3 | ||||||
Gross merchandise volume (3) |
| $ | 10,126.1 | $ | 9,271.8 |
| $ | 3,640.7 |
| $ | 2,995.2 |
| $ | 3,414.1 |
| $ | 3,087.8 |
Number of successful items sold (4) |
| 269.4 | 249.1 |
| 98.0 |
| 83.5 |
| 105.7 |
| 82.8 | ||||||
Number of successful items shipped (5) | 214.3 | 159.6 | 81.2 | 54.3 | 90.2 | 62.4 | |||||||||||
Total payment volume (6) |
| $ | 19,721.7 | $ | 13,153.8 |
| $ | 7,565.2 |
| $ | 4,552.4 |
| $ | 8,094.5 |
| $ | 5,639.1 |
Total volume of payments on marketplace (7) |
| $ | 9,393.7 | $ | 8,324.1 |
| $ | 3,377.6 |
| $ | 2,720.3 |
| $ | 3,203.3 |
| $ | 2,896.1 |
Total payment transactions (8) | 552.5 | 263.7 | 227.0 | 103.9 | 290.7 | 143.9 | |||||||||||
Unique buyers (9) | 36.9 | 31.5 | 22.4 | 17.9 | |||||||||||||
Unique sellers (10) | 9.2 | 8.9 | 4.4 | 4.3 | |||||||||||||
Capital expenditures |
| $ | 100.8 | $ | 72.1 |
| $ | 29.4 |
| $ | 25.3 |
| $ | 53.5 |
| $ | 33.0 |
Depreciation and amortization |
| $ | 52.5 | $ | 33.9 |
| $ | 19.5 |
| $ | 11.3 |
| $ | 21.6 |
| $ | 15.7 |
(1)MeasureNew or existing user who performed at least one of the cumulative numberfollowing actions during the reported period: (1) made one purchase, or reservation, or asked one question or MercadoLibre Marketplace or Classified Marketplace (2) maintained an active listing on MercadoLibre Marketplace or Classified Marketplace (3) maintained an active account in Mercado Shops (4) made a payment, money transfer, collection and/or advance using Mercado Pago (5) maintained an outstanding credit line through Mercado Credito or (6) maintained a balance of more than $5 invested in a Mercado Fondo asset management account. Management uses this metric to evaluate the size of our community of users who interact with the ecosystem and of which we have registered on the MercadoLibre Marketplace and confirmed theiroportunity to generate further engagement. With the changes in our business we believe it provides a better indication of our active user base rather than a registration excluding Classifieds users.metric that does not refflect any sort of interaction.
(2)Measure of the number of new users who have registered on the MercadoLibreMercado Libre Marketplace and confirmed their registration, excluding Classifieds users.
(3)Measure of the total U.S. dollar sum of all transactions completed through the MercadoLibreMercado Libre Marketplace, excluding Classifieds transactions.
(4)Measure of the number of items that were sold/purchased through the MercadoLibreMercado Libre Marketplace, excluding Classifieds items.
(5)Measure of the number of items that were shipped through our shipping service.
(6)Measure of the total U.S. dollar sum of all transactions paid for using Mercado Pago, including marketplace and non-marketplace transactions.
(7)Measure of the total U.S. dollar sum of all marketplace transactions paid for using Mercado Pago, excluding shipping and financing fees.
(8)Measure of the number of all transactions paid for using Mercado Pago.
(9)New or existing users with at least one purchase made in the period, including Classifieds users.
(10)New or existing users with at least one new listing in the period, including Classifieds users.
Net revenues
Nine-month Periods Ended | Change from 2018 | Three-month Periods Ended | Change from 2018 | Three-month Periods Ended | Change from 2019 | ||||||||||||||||||||
September 30, | to 2019 (*) | September 30, | to 2019 (*) | March 31, | to 2020 (*) | ||||||||||||||||||||
2019 | 2018 | in Dollars | in % | 2019 | 2018 | in Dollars | in % | 2020 | 2019 | in Dollars | in % | ||||||||||||||
(in millions, except percentages) | (in millions, except percentages) | (in millions, except percentages) | |||||||||||||||||||||||
Total Net Revenues (**) | $ 1,622.0 | $ 1,011.6 | $ 610.4 | 60.3% | $ 603.0 | $ 355.3 | $ 247.7 | 69.7% | |||||||||||||||||
Total Net Revenues | $ | 652.1 | $ | 473.8 | $ | 178.3 | 37.6% | ||||||||||||||||||
As a percentage of net revenues (*) | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | |||||||||||||||||||
(*) Percentages have been calculated using whole-dollar amounts rather than rounded amounts that appear in the table. The table above may not total due to rounding.
(**) The amount incurred in shipping subsidies netted from revenues, when we act as an agent, was $204.4 million and $316.7 million for the nine-month periods ended September 30, 2019 and 2018, respectively. The amount incurred in shipping subsidies netted from revenues, when we act as an agent, was $69.9 million and $107.6 million for the three-month periods ended September 30, 2019 and 2018, respectively.
Our net revenues grew 60.3%37.6% in the nine-monththree-month period ended September 30, 2019March 31, 2020 as compared to the same period in 2018.2019. The increase in net revenues was primarily attributable to increasesan increase in the enhanced marketplaceCommerce net revenues of 78.0%32.7% related to an increaseincreases in local currency gross merchandise volume in Argentina, Brazil and Mexico of 72%81%, 23%15% and 47%55%, respectively. Our net revenues grew 69.7% in the three-month period ended September 30, 2019 as compared to the same period in 2018, mainly as a result of increases in the enhanced marketplace net revenues of 70.9% related to an increase in local currency gross merchandise volume in Argentina, Brazil and Mexico of 80%, 24% and 47%, respectively
In addition, the increase in net revenues was attributable to:
a)a decrease of $112.3$35.4 million, or 35.5%47.8%, in shipping subsidies that are netted from revenues, during the nine-monththree-month period ended September 30, 2019March 31, 2020 as compared to the same period in 2018. For the three-month period ended September 30, 2019, shipping subsidies that are netted from revenues decreased $37.7 million, or 35.0%, as compared to the same period in 2018;2019; and
b)an increase of $86.4 million and $10.2$11.2 million for the nine and three-month periodsperiod ended September 30, 2019, respectively,March 31, 2020, as compared to the same periodsperiod in 2018,2019, mainly related to the flat fee we charge in Brazil, Argentina and Mexico for transactions below a certain merchandise value.
Our non-marketplaceFintech revenues increased 44.6%45.2%, from $534.4 million for the nine-month period ended September 30, 2018 to $772.6 million for the nine-month period ended September 30, 2019. Our non-marketplace revenues increased 68.6%, from $175.0$187.0 million for the three-month period ended September 30, 2018March 31, 2019 to $294.9$271.4 million for the three-month period ended September 30, 2019. These increases areMarch 31, 2020. This increase is mainly generated by a 49.9% and 66.2%43.5% increase in our total payment volume, mainly associated with off-platform transactions, financing and credits business for the nine and three-month periodsperiod ended September 30, 2019March 31, 2020 as compared to the same periodsperiod in 2018.2019.
The increase in our net revenues was partially offset by the devaluation of the Argentine Peso as described above.and the Brazilian Reais.
Nine-month Periods Ended | Change from 2018 | Three-month Periods Ended | Change from 2018 | |||||||||||||
September 30, | to 2019 (***) | September 30, | to 2019 (***) | |||||||||||||
Consolidated Net Revenues by revenue stream | 2019 | 2018 | in Dollars | in % | 2019 | 2018 | in Dollars | in % | ||||||||
(in millions, except percentages) | (in millions, except percentages) | |||||||||||||||
Brazil | ||||||||||||||||
Enhanced Marketplace | $ 520.4 | $ 260.9 | $ 259.5 | 99.5% | $ 187.4 | $ 105.5 | $ 81.9 | 77.7% | ||||||||
Non-Marketplace | 512.8 | 340.0 | 172.8 | 50.8% | 202.5 | 115.3 | 87.2 | 75.6% | ||||||||
1,033.2 | 600.8 | 432.4 | 72.0% | 389.9 | 220.8 | 169.1 | 76.6% | |||||||||
Argentina | ||||||||||||||||
Enhanced Marketplace | $ 148.7 | $ 149.8 | $ (1.1) | -0.8% | $ 54.7 | $ 44.6 | $ 10.1 | 22.7% | ||||||||
Non-Marketplace | 175.2 | 135.9 | 39.3 | 28.9% | 61.5 | 39.2 | 22.4 | 57.2% | ||||||||
323.9 | 285.8 | 38.1 | 13.3% | 116.2 | 83.7 | 32.5 | 38.8% | |||||||||
Mexico | ||||||||||||||||
Enhanced Marketplace | $ 145.6 | $ 39.0 | $ 106.6 | 273.1% | $ 53.7 | $ 19.5 | $ 34.2 | 175.4% | ||||||||
Non-Marketplace | 44.7 | 24.6 | 20.2 | 82.2% | 17.7 | 9.5 | 8.2 | 86.6% | ||||||||
190.3 | 63.6 | 126.7 | 199.4% | 71.4 | 29.0 | 42.4 | 146.4% | |||||||||
Other countries | ||||||||||||||||
Enhanced Marketplace | $ 34.8 | $ 27.5 | $ 7.3 | 26.4% | $ 12.3 | $ 10.8 | $ 1.5 | 14.2% | ||||||||
Non-Marketplace | 39.9 | 34.0 | 5.9 | 17.4% | 13.2 | 11.0 | 2.2 | 20.2% | ||||||||
74.7 | 61.5 | 13.2 | 21.4% | 25.5 | 21.8 | 3.7 | 17.2% | |||||||||
Consolidated | ||||||||||||||||
Enhanced Marketplace (*) | 849.4 | 477.2 | 372.2 | 78.0% | 308.1 | 180.3 | 127.8 | 70.9% | ||||||||
Non-Marketplace (**) | 772.6 | 534.4 | 238.2 | 44.6% | 294.9 | 175.0 | 120.0 | 68.6% | ||||||||
Total | $ 1,622.0 | $ 1,011.6 | $ 610.4 | 60.3% | $ 603.0 | $ 355.3 | $ 247.7 | 69.7% | ||||||||
Three-month Periods Ended | Change from 2019 | ||||||||||
March 31, | to 2020 (*) | ||||||||||
Consolidated Net Revenues by revenue stream | 2020 | 2019 | in Dollars | in % | |||||||
(in millions, except percentages) | |||||||||||
Brazil | |||||||||||
Commerce | $ | 214.6 | $ | 171.4 | $ | 43.2 | 25.2% | ||||
Fintech | 182.8 | 131.0 | 51.9 | 39.6% | |||||||
$ | 397.4 | $ | 302.4 | $ | 95.1 | 31.4% | |||||
Argentina | |||||||||||
Commerce | $ | 67.4 | $ | 48.9 | $ | 18.5 | 37.8% | ||||
Fintech | 65.4 | 44.8 | 20.6 | 45.9% | |||||||
$ | 132.9 | $ | 93.8 | $ | 39.1 | 41.7% | |||||
Mexico | |||||||||||
Commerce | $ | 77.3 | $ | 47.2 | $ | 30.0 | 63.6% | ||||
Fintech | 17.5 | 7.3 | 10.2 | 138.9% | |||||||
$ | 94.8 | $ | 54.6 | $ | 40.2 | 73.7% | |||||
Other countries | |||||||||||
Commerce | $ | 21.4 | $ | 19.2 | $ | 2.2 | 11.3% | ||||
Fintech | 5.6 | 3.8 | 1.8 | 46.5% | |||||||
$ | 27.0 | $ | 23.0 | $ | 4.0 | 17.2% | |||||
Consolidated | |||||||||||
Commerce | $ | 380.7 | $ | 286.8 | $ | 93.9 | 32.7% | ||||
Fintech | 271.4 | 187.0 | 84.4 | 45.2% | |||||||
Total | $ | 652.1 | $ | 473.8 | $ | 178.3 | 37.6% | ||||
(*) The amount incurred in shipping subsidies netted from revenues, when we act as an agent, was $204.4 million and $316.7 million for the nine-month periods ended September 30, 2019 and 2018, respectively. The amount incurred in shipping subsidies netted from revenues, when we act as an agent, was $69.9 million and $107.6 million for the three-month periods ended September 30, 2019 and 2018, respectively.
(**) Includes, among other things, payment fees, ad sales, classified fees and other ancillary services.
(***) Percentages have been calculated using whole-dollar amounts rather than the rounded amounts that appear in the table. The table above may not total due to rounding.
Brazil
Enhanced MarketplaceCommerce revenues in Brazil increased 99.5%25.2% in the nine-monththree-month period ended September 30, 2019March 31, 2020 as compared to the same period in 2018.2019. This increase was primarily a consequence of: i) a 23%15% increase in local currency gross merchandise volume; ii) a 102.6$30.8 million decrease in shipping subsidies related to our free shipping initiative, which is presented netted from revenues when we act as an agent;revenues; and iii) an increase of $81.8$5.4 million as a result of the implementation of a flat fee for transactions below a certain merchandise value. Non-MarketplaceThis increase was partially offset by a 15.4% approximate average devaluation of the local currency. Fintech revenues grew by 50.8%39.6%, a $172.8$51.9 million increase, during the nine-monththree-month period ended September 30, 2019March 31, 2020 as compared to the same period in 2018,2019, mainly driven by a 133.8% increase in the off-platform payments volume (which is partially monetized as a strategy to expand our ecosystem).
Enhanced Marketplace revenues in Brazil increased 77.7% in the three-month period ended September 30, 2019 as compared to the same period in 2018. This increase was primarily a consequence of: i) a 24% increase in local currency gross merchandise volume; ii) a $36.2 million decrease in shipping subsidies related to our free shipping initiative, which is presented netted from revenues when we act as an agent; and iii) an increase of $7.7 million as a result of the implementation of a flat fee for transactions below a certain merchandise value. Non-Marketplace revenues grew by 75.6%, a $87.2 million increase, during the three-month period ended September 30, 2019 as compared to the same period in 2018, mainly driven by a 130.1% increase in the off-platform payments volume (which is partially monetized as a strategy to expand our ecosystem).
Argentina
Enhanced Marketplace revenues in Argentina decreased 0.8% in the nine-month period ended September 30, 2019 as compared to the same period in 2018. The decrease was primarily a consequence of: i) a 43.6% approximately average devaluation of the local currency and ii) an increase of $8.6 million in shipping subsidies related to our free shipping initiative, which is presented netted from revenues when we act as an agent. This decrease was partially offset by: i) a 72% increase in local currency gross merchandise volume and ii) an increase of $4.4 million as a result of the implementation of a flat fee for transactions below a certain merchandise value. Non-Marketplace revenues grew 28.9%, a $39.3 million increase, during the nine-month period ended September 30, 2019 as compared to the same period in 2018, mainly driven by a 123.4%73.0% increase in the off-platform payments volume (which is partially monetized as a strategy to expand our ecosystem), partially offset by the aforementioned devaluation of the local currency.financing and credits business.
Enhanced MarketplaceArgentina
Commerce revenues in Argentina increased 22.7%37.8% in the three-month period ended September 30, 2019March 31, 2020 as compared to the same period in 2018.2019. This increase was primarily a consequence of: i) an 80%81% increase in local currency gross merchandise volume andvolume; ii) an increase of $2.4 million as a result of the implementation of a flat fee for transactions below a certain merchandise value. This increase was partially offset by: i) value; and iii) a 36.5% approximately devaluation of the local currency and ii) an increase of $1.5$5.0 million decrease in shipping subsidies related to our free shipping initiative, which is presented netted from revenues when we act as an agentrevenues. This increase was partially offset by. Non-Marketplacea 36.4% approximate average devaluation of the local currency. Fintech revenues grew 57.2%45.9%, a $22.4$20.6 million increase, during the three-month period ended September 30, 2019March 31, 2020 as compared to the same period in 2018,2019, mainly driven by a 170.9%103.9% increase in the off-platform payments volume (which is partially monetized as a strategy to expand our ecosystem), financing and credits business, partially offset by the aforementioned devaluation of the local currency.
Mexico
Enhanced MarketplaceCommerce revenues in Mexico increased 273.1%63.6% in the nine-monththree-month period ended September 30, 2019,March 31, 2020, as compared to the same period in 2018,2019, mainly due to: i) the reduced impact on revenues of shipping costs on revenues related to certain shipping services when we started acting as principal as of November 2018 and ii) a 47%55% increase in local currency gross merchandise volume. Nvolume; and ii) an increase of $3.2 million on-Marketplaceas a result of the implementation of a flat fee for transactions below a certain merchandise value. Fintech revenues grew 82.2%138.9%, a $20.2$10.2 million increase, during the nine-monththree-month period ended September 30, 2019March 31, 2020 as compared to the same period in 2018,2019, mainly driven by increases in the volume of off-platform payments transactions.transactions, financing and credits business.
on-Marketplace revenues grew 86.6%, a $8.2 million increase, during the three-month period ended September 30, 2019 as compared to the same period in 2018, mainly driven by increases in the volume of off-platform payments transactions.
The following table sets forth our total net revenues and the sequential quarterly growth of these net revenues for the periods described below:
Quarter Ended | Quarter Ended | |||||||||||||||
March 31, | June 30, | September 30, | December 31, | March 31, | June 30, | September 30, | December 31, | |||||||||
(in millions, except percentages) | (in millions, except percentages) | |||||||||||||||
(*) | (*) | |||||||||||||||
2020 | ||||||||||||||||
Net revenues | $ | 652.1 | $ | n/a | n/a | n/a | ||||||||||
Percent change from prior quarter (**) | -3% | |||||||||||||||
2019 | ||||||||||||||||
Net revenues (**) | $ | 473.8 | $ | 545.2 | $ | 603.0 | $ | n/a | ||||||||
Net revenues | $ | 473.8 | $ | 545.2 | $ | 603.0 | $ | 674.3 | ||||||||
Percent change from prior quarter | 11% | 15% | 11% | 11% | 15% | 11% | 12% | |||||||||
2018 | ||||||||||||||||
Net revenues (**) | $ | 321.0 | $ | 335.4 | $ | 355.3 | $ | 428.0 | ||||||||
Percent change from prior quarter | -10% | 4% | 6% | 20% | ||||||||||||
(*) Percentages have been calculated using whole-dollar amounts rather than the rounded amounts that appear in the table.
(**) The amount incurredNegative growth of Net revenues in shipping subsidies netted from revenues, when we act as an agent, was $204.4 million and $316.7 million for the nine-month periods ended September 30, 2019 and 2018, respectively. The amount incurred in shipping subsidies netted from revenues, when we act as an agent, was $69.9 million and $107.6 million for the three-month periodsperiod ended September 30,March 31, 2020 as compared with the three-month period ended December 31, 2019 is mainly a result of the impact of Covid-19 pandemic in the last two weeks of March 2020 and 2018, respectively.the devaluation of the Brazilian Reais. Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments” sections in the current document for further detail on impacts of Covid-19 Pandemic.
The following table sets forth the growth in net revenues in local currencies, for the nine and three-month period ended September 30, 2019March 31, 2020 as compared to the same period in 2018:2019:
Changes from 2018 to 2019 (*) | ||||
(% of revenue growth in Local Currency) (**) | Nine-month period | Three-month period | ||
Brazil | 84.9% | 77.3% | ||
Argentina | 107.1% | 118.9% | ||
Mexico | 202.8% | 152.5% | ||
Other Countries | 34.9% | 28.7% | ||
Total Consolidated | 95.1% | 90.5% | ||
Changes from 2019 to 2020 (*) | ||
(% of revenue growth in Local Currency) | Three-month period | |
Brazil | 54.8% | |
Argentina | 122.6% | |
Mexico | 80.5% | |
Other Countries | 37.9% | |
Total Consolidated | 70.5% |
(*) The local currency revenue growth was calculated by using the average monthly exchange rates for each month during 20182019 and applying them to the corresponding months in 2019,2020, so as to calculate what our financial results would have been if exchange rates had remained stable from one year to the next. See also “Non-GAAP Financial Measures” section below for details on FX neutral measures.
(**) The amount incurred in shipping subsidies netted from revenues, when we act as an agent, was $204.4 million and $316.7 million for the nine-month periods ended September 30, 2019 and 2018, respectively. The amount incurred in shipping subsidies netted from revenues, when we act as an agent, was $69.9 million and $107.6 million for the three-month periods ended September 30, 2019 and 2018, respectively.
In Argentina, the increase in local currency growth is due to an increase in our Argentine Commerce transactions volume, an increase in our shipped items volume, increases in our off-platform transactions business through Mercado Pago, an increase in our financing and credits business and a high level of inflation.
In MexicoBrazil, the increase in local currency growth is a consequence of an increase in our off-platform transactions through Mercado Pago, an increase in our financing and Brazil,credits business, lower shipping subsidies and an increase in our Commerce transactions volume.
In Mexico, the increase in local currency growth is a consequence of an increase of our MarketplaceCommerce transactions volumes,volume, increases in our off-platform transactions through Mercado Pago, an increase in our financing and credits business, and an increase in our shipped items volumes.volume.
Cost of net revenues
Nine-month Periods Ended | Change from 2018 | Three-month Periods Ended | Change from 2018 | Three-month Periods Ended | Change from 2019 | ||||||||||||||||||||
September 30, | to 2019 (*) | September 30, | to 2019 (*) | March 31, | to 2020 (*) | ||||||||||||||||||||
2019 | 2018 | in Dollars | in % | 2019 | 2018 | in Dollars | in % | 2020 | 2019 | in Dollars | in % | ||||||||||||||
(in millions, except percentages) | (in millions, except percentages) | (in millions, except percentages) | |||||||||||||||||||||||
Total cost of net revenues | $ 828.3 | $ 519.4 | $ 308.9 | 59.5% | $ 318.7 | $ 185.6 | $ 133.1 | 71.7% | $ | 339.3 | $ | 236.8 | $ | 102.5 | 43.3% | ||||||||||
As a percentage of net revenues (*) | 51.1% | 51.3% | 52.8% | 52.2% | 52.0% | 50.0% | |||||||||||||||||||
(*) Percentages have been calculated using whole-dollar amounts rather than the rounded amounts that appear in the table. The table above may not total due to rounding.
For the nine-monththree-month period ended September 30, 2019March 31, 2020 as compared to the same period of 2018,in 2019, the increase of $308.9$102.5 million in cost of net revenues was primarily attributable to: i) a $115.4 million increase in shipping carrier and operating costs; ii) an increase in collection fees of $72.7 million, which was mainly attributable to our Argentine and Brazilian operations as a result of the higher transactions volume of Mercado Pago in those countries; iii) a $34.6 million increase in cost of products sold attributable to increased sales of our mobile point of sale devices in Brazil, Argentina and Mexico; iv) a $33.7 million increase in sales taxes, mainly related to the growth of our Argentine and Brazilian operations; v) a $22.8 million increase in finance costs mainly related to funding our Mercado Pago business; and vi) a $18.5 million increase in customer support costs mainly as a consequence of higher salaries and wages due to new hires and temporary customer support workers.
For the three-month period ended September 30, 2019 as compared to the same period of 2018, the increase of $133.1 million in cost of net revenues was primarily attributable to: i) a $44.9$48.3 million increase in shipping carrier and operating costs; ii) a $33.4$21.5 million increase in collection fees, which was mainly attributable to our Argentine and Brazilian operations as a result of the higher transactions volume of Mercado Pago in those countries; iii) an $18.1a $13.9 million increase in cost of products sold attributable to increased sales of our mobile point of sale devicesgoods in Brazil, Argentina and Mexico; iv) a $14.4$7.3 million increase in sales taxes, mainly related to the growth of our Argentinehosting expenses; and Brazilian operations; v) a $8.9 million increase in customer support costs mainly as a consequence of higher salaries and wages due to new hires and temporary customer support workers; and vi) a $7.5$7.0 million increase in financeother payment costs mainly related to prepaid card costs and funding for our Mercado Pago business.
Product and technology development expenses
Nine-month Periods Ended | Change from 2018 | Three-month Periods Ended | Change from 2018 | Three-month Periods Ended | Change from 2019 | ||||||||||||||||||
September 30, | to 2019 (*) | September 30, | to 2019 (*) | March 31, | to 2020 (*) | ||||||||||||||||||
2019 | 2018 | in Dollars | in % | 2019 | 2018 | in Dollars | in % | 2020 | 2019 | in Dollars | in % | ||||||||||||
(in millions, except percentages) | (in millions, except percentages) | (in millions, except percentages) | |||||||||||||||||||||
Product and technology development | $ 165.8 | $ 107.3 | $ 58.5 | 54.5% | $ 59.5 | $ 35.5 | $ 24.0 | 67.7% | $ | 73.4 | $ | 52.4 | $ | 21.1 | 40.2% | ||||||||
As a percentage of net revenues (*) | 10.2% | 10.6% | 9.9% | 10.0% | 11.3% | 11.1% | |||||||||||||||||
(*) Percentages have been calculated using whole-dollar amounts rather than the rounded amounts that appear in the table. The table above may not total due to rounding.
For the nine-monththree-month period ended September 30, 2019,March 31, 2020, the increase in product and technology development expenses as compared to the same period in 20182019 amounted to $58.5$21.1 million. This increase was primarily attributable to: i) a $24.3$14.2 million increase in salaries and wages;wages mainly related to new hiring; and ii) a $21.7 million increase in other product and technology development expenses primarily related to office expenses and certain tax withholdings; iii) a $7.0 million increase in maintenance expenses; and iv) a $5.6 million increase in depreciation and amortization expenses.
For the three-month period ended September 30, 2019, the increase in product and technology development expenses as compared to the same period in 2018 amounted to $24.0 million. This increase was primarily attributable to: i) a $10.9 million increase in salaries and wages; ii) a $8.1 million increase in other product and technology development expenses primarily related to office expenses and certain tax withholdings; and iii) a $2.9$3.3 million increase in depreciation and amortization expenses.
We believe product development is one of our key competitive advantages and we intend to continue to invest in hiring engineers to meet the increasingly sophisticated product expectations of our customer base.
Sales and marketing expenses
Nine-month Periods Ended | Change from 2018 | Three-month Periods Ended | Change from 2018 | Three-month Periods Ended | Change from 2019 | ||||||||||||||||||
September 30, | to 2019 (*) | September 30, | to 2019 (*) | March 31, | to 2020 (*) | ||||||||||||||||||
2019 | 2018 | in Dollars | in % | 2019 | 2018 | in Dollars | in % | 2020 | 2019 | in Dollars | in % | ||||||||||||
(in millions, except percentages) | (in millions, except percentages) | (in millions, except percentages) | |||||||||||||||||||||
Sales and marketing | $ 564.3 | $ 342.4 | $ 221.9 | 64.8% | $ 252.9 | $ 110.4 | $ 142.5 | 129.0% | $ | 206.5 | $ | 130.7 | $ | 75.8 | 58.0% | ||||||||
As a percentage of net revenues (*) | 34.8% | 33.8% | 41.9% | 31.1% | 31.7% | 27.6% | |||||||||||||||||
(*) Percentages have been calculated using whole-dollar amounts rather than the rounded amounts that appear in the table. The table above may not total due to rounding.
For the nine-monththree-month period ended September 30, 2019,March 31, 2020, the $221.9$75.8 million increase in sales and marketing expenses as compared to the same period in 20182019 was primarily attributable to: i) an increase of $121.5$29.7 million in online and offline marketing expenses mainly in Brazil, Mexico and Argentina; ii) a $24.2$17.5 million increase in bad debt expenses;expenses partially explained by the adoption of the ASC 326 effective January 1, 2020; iii) a $21.3$ 12.2 million increase in other sales expenses mainly related to strategic marketing initiatives expenses; iv) a $5.9 million increase in our buyer protection program expenses, mainly in Brazil and Mexico; iv) a $20.9 million increase in chargebacks from credit cards due to the increase in our Mercado Pago transactions volume; v) a $ 18.6 million increase in other sales and marketing expenses, mainly related to branding initiatives; and vi) a $14.8 million increase in salaries and wages.
For the three-month period ended September 30, 2019, the $142.5 million increase in sales and marketing expenses as compared to the same period in 2018 was primarily attributable to: i) an increase of $88.4 million in online and offline marketing expenses mainly in Brazil, Mexico and Argentina; ii) a $20.4 million increase in bad debt expenses; iii) a $ 12.3 million increase in other sales and marketing expenses, mainly related to branding initiatives; iv) a $8.2 million increase in chargebacks from credit cards due to the increase in our Mercado Pago transactions volume; v) a $6.5 million increase in our buyer protection program expenses, mainly in Brazil and Mexico; and vi) a $6.0$5.1 million increase in salaries and wages.
General and administrative expenses
Nine-month Periods Ended | Change from 2018 | Three-month Periods Ended | Change from 2018 | Three-month Periods Ended | Change from 2019 | ||||||||||||||||||||
September 30, | to 2019 (*) | September 30, | to 2019 (*) | March 31, | to 2020 (*) | ||||||||||||||||||||
2019 | 2018 | in Dollars | in % | 2019 | 2018 | in Dollars | in % | 2020 | 2019 | in Dollars | in % | ||||||||||||||
(in millions, except percentages) | (in millions, except percentages) | (in millions, except percentages) | |||||||||||||||||||||||
General and administrative | $ 148.0 | $ 111.2 | $ 36.8 | 33.1% | $ 53.9 | $ 34.8 | $ 19.1 | 54.8% | $ | 62.6 | $ | 43.8 | $ | 18.7 | 42.8% | ||||||||||
As a percentage of net revenues (*) | 9.1% | 11.0% | 8.9% | 9.8% | 9.6% | 9.2% | |||||||||||||||||||
(*) Percentages have been calculated using whole-dollar amounts rather than the rounded amounts that appear in the table. The table above may not total due to rounding.
For the nine-monththree-month period ended September 30, 2019,March 31, 2020, the $36.8$18.7 million increase in general and administrative expenses as compared to the same period in 20182019 was primarily attributable to: i) a $18.6$11.6 million increase in salaries and wages; and ii) a $9.2 million increase in other general and administrative expenses, mainly related to certain tax withholdings; and iii) a $8.5$4.0 million increase in legal, tax and other fees.
For the three-month period ended September 30, 2019, the $19.1 million increase in general and administrative expenses as compared to the same period in 2018 was primarily attributable to: i) a $8.4 million increase in salaries and wages; ii) a $6.6 million increase in legal, tax and other fees; and iii) a $2.9 million increase in other general and administrative expenses, mainly related to certain tax withholdings.
Other income (expense), net
Nine-month Periods Ended | Change from 2018 | Three-month Periods Ended | Change from 2018 | Three-month Periods Ended | Change from 2019 | ||||||||||||||||||
September 30, | to 2019 (*) | September 30, | to 2019 (*) | March 31, | to 2020 (*) | ||||||||||||||||||
2019 | 2018 | in Dollars | in % | 2019 | 2018 | in Dollars | in % | 2020 | 2019 | in Dollars | in % | ||||||||||||
(in millions, except percentages) | (in millions, except percentages) | (in millions, except percentages) | |||||||||||||||||||||
Other income (expense), net | $ 40.0 | $ 10.0 | $ 30.0 | 298.3% | $ 15.0 | $ (3.3) | $ 18.3 | 553.3% | $ | 13.0 | $ | 5.2 | $ | 7.8 | 149.5% | ||||||||
As a percentage of net revenues (*) | 2.5% | 1.0% | 2.5% | -0.9% | 2.0% | 1.1% | |||||||||||||||||
(*) Percentages have been calculated using whole-dollar amounts rather than the rounded amounts that appear in the table. The table above may not total due to rounding.
For the nine-monththree-month period ended September 30, 2019,March 31, 2020, the $30.0$7.8 million increase in other income (expense), net as compared to the same period in 20182019 was primarily attributable toto: i) a $58.8$12.3 million increase in interest income from our financial investments as a result of the proceeds of the 2028 Notes and equity offering during March 2019, which generated more invested volume and interest gain, and a higher float in Brazil and Argentina. This increase was partially offset by: i) a higher foreign exchange loss of $24.0 million, related to the $22.1 million gain from 2018 compared with the $1.9 million loss from 2019; and ii) an increase of $4.9 million in financial expenses, mainly attributable to interest expense related to 2028 Notes.
For thethree-month period ended September 30, 2019, the $18.3millionincrease in other income (expense), net as compared to the same period in 2018 wasprimarily attributable to: i) a $19.8 million increase in interest income from our financial investments as a result of the proceeds of the 2028 Notes and equity offering during 2019, which generated more invested volume and interest gain, and a higher float in Brazil and Argentina; and ii) a $3.5 million decrease of $1.4 million in financial expenses mainly attributable to lower interest expense as a result of the 2019 Notes reaching maturity.our foreign exchange loss. This increase was partially offset by a lower foreign exchange gain of $2.9 million.$8.0 million increase in financial expenses mainly attributable to secured financial loans and interest expenses from our trusts related to our factoring business in Argentina.
Income tax
Three-month Periods Ended | Change from 2019 | |||||||||||||||||||||||
Nine-month Periods Ended | Change from 2018 | Three-month Periods Ended | Change from 2018 | March 31, | to 2020 (*) | |||||||||||||||||||
September 30, | to 2019 (*) | September, 30 | to 2019 (*) | 2020 | 2019 | in Dollars | in % | |||||||||||||||||
2019 | 2018 | in Dollars | in % | 2019 | 2018 | in Dollars | in % | (in millions, except percentages) | ||||||||||||||||
(in millions, except percentages) | (in millions, except percentages) | |||||||||||||||||||||||
Income tax (loss)/gain | $ (73.7) | $ 24.4 | $ (98.1) | -402.5% | $ (79.2) | $ 4.2 | $ (83.4) | -1969.6% | ||||||||||||||||
Income tax expense | $ | (4.4) | $ | (3.5) | $ | (0.9) | 26.9% | |||||||||||||||||
As a percentage of net revenues (*) | -4.5% | 2.4% | -13.1% | 1.2% | -0.7% | -0.7% | ||||||||||||||||||
(*) Percentages have been calculated using whole-dollar amounts rather than the rounded amounts that appear in the table. The table above may not total due to rounding.
During the nine and three-month periodsperiod ended September 30, 2019March 31, 2020 as compared to the same periodsperiod in 2018,2019, income tax (loss)/gainexpense increased by $98.1$0.9 million and $83.4 million, respectively, mainly as a result of valuation allowances accounted for on certain deferred tax assets in Mexico and Colombia.accounted for in the period ended March 31, 2020, partially offset by lower income tax expense in Brazil, mainly as a result of higher non-taxable pre-tax gains.
Our effective tax rate is defined as income tax (loss)/gain as a percentage of income/(loss) before income tax.
The following table summarizes our effective tax rates for the nine and three-month periods ended September 30, 2019March 31, 2020 and 2018:2019:
Nine-month Periods Ended | Three-month Periods Ended | |||||||
September 30, (*) | September 30, (*) | |||||||
2019 | 2018 | 2019 | 2018 | |||||
Effective tax rate | -166.5% | 41.6% | -118.3% | 29.6% | ||||
Three-month Periods Ended | ||||
March 31, (*) | ||||
2020 | 2019 | |||
Effective tax rate | -26.6% | 22.7% | ||
(*) Percentages have been calculated using whole-dollar amounts rather than the rounded amounts that appear in the table. The table above may not total due to rounding.
Our effective tax rate for the nine and three-month periodsperiod ended September 30, 2019March 31, 2020 decreased to a negative effective tax rate as compared to the same periodsperiod in 2018,2019, largely as a result of valuation allowances accounted for on certain deferred tax assets in Mexico and Colombiaaccounted for in the period ended March 31, 2020, partially offset by an increase in our Argentine income tax rate and pre-tax losses.mainly as a consequence of the temporary suspension of the knowledge-based economy promotional regime since 2020 by Argentine government until new rules for the application of the regime are issued.
The following table summarizes our effective tax rates for the nine and three-month periods ended June 30, 2019March 31, 2020 and 2018:2019:
Nine-month Periods Ended | Three-month Periods Ended | Three-month Periods Ended | ||||||||
September 30, | September 30, | March 31, | ||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | |||||
Effective tax rate by country | ||||||||||
Argentina | 9.1% | 21.8% | 12.6% | 33.7% | 45.1% | 15.9% | ||||
Brazil | 28.7% | 39.8% | 26.3% | 53.1% | 22.3% | 30.6% | ||||
Mexico | -55.5% | 28.5% | -169.3% | 29.1% | 1.0% | 34.3% | ||||
The decreaseincrease in the effective income tax rate in our Argentine subsidiaries during the nine and three-month period ended September 30, 2019March 31, 2020 as compared to the same periodsperiod in 20182019 was mainly a consequence of higherthe temporary suspension of the knowledge-based economy promotional regime since 2020 by the Argentine government until new rules for the application of the regime are issued, which had a direct impact on the income tax deductible expenses onrate for our Argentine business related to tax inflation adjustments on certain assets, in accordance with Argentine income tax law, and greater relief in overall income taxes as a result of the software development law.business.
For information regarding the benefits granted to the Company under the software development law, please see Note 2 to our interim unaudited condensed consolidated financial statements.
The decrease in our Brazilian effective income tax rate for the nine and three-month period ended September 30, 2019March 31, 2020 as compared to the same period in 2018,2019, was mainly related to higher non-taxable pre-tax gains.
The decrease in our Mexican effective income tax rate for the nine and three-month period ended September 30, 2019March 31, 2020 as compared to the same period in 20182019, was mainly related to valuation allowances accounted for on certain deferred tax assets in Mexico accounted for in the period ended March 31, 2020.
Segment information
(In millions, except for percentages) | Nine-month Period Ended September 30, 2019 (*) | |||||||||
Brazil | Argentina | Mexico | Other Countries | Total | ||||||
Net revenues | $ 1,033.2 | $ 323.9 | $ 190.3 | $ 74.7 | $ 1,622.0 | |||||
Direct costs | (872.0) | (239.9) | (254.3) | (70.7) | (1,437.1) | |||||
Direct contribution | 161.2 | 83.9 | (64.0) | 3.9 | 185.1 | |||||
Margin | 15.6% | 25.9% | -33.6% | 5.3% | 11.4% | |||||
Segment information
Nine-month Period Ended September 30, 2018 (*) | ||||||||||
Brazil | Argentina | Mexico | Other Countries | Total | ||||||
Net revenues | $ 600.8 | $ 285.8 | $ 63.6 | $ 61.5 | $ 1,011.6 | |||||
Direct costs | (544.1) | (185.8) | (101.1) | (57.2) | (888.2) | |||||
Direct contribution | 56.7 | 100.0 | (37.5) | 4.3 | 123.5 | |||||
Margin | 9.4% | 35.0% | -59.0% | 7.0% | 12.2% | |||||
Change from the Nine-month Period Ended September 30, 2018 to September 30, 2019 (*) | ||||||||||
Brazil | Argentina | Mexico | Other Countries | Total | ||||||
Net revenues | ||||||||||
in Dollars | $ 432.4 | $ 38.1 | $ 126.7 | $ 13.2 | $ 610.4 | |||||
in % | 72.0% | 13.3% | 199.4% | 21.4% | 60.3% | |||||
Direct costs | ||||||||||
in Dollars | $ (327.8) | $ (54.2) | $ (153.2) | $ (13.5) | $ (548.8) | |||||
in % | 60.2% | 29.2% | 151.6% | 23.7% | 61.8% | |||||
Direct contribution | ||||||||||
in Dollars | $ 104.5 | $ (16.1) | $ (26.5) | $ (0.4) | $ 61.6 | |||||
in % | 184.4% | -16.1% | 70.6% | -8.6% | 49.9% | |||||
(In millions, except for percentages) | Three-month Period Ended September 30, 2019 (*) | Three-month Period Ended March 31, 2020 (*) | ||||||||||||||||||||||
Brazil | Argentina | Mexico | Other Countries | Total | Brazil | Argentina | Mexico | Other Countries | Total | |||||||||||||||
Net revenues | $ 389.9 | $ 116.2 | $ 71.4 | $ 25.5 | $ 603.0 | $ | 397.4 | $ | 132.9 | $ | 94.8 | $ | 27.0 | $ | 652.1 | |||||||||
Direct costs | $ (370.7) | $ (88.5) | $ (103.5) | $ (25.8) | $ (588.6) | (322.6) | (101.0) | (114.8) | (27.6) | (566.0) | ||||||||||||||
Direct contribution | 19.2 | 27.7 | (32.2) | (0.3) | 14.4 | $ | 74.8 | $ | 31.9 | $ | (20.0) | $ | (0.6) | $ | 86.1 | |||||||||
Margin | 4.9% | 23.8% | -45.1% | -1.3% | 2.4% | 18.8% | 24.0% | -21.1% | -2.2% | 13.2% | ||||||||||||||
Three-month Period Ended September 30, 2018 (*) | Three-month Period Ended March 31, 2019 (*) | |||||||||||||||||||||||
Brazil | Argentina | Mexico | Other Countries | Total | Brazil | Argentina | Mexico | Other Countries | Total | |||||||||||||||
Net revenues | $ 220.8 | $ 83.7 | $ 29.0 | $ 21.8 | $ 355.3 | $ | 302.4 | $ | 93.8 | $ | 54.6 | $ | 23.0 | $ | 473.8 | |||||||||
Direct costs | $ (190.2) | $ (60.4) | $ (35.2) | $ (18.8) | $ (304.6) | (225.3) | (67.5) | (65.6) | (20.4) | (378.9) | ||||||||||||||
Direct contribution | 30.7 | 23.3 | (6.3) | 3.0 | 50.6 | $ | 77.0 | $ | 26.3 | $ | (11.0) | $ | 2.6 | $ | 94.9 | |||||||||
Margin | 13.9% | 27.8% | -21.6% | 13.6% | 14.3% | 25.5% | 28.0% | -20.2% | 11.3% | 20.0% | ||||||||||||||
Change from the Three-month Period Ended September 30, 2018 to September 30, 2019 (*) | Change from the Three-month Period Ended March 31, 2019 to March 31, 2020 (*) | |||||||||||||||||||||||
Brazil | Argentina | Mexico | Other Countries | Total | Brazil | Argentina | Mexico | Other Countries | Total | |||||||||||||||
Net revenues | ||||||||||||||||||||||||
in Dollars | $ 169.1 | $ 32.5 | $ 42.4 | $ 3.7 | $ 247.7 | $ | 95.1 | $ | 39.1 | $ | 40.2 | $ | 4.0 | $ | 178.3 | |||||||||
in % | 76.6% | 38.8% | 146.4% | 17.2% | 69.7% | 31.4% | 41.7% | 73.7% | 17.2% | 37.6% | ||||||||||||||
Direct costs | ||||||||||||||||||||||||
in Dollars | $ (180.5) | $ (28.1) | $ (68.3) | $ (7.0) | $ (284.0) | $ | (97.3) | $ | (33.5) | $ | (49.2) | $ | (7.2) | $ | (187.2) | |||||||||
in % | 94.9% | 46.6% | 193.8% | 37.3% | 93.2% | 43.2% | 49.7% | 75.0% | 35.0% | 49.4% | ||||||||||||||
Direct contribution | ||||||||||||||||||||||||
in Dollars | $ (11.4) | $ 4.4 | $ (25.9) | $ (3.3) | $ (36.2) | $ | (2.2) | $ | 5.6 | $ | (9.0) | $ | (3.2) | $ | (8.8) | |||||||||
in % | -37.3% | 18.7% | 413.0% | -110.8% | -71.5% | -2.9% | 21.2% | 81.5% | -122.6% | -9.3% | ||||||||||||||
(*) Percentages have been calculated using whole-dollar amounts rather than the rounded amounts that appear in the table. The table above may not total due to rounding.
Net revenues
Net revenues for the nine and three-month periodsperiod ended September 30, 2019March 31, 2020 as compared to the same period in 20182019 are described above in “Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Net revenues.”
Direct costs
Brazil
For the nine-monththree-month period ended September 30, 2019,March 31, 2020, as compared to the same period in 2018,2019, direct costs increased by 60.2%43.2%, mainly driven by: i) a 73.6%47.4% increase in sales and marketing expenses, mainly due to an increase in online and offline marketing expenses, bad debt expenses buyer protection program expenses,partially explained by the adoption of the ASC 326 effective January 1, 2020, chargebacks from credit cards due to the increase in our Mercado Pago transaction volume and other sales and marketing expenses mainly related to strategic marketing initiatives expenses and salaries and wages;; ii) a 55.4%35.3% increase in cost of net revenues, mainly attributable to an increase in shipping operating and carrier costs, collection fees as a consequence of the higher transactions volume of our Mercado Pago business, shipping operating and carrier costs, sales tax,increase in cost of products sold due to increasedsale of goods as a consequence of an increase in sales of our mobile point of sale devices and finance costs mainly related to funding our Mercado Pago business;products; iii) a 49.8%54.6% increase in product and technology development expenses, mainly due to an increase inother product and technology development expenses primarily related to certain tax withholdings, depreciation and amortization expenses and salaries and wages; and iv) a 36.4% increase in general and administrative expenses, mainly attributable to an increase in salaries and wages and legal fees, tax and other fees.
For the three-month period ended September 30, 2019, as compared to the same period in 2018, direct costs increased by 94.9%, mainly driven by: i) a 147.2% increase in sales and marketing expenses, mainly due to an increase in online and offline marketing expenses, bad debt expenses, buyer protection program expenses, chargebacks from credit cards due to the increase in our Mercado Pago transaction volume, other sales and marketing expenses mainly related to strategic marketing initiatives expenses and salaries and wages; ii) a 69.5% increase in cost of net revenues, mainly attributable to an increase in collection fees as a consequence of the higher transactions volume of our Mercado Pago business, shipping operating costs, sales tax, cost of products sold due to increased sales of our mobile point of sale devices and finance costs mainly related to funding our Mercado Pago business; iii) a 61.4% increase in product and technology development expenses, mainly due to an increase in other product and technology development expenses primarily related to certain tax withholdings,depreciation and amortization expenses and salaries and wages;expenses; and iv) a 76.9%94.4% increase in general and administrative expenses, mainly attributable to an increase in salaries and wages and legal, tax and other fees.
Argentina
For the nine-monththree-month period ended September 30, 2019,March 31, 2020, as compared to the same period in 2018,2019, direct costs increased by 29.2%49.7%, mainly driven by: i) a 37.6% increase in sales and marketing expenses, mainly due to an increase in online and offline marketing expenses, buyer protection program expenses, chargebacks from credit cards, bad debt expenses and other sales and marketing expenses mainly related to certain tax withholdings; ii) a 26.0% increase in cost of net revenues, mainly attributable to an increase in collection fees as a consequence of the higher transactions volume of our Mercado Pago business, an increase in shipping operating and carrier costs, cost of products sold due to increased sales of our mobile point of sale devices, and finance costs mainly related to funding our Mercado Pago business; iii) a 36.3% increase in product and technology development expenses, mainly due to an increase in depreciation and amortization expenses and salaries and wages; and iv) a 25.4% increase in general and administrative expenses, mainly attributable to an increase in salaries and wages and other general and administrative expenses mainly related to certain tax withholdings. This increase in direct costs are netted from the effect of inflation and devaluation in Argentina, as described previously in this document.
For the three-month period ended September 30, 2019, as compared to the same period in 2018, direct costs increased by 46.6%, mainly driven by: i) a 88.4%50.5% increase in sales and marketing expenses, mainly due to an increase in online and offline marketing expenses, bad debt expenses, chargebacks from credit cards, bad debt expenses and other sales and marketing expenses mainly related to strategic marketing initiatives expenses,certain tax withholdings; buyer protection program expenses and salaries and wages; ii) a 35.6%49.8% increase in cost of net revenues, mainly attributable to an increase in shipping operating and carrier costs, sales taxes, finance costs mainly related to funding our Mercado Pago business, an increase in cost of sale of goods as a consequence of an increase in sales of products, and an increase in collection fees as a consequence of the higher transactions volume of our Mercado Pago business, an increase in shipping operating and carrier costs and finance costs mainly related to funding our Mercado Pago business;business; iii) a 8.0%20.4% increase in product and technology development expenses, mainly due to an increase in depreciation and amortization expenses; and iv) a 24.1%64.3% increase in general and administrative expenses, mainly attributable to an increase in salaries and wages and other general and administrative expenses mainly related to certain tax withholdings.wages. This increase in direct costs are netted from the effect of inflation and devaluation in Argentina, as described previously in this document.
Mexico
For the nine-monththree-month period ended September 30, 2019,March 31, 2020, as compared to the same period in 2018,2019, direct costs increased by 151.6%75.0%, mainly driven by: i) a 309.1% increase in cost of net revenues, mainly attributable to an increase in shipping operating costs, collection fees due to higher Mercado Pago penetration, customer support costs and cost of products sold as a result of increased sales of our mobile point of sale devices; ii) a 79.4%99.5% increase in sales and marketing expenses, mainly due to increases in online and offline marketing expenses, buyer protection program expenses, bad debt expenses partially explained by the adoption of the ASC 326 effective January 1, 2020, chargebacks from credit cards due to the increase in our Mercado Pago transaction volume and salaries and wages; iii)ii) a 81.9% increase in product and technology development expenses, mainly attributable todepreciation and amortization expenses; and iv) a 66.5% increase in general and administrative expenses mainly due to an increase in salaries and wages and other general and administrative expenses.
For the three-month period ended September 30, 2019, as compared to the same period in 2018, direct costs increased by 193.8%, mainly driven by: i) a 293.4%64.2% increase in cost of net revenues, mainly attributable to an increase in shipping operating and carrier costs, an increase in collection fees due to higher Mercado Pago penetration, customer support costs and an increase in cost of products soldsale of goods as a resultconsequence of increased sales of our mobile point of sale devices; ii) a 143.9%an increase in sales and marketing expenses, mainly due to increases in online and offline marketing expenses, buyer protection program expenses, chargebacks from credit cards due to the increase in our Mercado Pago transaction volume and salaries and wages;of products; iii) a 83.4%76.9% increase in product and technology development expenses, mainly attributable to depreciation and amortization expenses; and iv) a 103.7%36.8% increase in general and administrative expenses, mainly attributable to an increase in salaries and wages and other general and administrative expenses mainly related to certain tax withholdings.wages.
Liquidity and Capital Resources
Our main cash requirement has been working capital to fund Mercado Pago financing operations. We also require cash for capital expenditures relating to technology infrastructure, software applications, office space, business acquisitions, to fund our credit business, to build out our logistics capacity and the interest payments on our issued convertible notes. Please refer to Note 79 of our unaudited interim condensed consolidated financial statements for further detail on purchase commitments.
Since our inception, we have funded our operations primarily through contributions received from our stockholders during the first two years of operations, from funds raised during our initial public offering, and from cash generated from our operations. We issued the 2019 Notes and 2028 Notes for net proceeds of approximately $321.7 million and $864.6 million, respectively.million. We have funded Mercado Pago mainly by discounting credit cards receivable and credit lines.
Additionally, we continue fundingstarted to fund our Mercado Pago and Mercado Credito businessbusinesses through the securitization of credit cards receivable and certain loans receivable through SPEs created in Brazil, Mexico and Argentina, formed to securitize loans receivable provided by us to our users. We will be using this alternative funding as the Mercado Credito business requires financing to develop and improve its operations.Argentina. Please refer to Note 1113 of our unaudited interim condensed consolidated financial statements for further detail on securitization transactions.
Finally, we issued common and preferred stock in the securities offerings that closed on March 15, 2019 and March 29, 2019, respectively, for net aggregate proceeds of $1,966$1,965.9 million, which are intended to be used to fund the growth of our payment initiatives, build out our logistics capacity, drive the adoption of these services and for general corporate purposes. Please see note 1012 to our unaudited condensed consolidated financial statements for additional information regarding our equity offerings.
Given the uncertain progress of the COVID-19 pandemic and the related macroeconomic instability in the countries where we operate, it is not possible to have certainty around business development and cash generation for the remainder of the year 2020. In terms of liquidity and cash management, as of the date of the filing of this report, our relevant sources of funding remain available and new credit facilities have been obtained at the geographic segment level. Please refer to Note 16 of our unaudited interim condensed consolidated financial statements for further detail on COVID-19 impacts.
As of September 30, 2019,March 31, 2020, our main source of liquidity was $2,774.6$2,276.4 million of cash and cash equivalents and short-term investments, which excludes a $371.6$326.7 million investment related to the Central Bank of Brazil Mandatory Guarantee and $3.6$26.5 million investment related to financial guarantees for secured lines of credit in Argentina, and $270.0 million of long-term investments, and consists of cash generated from operations, proceeds from loans, from the issuance of the 2028 Notes and proceeds from the issuance of common and preferred stock. We consider our long-term investments as part of our liquidity because long-term investments are comprised of available-for-sale securities, classified as long-term as a consequence of their contractual maturities.
The significant components of our working capital are cash and cash equivalents, restricted cash and cash equivalents, short-term investments, accounts receivable, loans receivable, accounts payable and accrued expenses, funds receivable from and payable to Mercado Pago users, and short-term debt.
As of September 30, 2019,March 31, 2020, cash and investments of our non-U.S. subsidiaries amounted to $1,012.4$1,159.9 million, 31.8%37.5% of our consolidated cash, restricted cash and cash equivalents and investments, and our non-U.S. dollar-denominated cash and investments amounted to approximately 27.2%32.6% of our consolidated cash and investments. Our non-U.S. dollar-denominated cash and investments are located primarily in Brazil.
The following table presents our cash flows from operating activities, investing activities and financing activities for the nine-monththree-month periods ended September 30, 2019March 31, 2020 and 2018:2019:
Nine-month Periods Ended | Three-month Periods Ended | |||||||||||||
September 30, (*) | March 31, (*) | |||||||||||||
(In millions) | 2019 | 2018 | 2020 | 2019 | ||||||||||
Net cash provided by (used in): | ||||||||||||||
Net cash (used in) provided by: | ||||||||||||||
Operating activities | $ 372.8 | $ 196.1 | $ | (85.7) | $ | 138.4 | ||||||||
Investing activities | (1,273.4) | 22.1 | (150.1) | (1,260.1) | ||||||||||
Financing activities | 1,941.1 | 570.6 | 154.6 | 1,974.7 | ||||||||||
Effect of exchange rates on cash, cash equivalents, restricted cash and cash equivalents | (48.2) | (99.4) | ||||||||||||
Net increase in cash, cash equivalents, restricted cash and cash equivalents | $ 992.3 | $ 689.5 | ||||||||||||
Effect of exchange rates on cash and cash equivalents, restricted cash and cash equivalents | (104.9) | (11.4) | ||||||||||||
Net (decrease)/increase in cash and cash equivalents, restricted cash and cash equivalents | $ | (186.0) | $ | 841.6 | ||||||||||
(*) The table above may not total due to rounding.
Net cash (used in)/provided by operating activities
Cash (used in)/provided by operating activities consists of net (loss)/income adjusted for certain non-cash items, and the effect of changes in working capital and other activities:
Nine-month Periods Ended | Change from 2018 | Three-month Periods Ended | Change from 2019 | ||||||||||||||
September 30, (*) | to 2019 (*) | March 31, (*) | to 2020 (*) | ||||||||||||||
2019 | 2018 | in Dollars | in % | 2020 | 2019 | in Dollars | in % | ||||||||||
(in millions, except percentages) | (in millions, except percentages) | ||||||||||||||||
Net Cash provided by: |
|
| |||||||||||||||
Net Cash (used in)/provided by: |
|
| |||||||||||||||
Operating activities | $ 372.8 | $ 196.1 | $ 176.7 | 90.1% | $ | (85.7) | $ | 138.4 | $ | (224.0) | -161.9% | ||||||
(*) Percentages have been calculated using whole-dollar amounts rather than the rounded amounts that appear in the table. The table above may not total due to rounding.
The $176.7$224.0 million increasedecrease in net cash (used in)/provided by operating activities during the nine-monththree-month period ended September 30, 2019,March 31, 2020, as compared to the same period in 2018,2019, was primarily driven by: i) a $120.3$85.1 million increase as a consequence of higher net loss after non-cash adjustments; ii) a $37.9 million increase in accounts payable; iii) a $24.4 million increase in interest received from investments; iv) a $16.4 million increase in accounts receivable; v) a $16.1 million increase in prepaid expenses; vi) a $12.2 million increasedecrease in funds payable to customers; and vii)ii) a $12.0$69.2 million increase in credit cards receivable; iii) a $44.9 million decrease in other liabilities.liabilities; and iv) a $42.6 million decrease in accounts payable and accrued expenses. This increasedecrease was partially offset by a $55.9an decrease of $19.4 million decrease in credit cardsaccounts receivable.
Net cash (used in)/provided by investing activities
Net cash used in investing activities
Nine-month Periods Ended | Change from 2018 | ||||||||||||||||
September 30, (*) | to 2019 (*) | ||||||||||||||||
2019 | 2018 | in Dollars | in % | Three-month Periods Ended | Change from 2019 | ||||||||||||
(in millions, except percentages) | March 31, (*) | to 2020 (*) | |||||||||||||||
Net Cash (used in)/provided by: |
|
| |||||||||||||||
2020 | 2019 | in Dollars | in % | ||||||||||||||
(in millions, except percentages) | |||||||||||||||||
Net Cash used in: |
|
| |||||||||||||||
Investing activities | $ (1,273.4) | $ 22.1 | $ (1,295.5) | -5849.7% | $ | (150.1) | $ | (1,260.1) | $ | 1,110.0 | -88.1% | ||||||
(*) Percentages have been calculated using whole-dollar amounts rather than the rounded amounts that appear in the table. The table above may not total due to rounding.
Net cash (used in)/provided byused in investing activities in the nine-monththree-month period ended September 30, 2019March 31, 2020 resulted mainly from purchases of investments of $3,262.6$1,323.6 million, which was partially offset by proceeds from the sale and maturity of investments of $2,240.5$1,250.0 million, as part of our financial strategy. We used $150.4 million in principal of loans receivable granted to merchants and consumers under our Mercado Credito solution; and $100.7used: a) $45.2 million in the purchase of property and equipment (mainly in information technology assets in Argentina, Brazil and Mexico)., b) $27.3 million in principal of loans receivable granted to merchants and consumers under our Mercado Credito solution and $7.6 million in payments related to the acquisition of Kiserty S.A. The cash used in investing activities on the three-month period ended March 31, 2020 was partially offset by receipts from settlements of derivative instruments for $3.7 million.
Net cash provided by financing activities
Nine-month Periods Ended | Change from 2018 | Three-month Periods Ended | Change from 2019 | ||||||||||||||
September 30, (*) | to 2019 (*) | March 31, (*) | to 2020 (*) | ||||||||||||||
2019 | 2018 | in Dollars | in % | 2020 | 2019 | in Dollars | in % | ||||||||||
(in millions, except percentages) | (in millions, except percentages) | ||||||||||||||||
Net Cash provided by: |
|
|
|
| |||||||||||||
Financing activities | $ 1,941.1 | $ 570.6 | $ 1,370.5 | 240.2% | $ | 154.6 | $ | 1,974.7 | $ | (1,820.1) | -92.2% | ||||||
(*) Percentages have been calculated using whole-dollar amounts rather than the rounded amounts that appear in the table. The table above may not total due to rounding.
For the nine-monththree-month period ended September 30, 2019March 31, 2020, the $1,370.5$1,820.1 million increasedecrease in net cash provided by financing activities was mainly derived from $1,867.2$1,866.5 million in proceeds from the issuance of Common Stock and the $98.7 million in proceeds from the issuance of Preferred Stock and a $348 million increase in payments from the exchangefirst quarter of the 2019 Notes during 2018. This increase was partially offset by a decrease of $880 million related to funds received from the issuance of the 2028 Notes in August 2018 and a decrease of $121.7 million related to the partial unwinding of the 2019 Notes Capped Call Transactions during August 2018.2019.
In the event that we decide to pursue strategic acquisitions in the future, we may fund them with available cash, third-party debt financing, or by raising equity capital, as market conditions allow.
Debt
Convertible Senior Notes
On August 24, 2018, we issued $800 million of 2.00% Convertible Senior Notes due 2028 and on August 31, 2018 we issued an additional $80 million of notes pursuant to the partial exercise of the initial purchasers’ option to purchase such additional notes, resulting in an aggregate principal amount of $880 million of 2.00% Convertible Senior Notes due 2028. The 2028 Notes are unsecured, unsubordinated obligations, which pay interest in cash semi-annually, on February 15 and August 15, at a rate of 2.00% per annum. The 2028 Notes will mature on August 15, 2028 unless earlier repurchased or converted in accordance with their terms prior to such date. The 2028 Notes may be converted, under specific conditions, based on an initial conversion rate of 2.2553 shares of common stock per $1,000 principal amount of the 2028 Notes (equivalent to an initial conversion price of $443.40 per share of common stock), subject to adjustment as described in the indenture governing the 2028 Notes.
On June 30, 2014, we issued $330 million of 2.25% convertible senior notes due 2019 (the “2019 Notes”). The 2019 Notes were unsecured, unsubordinated obligations, which paid interest in cash semi-annually, on January 1 and July 1 of each year, at a rate of 2.25% per annum. The 2019 Notes matured on July 1, 2019. Holders of $66.0 million principal amount of the 2019 Notes elected to convert their 2019 Notes at maturity, and we issued 523,407 shares of our common stock and paid $8 thousands in cash (because of the fraction of shares) in settlement of such conversions. $17 thousands of the principal amount of the 2019 Notes was not converted and was repaid by us in cash at maturity.
Also, on July 1, 2019, we received and retired 131,994 shares of our Common Stock in settlement of capped call agreements that we had previously entered into in relation to the 2019 Notes.
Please refer to note 911 to our unaudited interim condensed consolidated financial statements for additional information regarding the 2019 Notes, the 2028 Notes and the related capped call transactions.
Mercado Pago Funding
During 2019,In 2020, we, through our subsidiaries, continued obtaining certain lines of credit in Argentina, Chile and Uruguay primarily to fund the Mercado Pago business. Additionally, we continue to securitize certain loans receivableand credit card receivables through our Argentine, Mexican and Brazilian SPEs, formed to securitize loans and credit cards receivable provided by us to our users. Please refer to Note 1113 to our interim unaudited condensed consolidated financial statements for additional detail.
Capital expenditures
Our capital expenditures (composed of our payments for property and equipment (as fulfillment centers), intangible assets and acquired businesses) for the nine-monththree-month periods ended September 30,March 31, 2020 and 2019 and 2018 amounted to $100.8$53.5 million and $72.1$33.0 million, respectively.
During the nine-monththree-month period ended September 30, 2019,March 31, 2020, we invested $46.5$32.3 million in information technology in Brazil, Argentina and Mexico, and $48.0$10.7 million in our Argentine, Brazilian and Mexican offices.
We are continually increasing our level of investment in hardware and software licenses necessary to improve and update our platform’s technology and computer software developed internally. We anticipate continued investments in capital expenditures related to information technology and logistic network capacity in the future as we strive to maintain our position in the Latin American e-commerce market.
We believe that our existing cash and cash equivalents, including the sale of credit card receivables and cash generated from operations will be sufficient to fund our operating activities, property and equipment expenditures and to pay or repay obligations going forward.
Off-balance sheet arrangements
As of September 30, 2019,March 31, 2020, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources.
Recently issued accounting pronouncements
See Item 1 of Part I, “Unaudited Interim Condensed Consolidated Financial Statements-Note 2-Summary of significant accounting policies— Recently Adopted Accounting Standards and Recently issued accounting pronouncements not yet adopted.”
Non-GAAP Financial Measures
To supplement our consolidated financial statements presented in accordance with U.S. GAAP, we use foreign exchange (“FX”) neutral measures as a non-GAAP measure.
This non-GAAP measure should not be considered in isolation or as a substitute for measures of performance prepared in accordance with U.S. GAAP and may be different from non-GAAP measures used by other companies. In addition, this non-GAAP measure is not based on any comprehensive set of accounting rules or principles. Non-GAAP measures have limitations in that they do not reflect all of the amounts associated with our results of operations as determined in accordance with U.S. GAAP. This non-GAAP financial measure should only be used to evaluate our results of operations in conjunction with the most comparable U.S. GAAP financial measures.
Reconciliation of this non-GAAP financial measure to the most comparable U.S. GAAP financial measure can be found in the table included in this quarterly report.
We believe that reconciliation of FX neutral measures to the most directly comparable GAAP measure provides investors an overall understanding of our current financial performance and its prospects for the future. Specifically, we believe this FX neutral non-GAAP measure provide useful information to both Management and investors by excluding the foreign currency exchange rate impact that may not be indicative of our core operating results and business outlook.
The FX neutral measures were calculated by using the average monthly exchange rates for each month during 20182019 and applying them to the corresponding months in 2019,2020, so as to calculate what our results would have been if exchange rates had remained stable from one year to the next. The table below excludes intercompany allocation FX effects. Finally, this measures does not include any other macroeconomic effect such as local currency inflation effects, the impact on impairment calculations or any price adjustment to compensate local currency inflation or devaluations.
The following table sets forth the FX neutral measures related to our reported results of the operations for the nine and three-month periodsperiod ended September 30, 2019:March 31, 2020:
Three-Month Periods Ended | ||||||||||||
As reported | FX Neutral Measures | As reported | ||||||||||
(In millions, except percentages) | 2020 | 2019 | Percentage Change | 2020 | 2019 | Percentage Change | ||||||
(Unaudited) | (Unaudited) | |||||||||||
Net revenues | $ 652.1 | $ 473.8 | 37.6% | $ 807.7 | $ 473.8 | 70.5% | ||||||
Cost of net revenues | (339.3) | (236.8) | 43.3% | (422.4) | (236.8) | 78.4% | ||||||
Gross profit | 312.8 | 237.0 | 32.0% | 385.3 | 237.0 | 62.6% | ||||||
Operating expenses | (342.5) | (226.9) | 51.0% | (463.5) | (226.9) | 104.3% | ||||||
(Loss) Income from operations | (29.7) | 10.1 | -392.9% | (78.3) | 10.1 | -871.5% | ||||||
(*) The table above may not total due to rounding.
Nine-month Periods Ended | ||||||||||||
As reported | FX Neutral Measures | As reported | ||||||||||
(In millions, except percentages) | 2019 | 2018 | Percentage Change | 2019 | 2018 | Percentage Change | ||||||
(Unaudited) | (Unaudited) | |||||||||||
Net revenues | $ 1,622.0 | $ 1,011.6 | 60.3% | $ 1,974.0 | $ 1,011.6 | 95.1% | ||||||
Cost of net revenues | (828.3) | (519.4) | 59.5% | (1,026.8) | (519.4) | 97.7% | ||||||
Gross profit | 793.8 | 492.2 | 61.3% | 947.2 | 492.2 | 92.4% | ||||||
Operating expenses | (878.0) | (560.9) | 56.5% | (1,150.5) | (560.9) | 105.1% | ||||||
Loss from operations | (84.3) | (68.7) | 22.7% | (203.3) | (68.7) | 196.0% | ||||||
The table above shows aan increase of loss from operations on an FX neutral basis, mainly as a result of an Argentine and Brazilian local currency devaluation (of an approximate average 43.6%) as36.4% and 15.4%, respectively) for the first quarter of September 30, 20192020 compared to September 30, 2018,the first quarter of 2019, which has a strong impact when estimating our Argentine operating expenses on an FX neutral basis.
Three-month Periods Ended | ||||||||||||
As reported | FX Neutral Measures | As reported | ||||||||||
(In millions, except percentages) | 2019 | 2018 | Percentage Change | 2019 | 2018 | Percentage Change | ||||||
(Unaudited) | (Unaudited) | |||||||||||
Net revenues | $ 603.0 | $ 355.3 | 69.7% | $ 676.9 | $ 355.3 | 90.5% | ||||||
Cost of net revenues | (318.7) | (185.6) | 71.7% | (364.7) | (185.6) | 96.5% | ||||||
Gross profit | 284.3 | 169.7 | 67.5% | 312.2 | 169.7 | 83.9% | ||||||
Operating expenses | (366.3) | (180.7) | 102.7% | (432.6) | (180.7) | 139.4% | ||||||
Loss from operations | (81.9) | (11.0) | 644.5% | (120.5) | (11.0) | 994.7% | ||||||
(*) The table above may not total due to rounding.
The table above shows a loss from operations on an FX neutral basis, mainly as a result of an Argentine local currency devaluation (of an approximate average 36.5%) as of September 30, 2019 compared to September 30, 2018, which has a strong impact when estimating our Argentine operating expenses on an FX neutral basis.
Item 3 — Qualitative and Quantitative Disclosure About Market Risk
We are exposed to market risks arising from our business operations. These market risks arise mainly from the possibility that changes in interest rates and the U.S. dollar exchange rate with local currencies, particularly the Brazilian Reais and Argentine Peso due to Brazil’s and Argentine’s respective share of our revenues, may affect the value of our financial assets and liabilities. Latin American countries in which we operate have been negatively affected by the outbreak of COVID-19, which we operate have been negatively affected by the outbreak of COVID-19, which has generated macroeconomic instability and led to the devaluation of certain Latin American currencies. Please refer to Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Recent Developments in the current document for further detail on impacts of Covid-19 Pandemic.
Foreign currencies
We have significant operations internationally that are denominated in foreign currencies, primarily the Brazilian Reais, Argentine Peso, Mexican Peso, Colombian Peso and Chilean Peso, subjecting us to foreign currency risk, which may adversely impact our financial results. We transact business in various foreign currencies and have significant international revenues and costs. In addition, we charge our international subsidiaries for their use of intellectual property and technology and for certain corporate services. Our cash flows, results of operations and certain of our intercompany balances that are exposed to foreign exchange rate fluctuations may differ materially from expectations and we may record significant gains or losses due to foreign currency fluctuations and related hedging activities.
As of September 30, 2019,March 31, 2020, we hold cash and cash equivalents in local currencies in our subsidiaries, and have receivables denominated in local currencies in all of our operations. Our subsidiaries generate revenues and incur most of their expenses in the respective local currencies of the countries in which they operate. As a result, our subsidiaries use their local currency as their functional currency except for our Argentine subsidiaries, whose functional currency is the U.S. dollar due to the inflationary environment. As of September 30, 2019,March 31, 2020, the total cash, cash equivalents, and restricted cash and cash equivalent denominated in foreign currencies totaled $328.8$522.3 million, short-term investments denominated in foreign currencies totaled $536.3$493.1 million and accounts receivable, credit cards receivable and loans receivable in foreign currencies totaled $499.9$541.8 million. As of September 30, 2019,March 31, 2020, we had no long-term investments denominated in foreign currencies. To manage exchange rate risk, our treasury policy is to transfer most cash and cash equivalents in excess of working capital requirements into U.S. dollar-denominated accounts in the United States and to enter into certain foreign exchange derivatives, as forwards, in order to mitigate our exposure to foreign exchange risk. As of September 30, 2019,March 31, 2020, our U.S. dollar-denominated cash and cash equivalents, restricted cash and cash equivalents and short-term investments totaled $2,318.0$2,823.7 million and our U.S. dollar-denominated long-term investments totaled $3.6$270.0 million.
For the nine-monththree-month period ended September 30, 2019,March 31, 2020, we had a consolidated loss on foreign currency of $1.9$0.2 million primarilymainly related to the loss on foreign exchange in our Brazilian subsidiaries as a result of the strengtheningconsequence of the U.S. dollardevaluation of the Brazilian Reais over our Argentine Peso net asset position in Argentina during the nine-month period. For the three-month periods ended September 30, 2019, we had a consolidated gain on foreign currency of $1.0 million, primarily as a result of the strengthening of the U.S. dollar over our Argentine PesoDollar net liability position in Argentina during the third quarterBrazil. (See “Management’s Discussion and Analysis of 2019.Financial Condition and Results of Operations—Results of operations—Other income (expenses), net” for more information).
The following table sets forth the percentage of consolidated net revenues by segment for the nine and three-month periods ended September 30, 2019March 31, 2020 and 2018:2019:
Nine-month Periods Ended | Three-month Periods Ended | Three-month Periods Ended | ||||||||||||||||||
September 30, | September 30, | March 31, | ||||||||||||||||||
(% of total consolidated net revenues) (*) (**) | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||
(% of total consolidated net revenues) (*) | 2020 | 2019 | ||||||||||||||||||
Brazil | 63.7 | % | 59.4 | % | 64.7 | % | 62.2 | % | 60.9 | % | 63.8 | % | ||||||||
Argentina | 20.0 | 28.2 | 19.3 | 23.6 | 20.4 | 19.8 | ||||||||||||||
Mexico | 11.7 | 6.3 | 11.8 | 8.2 | 14.5 | 11.5 | ||||||||||||||
Other Countries | 4.6 | 6.1 | 4.2 | 6.1 | 4.1 | 4.9 | ||||||||||||||
(*) Percentages have been calculated using whole-dollar amounts.
(**) The amount incurred in shipping subsidies netted from revenues, when we act as an agent, was $204.4 million and $316.7 million for the nine-month periods ended September 30, 2019 and 2018, respectively. The amount incurred in shipping subsidies netted from revenues, when we act as an agent, was $69.9 million and $107.6 million for the three-month periods ended September 30, 2019 and 2018, respectively.
Foreign Currency Sensitivity Analysis
The table below shows the impact on our net revenues, expenses, other expenses and income tax, net income and equity for a positive and a negative 10% fluctuation on all the foreign currencies to which we are exposed to for the nine-monththree-month period ended September 30, 2019:March 31, 2020:
Foreign Currency Sensitivity Analysis (*) | Foreign Currency Sensitivity Analysis (*) | Foreign Currency Sensitivity Analysis (*) | ||||||||
(In millions) | -10% | Actual | +10% | -10% | Actual | +10% | ||||
(1) | (2) | (1) | (2) | |||||||
Net revenues | $ 1,802.2 | $ 1,622.0 | $ 1,474.7 | $ 724.5 | $ 652.1 | $ 592.8 | ||||
Expenses | (1,896.1) | (1,706.3) | (1,551.1) | (757.7) | (681.8) | (619.7) | ||||
Loss from operations | (93.9) | (84.3) | (76.4) | (33.2) | (29.7) | (26.8) | ||||
Other income/(expenses) and income tax related to P&L items | (35.4) | (31.8) | (28.9) | 8.8 | 8.8 | 8.7 | ||||
Foreign Currency impact related to the remeasurement of our Net Asset position | (2.1) | (1.9) | (1.7) | (0.2) | (0.2) | |||||
Net Loss | (131.4) | (118.0) | (107.1) | (24.5) | (21.1) | (18.3) | ||||
Total Shareholders' Equity | $ 2,143.0 | $ 2,038.2 | $ 2,032.3 | $ 1,860.6 | $ 1,866.6 | $ 1,749.5 | ||||
(1)Appreciation of the subsidiaries’ local currency against U.S. Dollar
(2)Depreciation of the subsidiaries’ local currency against U.S. Dollar
(*) The table above may not total due to rounding.
The table above shows an increase in our net loss when the U.S. dollar weakens against foreign currencies because of the negative impact of the increase in loss from operations, other income/(expenses) and income tax related to P&L items and the re-measurement of our net asset position in U.S. dollars.operations. On the other hand, the table above shows a decrease in our net loss when the U.S. dollar strengthens against foreign currencies because of the positive impact of the decrease in loss from operations, other income/(expenses) and income tax related to P&L items and the re-measurement of our net asset position in U.S. dollars.
operations.
Argentine Segment
In accordance with U.S. GAAP, we have classified our Argentine operations as highly inflationary since July 1, 2018, using the U.S. dollar as the functional currency for purposes of reporting our financial statements. Therefore, no translation effect has been accounted for in other comprehensive income related to our Argentine operations since July 1, 2018.
As of September 30, 2019,March 31, 2020, the Argentine Peso exchange rate against the U.S. dollar was 57.59.64.47.
Considering a hypothetical devaluation of 10% of the Argentine Peso against the U.S. dollar on September 30, 2019March 31, 2020, the reported net liability position in our Argentine subsidiaries would have recorded a foreign exchange gain amounting to approximately $2.1$0.5 million in our Argentine subsidiaries.
Brazilian Segment
As of September 30, 2019, the Brazilian Reais exchange rate against the U.S. dollar was 4.16.
Considering a hypothetical devaluation of 10% of the Brazilian Reais against the U.S. dollar on September 30, 2019,March 31, 2020, the reported net assets position in our Brazilian subsidiaries would have decreased by approximately $45.4$48.7 million with the related impact in Other Comprehensive Income. Additionally, we would have recorded a foreign exchange loss amounting to approximately $7.0$8.0 million in our Brazilian subsidiaries.
Mexican Segment
Considering a hypothetical devaluation of 10% of the Mexican peso against the U.S. dollar on March 31, 2020, the reported net assets in our Mexican subsidiaries would have decreased by approximately $14.2 million with the related impact in Other Comprehensive Income. Additionally, we would have recorded a foreign exchange loss amounting to approximately $0.8 million in our Mexican subsidiaries.
Interest
Our earnings and cash flows are also affected by changes in interest rates. These changes could have an impact on the interest rates that financial institutions charge us prior to the time we sell our Mercado Pago receivables. As of September 30, 2019,March 31, 2020, Mercado Pago’s receivables totaled $288.6$366.8 million. Interest rate fluctuations could also impact interest earned through our Mercado Credito solution. As of September 30, 2019,March 31, 2020, loans granted under our Mercado Credito solution totaled $176.1$148.3 million. Interest rate fluctuations could also negatively affect certain of our fixed rate and floating rate investments comprised primarily of time deposits, money market funds, investment grade corporate debt securities and sovereign debt securities. Investments in both fixed rate and floating rate interest earning products carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than predicted if interest rates fall.
Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes. As of September 30, 2019,March 31, 2020, the average duration of our available for sale securities, defined as the approximate percentage change in price for a 100-basis-point change in yield, was 0.4%0.7%. If interest rates were to instantaneously increase (decrease) by 100 basis points, the fair market value of our available for sale securities as of September 30, 2019March 31, 2020 could decrease (increase) by approximately $4.3$7.8 million.
As of September 30, 2019,March 31, 2020, our short-term investments amounted to $1,726.2$1,558.3 million and our long-term investments amounted to $3.6$270.0 million. These investments, except for the $371.6$326.7 million investment related to the Central Bank of Brazil Mandatory Guarantee and the $26.5 million related to guarantee for secured lines of credit in Argentina, can be readily converted at any time into cash or into securities with a shorter remaining time to maturity. We determine the appropriate classification of our investments at the time of purchase and re-evaluate such designations as of each balance sheet date.
Equity Price Risk
Our board of directors adopted the 2012 long-term retention plan (the “2012 LTRP”), under which each eligible employee must satisfy the performance conditions established by the Board of Directors for such employee. If these conditions are satisfied, the eligible employee will, subject to his or her continued employment as of each applicable payment date, receive cash awards (“LTRP Awards”), which are payable as follows:
eligible employees will receive a fixed payment equal to 6.25% of his or her LTRP Award under the 2012 LTRP, once a year for a period of eight years. The 2012 LTRP awards began paying out starting in 2013 (the “2012 Annual Fixed Payment”); and
on each date we pay the 2012 Annual Fixed Payment to an eligible employee, he or she will also receive a payment (the “2012 Variable Payment”) equal to the product of (i) 6.25% of the applicable 2012 LTRP Award and (ii) the quotient of (a) divided by (b), where (a), the numerator, equals the Applicable Year Stock Price (as defined below) and (b), the denominator, equals the 2011 Stock Price, $77.77, which was the average closing price of the Company’s common stock on the NASDAQ Global Select Market during the final 60 trading days of 2011. The “Applicable Year Stock Price” equals the average closing price of the Company’s common stock on the NASDAQ Global Select Market during the final 60 trading days of the year preceding the applicable payment date.
Our board of directors, upon the recommendation of the compensation committee, approved the 2014, 2015, 2016, 2017, and 2018 Long Term Retention Plan (the “2014, 2015, 2016, 2017 and 2018 LTRPs”), respectively.
In order to receive an award under the 2014, 2015, 2016, 2017 and/or 2018 LTRP, each eligible employee must satisfy the performance conditions established by the Board of Directors for such employee. If these conditions are satisfied, the eligible employee will, subject to his or her continued employment as of each applicable payment date, receive the full amount of his or her 2014, 2015, 2016, 2017, and/or 2018 LTRP award, payable as follows:
the eligible employee will receive a fixed payment, equal to 8.333% of his or her 2014, 2015, 2016, 2017, and/or 2018 LTRP bonus once a year for a period of six years starting in March 2015, 2016, 2017, 2018 and/or 2019 respectively (the “2014, 2015, 2016, 2017, or 2018 Annual Fixed Payment”, respectively); and
on each date we pay the respective Annual Fixed Payment to an eligible employee, he or she will also receive a payment (the “2014, 2015, 2016, 2017, or 2018 Variable Payment”, respectively) equal to the product of (i) 8.333% of the applicable 2014, 2015, 2016, 2017, and/or 2018 LTRP award and (ii) the quotient of (a) divided by (b), where (a), the numerator, equals the Applicable Year Stock Price (as defined below) and (b), the denominator, equals the 2013 (with respect to the 2014 LTRP), 2014 (with respect to the 2015 LTRP), 2015 (with respect to the 2016 LTRP), 2016 (with respect to the 2017 LTRP) and 2017 (with respect to the 2018 LTRP) Stock Price, defined as $118.48, $127.29, $111.02, $164.17 and $270.84 for the 2014, 2015, 2016, 2017 and 2018 LTRP, respectively, which was the average closing price of our common stock on the NASDAQ Global Select Market during the final 60 trading days of 2013, 2014, 2015, 2016 and 2017, respectively. The “Applicable Year Stock Price” shall equal the average closing price of our common stock on the NASDAQ Global Select Market during the final 60 trading days of the year preceding the applicable payment date.
Our board of directors, upon the recommendation of the compensation committee, approved the 2019 and 2020 Long Term Retention Program (the “2019 LTRP”and 2020 LTRPs”), respectively, under which certain eligible employees have the opportunity to receive cash payments annually for a period of six years (with the first payment occurring on or about March 31, 2020)the first quarter of 2020 and 2021, respectively). In order to receive the full target award under the 2019 and/or 2020 LTRP, each eligible employee must remain employed as of each applicable payment date. The 2019 and 2020 LTRP award isawards are payable as follows:
the eligible employee will receive 16.66% of half of his or her target 2019 and/or 2020 LTRP bonus once a year for a period of six years, with the first payment occurring on or about March 31,during the first quarter of 2020 and 2021 (the “2019 or 2020 Annual Fixed Payment”), respectively); and
on each date we pay the 2019respective Annual Fixed Payment to an eligible employee, he or she will also receive a payment (the “2019 or 2020 Variable Payment”) equal to the product of (i) 16.66 % of half of the target 2019 or 2020 LTRP award and (ii) the quotient of (a) divided by (b), where (a), the numerator, equals the Applicable Year Stock Price (as defined below) and (b), the denominator, equals the average closing price of our common stock on the NASDAQ Global Select Market during the final 60 trading days of 2018 and 2019 defined as $322.91 and $553.45 for the 2019 LTRP.and 2020 LTRP, respectively. The “Applicable Year Stock Price” shall equal the average closing price of our common stock on the NASDAQ Global Select Market during the final 60 trading days of the year preceding the applicable payment date.
At September 30, 2019,March 31, 2020, the total contractual obligation fair value of our 2012, 2014, 2015, 2016, 2017, 2018, 2019 and 20192020 LTRP Variable Payment obligation amounted to $135.9$153.8 million. As of September 30, 2019,March 31, 2020, the accrued liability related to the 2012, 2014, 2015, 2016, 2017, 2018, 2019 and 20192020 Variable Payment of the LTRP included in Salaries and Social security payable in our condensed consolidated balance sheet amounted to $60.8$39.8 million. The following table shows a sensitivity analysis of the risk associated with our total contractual obligation fair value related to the 2012, 2014, 2015, 2016, 2017, 2018, 2019 and 20192020 LTRP Variable Payment if our common stock price per share were to increase or decrease by up to 40%:
As of September 30, 2019 | As of March 31, 2020 | |||||||
MercadoLibre, Inc | 2012, 2014, 2015, 2016, 2017, 2018 and 2019 | MercadoLibre, Inc | 2012, 2014, 2015, 2016, 2017, 2018, 2019 and 2020 | |||||
Equity Price | LTRP Variable contractual obligation | Equity Price | LTRP Variable contractual obligation | |||||
(In thousands, except equity price) | ||||||||
Change in equity price in percentage | ||||||||
40% | 846.75 | 190,304 | 863.68 | 215,352 | ||||
30% | 786.27 | 176,711 | 801.99 | 199,969 | ||||
20% | 725.79 | 163,118 | 740.30 | 184,587 | ||||
10% | 665.31 | 149,525 | 678.61 | 169,205 | ||||
Static | (*) | 604.82 | 135,932 | (*) | 616.91 | 153,823 | ||
-10% | 544.34 | 122,339 | 555.22 | 138,440 | ||||
-20% | 483.86 | 108,745 | 493.53 | 123,058 | ||||
-30% | 423.38 | 95,152 | 431.84 | 107,676 | ||||
-40% | 362.89 | 81,559 | 370.15 | 92,294 | ||||
(*) Average closing stock price for the last 60 trading days of the closing date.
Item 4 — Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our Management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Evaluation of disclosure controls and procedures
Based on the evaluation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) required by Exchange Act Rules 13a-15(b) or 15d-15(b), our chief executive officer and our chief financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.
Changes in Internal Controls Over Financial Reporting
There were no changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the nine-monththree-month period ended September 30, 2019March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Most of our employees are working remotely due to the COVID-19 pandemic, and we continue to monitor and assess the impact of the COVID-19 pandemic on our internal controls.
PART II. OTHER INFORMATION
Item 1 — Legal Proceedings
See Item 1 of Part I, “Financial Statements—Note 79 Commitments and Contingencies—Litigation and other Legal Matters.”
Item 1A — Risk Factors
As of September 30, 2019, there have been no material changes in ourWe previously disclosed risk factors from those disclosedunder "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.2019. In addition to those risk factors and the other information included elsewhere in this report, you should also carefully consider the risk factor discussed below. The risk described below and in our Annual Report on Form 10-K for the year ended December 31, 2019 are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we deem to be immaterial also may materially adversely affect our business, financial condition and/or results of operations:
The outbreak of COVID-19 has had, and may have continue to have, a negative impact on the global economy and on our business, operations and results
The outbreak of COVID-19 a novel strain of coronavirus, was recognized as a pandemic by the World Health Organization in March 2020, and has now spread around the world. The outbreak, and measures taken to contain or mitigate it, have had dramatic adverse consequences for the global economy, including on demand, operations, supply chains and financial markets. The nature and scope of the consequences to date are difficult to evaluate precisely, and their future course is impossible to predict with confidence.
The COVID-19 crisis had negative effects on our business as of the end of the first quarter of 2020 affecting our level of operations, consumer buying trends, and consequently, our net revenues. In the logistics business, lockdowns imposed by Latin American governments have restricted merchants from operating leading to order backlogs and potential cancellations for orders delivered through drop ship and cross-docking networks. Mercado Pago has also experienced deceleration in number of payments processed at times, as a consequence of lower foot traffic in physical retail, resulting in lower mobile point of sale and QR total payment volume growth. If these effects are sustained, they could have accounting consequences such as impairments of fixed assets or goodwill. It could affect our ability to operate effective internal control over financial reporting. It could also affect our ability to execute our expansion plans or invest in products and development. The adverse effect on our business, operations, or financial results of any of the matters described above could be material.
The future impact of the COVID-19 crisis on our business, operations, or financial results is highly uncertain and will depend on numerous evolving factors that we cannot predict, including, but not limited to:
the duration, scope, and severity of the COVID-19 pandemic;
disruption of our logistics network;
disruption or delay of the activity of our merchants;
a shift in consumer behavior;
the impact of travel bans, work-from-home policies, or shelter-in-place orders;
the temporary or prolonged shutdown of manufacturing facilities or retail stores and decreased retail traffic;
staffing shortages;
general economic, financial, and industry conditions, particularly conditions relating to liquidity, financial performance, and related credit issues in the retail sector, which may be amplified by the effects of COVID-19; and
the long-term effects of COVID-19 on the national and global economy, including on consumer confidence and spending, financial markets and the availability of credit for us, our suppliers and our customers.
Item 6 — Exhibits
The information set forth under “Index to Exhibits” below is incorporated herein by reference.
MercadoLibre, Inc.
INDEX TO EXHIBITS
3.1 | Registrant’s Amended and Restated Certificate of Incorporation. (1) | |
3.2 | ||
3.3 | Registrant’s Certificate of Designation of Series A Perpetual Preferred Stock. (2) | |
4.1 | Form of Specimen Certificate for the Registrant’s Common Stock. (3) | |
4.2 | ||
10.1 | ||
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31.1 | ||
31.2 | ||
32.1 | ||
32.2 | ||
101 | The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended | |
104 | The cover page from the Company’s Form 10-Q for the quarterly period ended |
* | Filed or furnished herewith, as applicable. |
(1) | Incorporated by reference to the Registration Statement on Form S-1 filed on May 11, 2007. |
(2) | Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on March 29, 2019. |
(3) | Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009. |
(4) | Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on August 24, 2018. |
(5) | Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on |
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MERCADOLIBRE, INC. | ||||||
Registrant | ||||||
Date: | By: | /s/ Marcos Galperin | ||||
Marcos Galperin | ||||||
President and Chief Executive Officer | ||||||
By: | /s/ Pedro Arnt | |||||
Pedro Arnt | ||||||
Executive Vice President and Chief Financial Officer | ||||||