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 June 30, 2013
-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, C1430CRG, Argentina
(Address of registrants principal executive offices)
(+5411) 4640-8000
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files. Yes x No ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company. See definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act:
Large accelerated filer | x | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
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 issuers classes of common stock, as of the latest practicable date.
44,152,933 shares of the issuers common stock, $0.001 par value, outstanding as of July 29, 2013.
MERCADOLIBRE, INC.
Item 1 Unaudited Interim Condensed Consolidated Financial Statements |
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Interim Condensed Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012 |
2 | |||
3 | ||||
4 | ||||
5 | ||||
Notes to the Interim Condensed Consolidated Financial Statements |
6 | |||
Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations |
28 | |||
Item 3 Qualitative and Quantitative Disclosures About Market Risk |
49 | |||
53 | ||||
53 | ||||
54 | ||||
55 | ||||
55 | ||||
57 | ||||
Exhibit 3.1 |
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Exhibit 3.2 |
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Exhibit 10.1 |
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Exhibit 10.2 |
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Exhibit 10.3 |
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Exhibit 10.4 |
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Exhibit 10.5 |
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Exhibit 10.6 |
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Exhibit 31.1 |
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Exhibit 31.2 |
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Exhibit 32.1 |
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Exhibit 32.2 |
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EX-101 INSTANCE DOCUMENT |
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EX-101 SCHEMA DOCUMENT |
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EX-101 CALCULATION LINKBASE DOCUMENT |
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EX-101 LABELS LINKBASE DOCUMENT |
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EX-101 PRESENTATION LINKBASE DOCUMENT |
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EX-101 DEFINITION LINKBASE DOCUMENT |
Item 1. | Unaudited Interim Condensed Consolidated Financial Statements |
MercadoLibre, Inc.
Interim Condensed Consolidated Financial Statements
as of June 30, 2013 and December 31, 2012
and for the six and three-month periods
ended June 30, 2013 and 2012
MercadoLibre, Inc.
Interim Condensed Consolidated Balance Sheets
As of June 30, 2013 and December 31, 2012
June 30, | December 31, | |||||||
2013 | 2012 | |||||||
(Unaudited) | (Audited) | |||||||
Assets | ||||||||
Current assets: |
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Cash and cash equivalents |
$ | 131,191,347 | $ | 101,489,002 | ||||
Short-term investments |
71,299,941 | 93,694,805 | ||||||
Accounts receivable, net |
21,323,148 | 19,837,022 | ||||||
Credit cards receivables, net |
61,619,241 | 35,816,506 | ||||||
Prepaid expenses |
3,522,020 | 2,080,079 | ||||||
Deferred tax assets |
12,650,847 | 11,040,543 | ||||||
Other assets |
11,393,068 | 11,403,218 | ||||||
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Total current assets |
312,999,612 | 275,361,175 | ||||||
Non-current assets: |
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Long-term investments |
59,437,585 | 85,955,584 | ||||||
Property and equipment, net |
80,081,659 | 37,726,222 | ||||||
Goodwill |
59,558,023 | 60,366,063 | ||||||
Intangible assets, net |
6,717,766 | 7,279,865 | ||||||
Deferred tax assets |
4,827,859 | 5,862,247 | ||||||
Other assets |
5,959,728 | 6,118,120 | ||||||
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Total non-current assets |
216,582,620 | 203,308,101 | ||||||
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Total assets |
$ | 529,582,232 | $ | 478,669,276 | ||||
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Liabilities and Equity | ||||||||
Current liabilities: |
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Accounts payable and accrued expenses |
$ | 31,467,967 | $ | 23,976,613 | ||||
Funds payable to customers |
114,370,081 | 101,472,662 | ||||||
Salaries and social security payable |
19,395,436 | 19,974,463 | ||||||
Taxes payable |
15,371,128 | 19,210,568 | ||||||
Loans payable and other financial liabilities |
11,870,676 | 84,570 | ||||||
Dividends payable |
6,313,869 | 4,812,396 | ||||||
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Total current liabilities |
198,789,157 | 169,531,272 | ||||||
Non-current liabilities: |
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Salaries and social security payable |
6,324,543 | 3,452,445 | ||||||
Loans payable and other financial liabilities |
33,977 | 59,493 | ||||||
Deferred tax liabilities |
8,134,726 | 8,975,290 | ||||||
Other liabilities |
3,395,767 | 2,837,150 | ||||||
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Total non-current liabilities |
17,889,013 | 15,324,378 | ||||||
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Total liabilities |
$ | 216,678,170 | $ | 184,855,650 | ||||
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Commitments and contingencies (Note 7) |
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Redeemable noncontrolling interest |
$ | 4,000,000 | $ | 4,000,000 | ||||
Equity: |
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Common stock, $0.001 par value, 110,000,000 shares authorized, 44,152,933 and 44,150,920 shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively |
$ | 44,153 | $ | 44,151 | ||||
Additional paid-in capital |
120,491,485 | 120,468,759 | ||||||
Retained earnings |
252,781,049 | 218,083,844 | ||||||
Accumulated other comprehensive loss |
(64,412,625 | ) | (48,783,128 | ) | ||||
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Total Equity |
308,904,062 | 289,813,626 | ||||||
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Total Liabilities, Redeemable Noncontrolling Interest and Equity |
$ | 529,582,232 | $ | 478,669,276 | ||||
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The accompanying notes are an integral part of these condensed consolidated financial statements.
2
MercadoLibre, Inc.
Interim Condensed Consolidated Statements of Income
For the six and three-month periods ended June 30, 2013 and 2012
Six Months Ended June 30, | Three Months Ended June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Net revenues |
$ | 214,909,107 | $ | 172,580,065 | $ | 112,183,360 | $ | 88,844,059 | ||||||||
Cost of net revenues |
(59,726,378 | ) | (44,989,178 | ) | (31,077,211 | ) | (23,892,881 | ) | ||||||||
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Gross profit |
155,182,729 | 127,590,887 | 81,106,149 | 64,951,178 | ||||||||||||
Operating expenses: |
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Product and technology development |
(19,142,610 | ) | (13,719,892 | ) | (9,760,220 | ) | (6,133,819 | ) | ||||||||
Sales and marketing |
(43,161,483 | ) | (34,233,040 | ) | (20,823,546 | ) | (16,805,362 | ) | ||||||||
General and administrative |
(28,858,158 | ) | (22,822,289 | ) | (15,073,088 | ) | (10,127,077 | ) | ||||||||
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Total operating expenses |
(91,162,251 | ) | (70,775,221 | ) | (45,656,854 | ) | (33,066,258 | ) | ||||||||
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Income from operations |
64,020,478 | 56,815,666 | 35,449,295 | 31,884,920 | ||||||||||||
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Other income (expenses): |
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Interest income and other financial gains |
5,596,320 | 6,070,862 | 2,202,314 | 2,982,303 | ||||||||||||
Interest expense and other financial losses |
(892,020 | ) | (551,617 | ) | (531,668 | ) | (474,300 | ) | ||||||||
Foreign currency gains (losses) |
(2,648,848 | ) | (283,969 | ) | 3,600,866 | 749,008 | ||||||||||
Other gains (losses), net |
(2,340 | ) | (11,263 | ) | 1,393 | (7,009 | ) | |||||||||
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Net income before income / asset tax expense |
66,073,590 | 62,039,679 | 40,722,200 | 35,134,922 | ||||||||||||
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Income / asset tax expense |
(18,529,981 | ) | (17,007,817 | ) | (10,701,182 | ) | (9,740,098 | ) | ||||||||
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Net income |
$ | 47,543,609 | $ | 45,031,862 | $ | 30,021,018 | $ | 25,394,824 | ||||||||
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Less: Net Income attributable to Redeemable Noncontrolling Interest |
84,715 | 18,060 | 42,377 | 15,632 | ||||||||||||
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Net income attributable to MercadoLibre, Inc. shareholders |
$ | 47,458,894 | $ | 45,013,802 | $ | 29,978,641 | $ | 25,379,192 | ||||||||
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Six Months Ended June 30, | Three Months Ended June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Basic EPS |
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Basic net income attributable to MercadoLibre, Inc. Shareholders per common share |
$ | 1.07 | $ | 1.02 | $ | 0.67 | $ | 0.57 | ||||||||
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Weighted average of outstanding common shares |
44,152,132 | 44,145,038 | 44,152,933 | 44,147,999 | ||||||||||||
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Diluted EPS |
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Diluted net income attributable to MercadoLibre, Inc. Shareholders per common share |
$ | 1.07 | $ | 1.02 | $ | 0.67 | $ | 0.57 | ||||||||
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Weighted average of outstanding common shares |
44,152,132 | 44,149,178 | 44,152,933 | 44,152,133 | ||||||||||||
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The accompanying notes are an integral part of these condensed consolidated financial statements.
3
MercadoLibre, Inc.
Interim Condensed Consolidated Statements of Comprehensive Income
For the six and three-month periods ended June 30, 2013 and 2012
Six Months Ended June 30, | Three Months Ended June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Net income |
$ | 47,543,609 | $ | 45,031,862 | $ | 30,021,018 | $ | 25,394,824 | ||||||||
Other comprehensive (loss) income, net of income tax: |
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Currency translation adjustment |
(14,627,161 | ) | (6,823,966 | ) | (13,667,817 | ) | (10,403,113 | ) | ||||||||
Unrealized net (losses) gains on available for sale investments |
(242,770 | ) | 870,295 | (771,109 | ) | 176,322 | ||||||||||
Less: reclassification adjustment for gains on available for sale investments included in net income |
(759,565 | ) | (924,657 | ) | | | ||||||||||
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Net change in accumulated other comprehensive loss, net of income tax |
(15,629,496 | ) | (6,878,328 | ) | (14,438,926 | ) | (10,226,791 | ) | ||||||||
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Total Comprehensive Income |
$ | 31,914,113 | $ | 38,153,534 | $ | 15,582,092 | $ | 15,168,033 | ||||||||
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Less: Comprehensive Income (loss) attributable to Redeemable Noncontrolling Interest |
67,415 | 153,736 | (152,439 | ) | (148,512 | ) | ||||||||||
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Comprehensive Income attributable to MercadoLibre, Inc. Shareholders |
$ | 31,846,698 | $ | 37,999,798 | $ | 15,734,531 | $ | 15,316,545 | ||||||||
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The accompanying notes are an integral part of these condensed consolidated financial statements.
4
MercadoLibre, Inc.
Interim Condensed Consolidated Statements of Cash Flows
For the six-month periods ended June 30, 2013 and 2012
Six Months Ended June 30, | ||||||||
2013 | 2012 | |||||||
(Unaudited) | ||||||||
Cash flows from operations: |
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Net income attributable to MercadoLibre, Inc. Shareholders |
$ | 47,458,894 | $ | 45,013,802 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
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Net Income attributable to Redeemable Noncontrolling Interest |
84,715 | 18,060 | ||||||
Net Devaluation Loss in Venezuela |
6,420,929 | | ||||||
Depreciation and amortization |
5,456,023 | 4,057,471 | ||||||
Accrued interest |
(2,985,764 | ) | (6,221,322 | ) | ||||
LTRP accrued compensation |
4,297,543 | 2,202,842 | ||||||
Deferred income taxes |
(1,815,001 | ) | 145,970 | |||||
Changes in assets and liabilities: |
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Accounts receivable |
(8,218,798 | ) | (3,034,916 | ) | ||||
Credit Card Receivables |
(31,226,712 | ) | (5,810,748 | ) | ||||
Prepaid expenses |
(1,604,294 | ) | (730,975 | ) | ||||
Other assets |
(1,761,828 | ) | (453,355 | ) | ||||
Accounts payable and accrued expenses |
12,375,483 | 5,682,625 | ||||||
Funds payable to customers |
21,955,337 | 13,461,760 | ||||||
Other liabilities |
2,333,387 | 548,167 | ||||||
Interest received from investments |
6,391,850 | 3,609,409 | ||||||
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Net cash provided by operating activities |
59,161,764 | 58,488,790 | ||||||
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Cash flows from investing activities: |
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Purchase of investments |
(411,974,520 | ) | (205,377,324 | ) | ||||
Proceeds from sale and maturity of investments |
449,386,936 | 186,841,187 | ||||||
Payment for acquired businesses, net of cash acquired |
(3,224,162 | ) | | |||||
Purchases of intangible assets |
(12,657 | ) | (1,390,738 | ) | ||||
Purchases of property and equipment (*) |
(38,093,323 | ) | (8,323,905 | ) | ||||
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Net cash provided by (used in) investing activities |
(3,917,726 | ) | (28,250,780 | ) | ||||
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Cash flows from financing activities: |
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Dividends paid |
(11,126,265 | ) | (8,343,398 | ) | ||||
Repurchase of Common Stock |
(1,012,216 | ) | | |||||
Stock options exercised |
3,020 | 2,400 | ||||||
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Net cash used in financing activities |
(12,135,461 | ) | (8,340,998 | ) | ||||
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Effect of exchange rate changes on cash and cash equivalents |
(13,406,232 | ) | (1,682,959 | ) | ||||
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Net increase in cash and cash equivalents |
29,702,345 | 20,214,053 | ||||||
Cash and cash equivalents, beginning of the period |
101,489,002 | 67,381,677 | ||||||
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Cash and cash equivalents, end of the period |
$ | 131,191,347 | $ | 87,595,730 | ||||
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(*) | Net of financial liabilities, see Note 5 Office building acquisition agreement in Buenos Aires |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
MercadoLibre, Inc.
Notes to Interim Condensed Consolidated Financial Statements (unaudited)
1. | Nature of Business |
MercadoLibre, Inc. (MercadoLibre or the Company) was incorporated in Delaware in October 1999. MercadoLibre is a Latin American e-commerce platform and payments leader. MercadoLibre is an e-commerce enabler whose mission is to build the necessary online and technology tools to allow practically anyone to trade almost anything in Latin America. MercadoLibre enables commerce through its marketplace platform (including online classifieds for motor vehicles, vessels, aircraft, services and real estate), the Latin American largest online marketplace, which allows users to buy and sell in nearly every country in Latin America; through MercadoPago, which enables individuals and businesses to send and receive online payments; through MercadoClics, which facilitates the advertising service to large retailers and brands to promote their product and services on the web; and through MercadoShops which facilitates users to set-up, manage promote their own on-line web-stores, to support MercadoLibres mission of enabling e-commerce.
As of June 30, 2013, the Company, through its wholly-owned subsidiaries, operated online commerce platforms directed towards Argentina, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Mexico, Panama, Peru, Portugal, Uruguay and Venezuela, and online payments solutions directed towards Argentina, Brazil, Mexico, Venezuela, Chile and Colombia. In addition, the Company operates a real estate classified platform that covers some areas of State of Florida, U.S.A.
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 and its subsidiaries.
These interim condensed consolidated financial statements are stated in U.S. dollars. All intercompany transactions and balances have been eliminated.
Substantially all revenues and operating costs are generated in the Companys foreign operations, amounting to approximately 99.6% and 99.4% of the consolidated totals during the six-month periods ended June 30, 2013 and 2012, respectively. Long-lived assets located in the foreign operations totaled $136,822,517 and $98,569,068 as of June 30, 2013 and December 31, 2012, respectively.
These interim condensed consolidated financial statements reflect the Companys consolidated financial position as of June 30, 2013 and December 31, 2012. These financial statements also show the Companys consolidated statements of income and of comprehensive income for the three and six-month periods ended June 30, 2013 and 2012, its consolidated statement of cash flows for the six-month periods ended June 30, 2013 and 2012. These interim condensed consolidated financial statements include all normal recurring adjustments that management believes are necessary to fairly state the Companys financial position, operating results and cash flows.
6
MercadoLibre, Inc.
Notes to Interim Condensed Consolidated Financial Statements (unaudited)
2. | Summary of Significant Accounting Policies (Continued) |
Basis of presentation (Continued)
Because all of the disclosures required by U.S. GAAP for annual consolidated financial statements are not included herein, these unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for the year ended December 31, 2012, contained in the Companys Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on February 28, 2013. The condensed consolidated statements of income, of comprehensive income and of cash flows for the periods presented herein are not necessarily indicative of results expected for any future period.
Foreign Currency Translation
All of the Companys foreign operations have determined the local currency to be their functional currency, except for Venezuela since the year ended December 31, 2010. Accordingly, these foreign subsidiaries translate assets and liabilities from their local currencies into U.S. dollars using period/year-end exchange rates while income and expense accounts are translated at the average rates in effect during the period/year. The resulting translation adjustment is recorded as part of accumulated other comprehensive income (loss). Gains and losses resulting from transactions denominated in non-functional currencies are recognized in earnings.
According to U.S. GAAP, the Company has transitioned its Venezuelan operations to highly inflationary status as from January 1, 2010 considering the U.S. dollar to be the functional currency for such operation.
On February 8, 2013, the Government of Venezuela, through the Foreign Exchange Agreement No. 14, has devalued as from February 9, 2013, the official exchange rate from 4.3 to 6.3 Bolivares Fuertes per U.S. dollar. The devaluation required re-measurement of the Companys Venezuelan subsidiaries non-U.S. dollar denominated monetary assets and liabilities as from February 9, 2013. This devaluation has generated a foreign currency loss of approximately $6.4 million.
In addition, on February 8, 2013, the Government of Venezuela, through Decree No. 9381 (the Decree) has created the Organo Superior para la Optimización del Sistema Cambiario (or the Committee), a committee that will have the authority to design, plan and execute foreign exchange policies. Finally, on February 9, 2013, the BCV eliminated the SITME, which was a former system that allowed companies limited access to foreign currencies for payments to foreign suppliers.
7
MercadoLibre, Inc.
Notes to Interim Condensed Consolidated Financial Statements (unaudited)
2. | Summary of Significant Accounting Policies (Continued) |
Foreign Currency Translation (Continued)
On March 19, 2013, the BCV announced the creation of the Sistema Complementario de Administración de Divisas, or SICAD, which will act jointly with the Commission for the Administration of Foreign Exchange Control (CADIVI). In order to operate within this new system, a company should be registered at the Registro Automatizado (Automatized Register, or RUSAD). The acquisition of foreign currencies under this new system is organized under an auction process to obtain foreign currencies for payments to foreign suppliers, where the minimum exchange rate to be offered is 6.30 Bolivares Fuertes per U.S. dollar. At the date of these condensed consolidated financial statements, the Company has been unable to access the auction process and there is no information available on the details or planned frequency of the SICAD mechanism.
Accordingly, as of June 30, 2013, the exchange rate used to re-measure the net monetary assets of the Companys Venezuelan subsidiaries was 6.30 Bolivares Fuertes per U.S. dollar. Moreover, transactions carried out by the Companys Venezuelan subsidiaries were re-measured at the monthly average exchange rate for the six months then ended. The SITME rate used to re-measure foreign currency transactions during 2012 was 5.3 Bolivares Fuertes per U.S. dollar. The devaluation of the official exchange rate of the Bolivares Fuertes against the U.S. dollar from 5.3 to 6.3 Bolivares Fuertes per U.S. dollar generated a foreign currency loss amounted to approximately $6.4 million in the first quarter of 2013. The Bolivares Fuertes could lose further value with respect to the U.S. dollar depending on the foreign currency exchange policies that might be adopted by the government of Venezuela in the future.
Until 2010 the Company was able to obtain U.S. dollars for any purpose, including dividends distribution, using alternative mechanisms other than through the CADIVI. Those U.S. dollars, obtained at a higher exchange rate than the one offered by CADIVI, and held in balance at U.S. bank accounts of its Venezuelan subsidiaries, were used for dividend distributions from its Venezuelan subsidiaries. CADIVI is the only means by which U.S. dollars for dividend distributions can be requested. The Companys Venezuelan subsidiaries did not request authorization to CADIVI in 2012, neither during the six months ended June 30, 2013, to acquire U.S. dollars to make dividend distributions. The Company has not distributed dividends from its Venezuelan subsidiaries since 2011.
The following table sets forth the assets, liabilities and net assets of the Companys Venezuelan subsidiaries, before intercompany eliminations, as of June 30, 2013 and December 31, 2012 and net revenues for the six-month periods ended June 30, 2013 and 2012.
8
MercadoLibre, Inc.
Notes to Interim Condensed Consolidated Financial Statements (unaudited)
2. | Summary of Significant Accounting Policies (Continued) |
Foreign Currency Translation (Continued)
For the six-month periods ended | ||||||||
June 30, | ||||||||
2013 | 2012 | |||||||
Venezuelan operations |
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Net Revenues |
$ | 32,694,097 | $ | 23,658,890 | ||||
June 30, | December 31, | |||||||
2013 | 2012 | |||||||
Assets |
74,128,243 | 62,938,728 | ||||||
Liabilities |
(28,719,423 | ) | (22,652,965 | ) | ||||
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|||||
Net Assets |
$ | 45,408,820 | $ | 40,285,763 | ||||
|
|
|
|
As of June 30, 2013, net assets (before intercompany eliminations) of the Venezuelan subsidiaries amounted to approximately 14.7% of the consolidated net assets, and cash and investments of the Venezuelan subsidiaries held in local currency in Venezuela amounted to approximately 13.0% of the consolidated cash and investments.
The Companys ability to obtain U.S. dollars in Venezuela is negatively affected by the exchange regulations in Venezuela that are described above. In addition, its business and ability to obtain U.S. dollars in Venezuela would be negatively affected by additional material devaluations or the imposition of significant additional and more stringent controls on foreign currency exchange by the Venezuelan government in the future.
Despite the current difficult macroeconomic environment in Venezuela, the Company continues to actively manage, through its Venezuelan subsidiaries, its investment in and exposure to Venezuela. Based on current operating, political and economic conditions and certain other factors in Venezuela, management currently believes that its business plans and operating strategy in Venezuela will not be materially adversely impacted in the long run.
Income Tax Holiday in Argentina
From fiscal year 2008, the Companys Argentine subsidiary is beneficiary of a software development law. Part of the benefits obtained from being beneficiary of the aforementioned law is a relief of 60% of total income tax determined in each year, until fiscal year 2014.
9
MercadoLibre, Inc.
Notes to Interim Condensed Consolidated Financial Statements (unaudited)
2. | Summary of Significant Accounting Policies (Continued) |
Income Tax Holiday in Argentina (Continued)
Aggregate tax benefit totaled $2,275,176 and $2,153,761 for the three-month periods ended June 30, 2013 and 2012, respectively, while for the six-month periods ended at such dates amounted to $4,769,024 and $4,125,240, respectively. Aggregate per share effect of the Argentine tax holiday amounted to $0.05 and $0.05 for the three-month periods ended June 30, 2013 and 2012, respectively, while for the six-month periods ended at such dates amounted to $0.11 and $0.09, respectively.
In addition, the recently acquired software development company (see Note 4), located in the Province of Cordoba, Argentina, is also beneficiary of the aforementioned income tax holiday, however the total benefit obtained is immaterial.
If the Company had not been granted the Argentine tax holiday, the Company would have pursued an alternative tax planning strategy and, therefore, the impact of not having this particular benefit would not necessarily be the abovementioned U.S. dollar and per share effect.
On August 17, 2011, the Argentine government issued a new software development Law which is still pending for the regulatory decree. If the Argentine operation qualifies under the new software development law, the current income tax relief could slightly decrease but will extend its tax holiday, which would otherwise finish in 2014, for an additional five year period, to 2019 and would obtain some other fiscal benefits.
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 allowance for doubtful accounts, depreciation, amortization, impairment and useful lives of long-lived assets, compensation cost related to cash and share-based compensation, recognition of current and deferred income taxes and contingencies. Actual results could differ from those estimates.
Recent Accounting Pronouncements
In March 2013, the Financial Accounting Standards Board (FASB) issued Parents Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity a consensus of the FASB Emerging Issues Task Force clarifying the accounting for the release of cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2013. The Company does not anticipate that this adoption will have a significant impact on its financial position, results of operations or cash flows.
10
MercadoLibre, Inc.
Notes to Interim Condensed Consolidated Financial Statements (unaudited)
3. | Net income per share |
Basic earnings per share for the Companys common stock is computed by dividing net income available to common shareholders attributable to common stock for the period by the weighted average number of common shares outstanding during the period.
Diluted earnings per share for the Companys common stock assume the exercise of outstanding stock options under the Companys stock based employee compensation plan.
The following table shows how net income available to common shareholders is allocated using the two-class method, for the three and six-month periods ended June 30, 2013 and 2012:
Three Months Ended June 30, | ||||||||||||||||
2013 | 2012 | |||||||||||||||
Basic | Diluted | Basic | Diluted | |||||||||||||
Net income |
$ | 30,021,018 | $ | 30,021,018 | $ | 25,394,824 | $ | 25,394,824 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income attributable to noncontrolling interests |
(42,377 | ) | (42,377 | ) | (15,632 | ) | (15,632 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Change in redeemable amount of noncontrolling interest |
(349,911 | ) | (349,911 | ) | (179,098 | ) | (179,098 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income attributable to MercadoLibre, Inc. Shareholders corresponding to common stock |
$ | 29,628,730 | $ | 29,628,730 | $ | 25,200,094 | $ | 25,200,094 | ||||||||
|
|
|
|
|
|
|
|
Six Months Ended June 30, | ||||||||||||||||
2013 | 2012 | |||||||||||||||
Basic | Diluted | Basic | Diluted | |||||||||||||
Net income |
$ | 47,543,609 | $ | 47,543,609 | $ | 45,031,862 | $ | 45,031,862 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income attributable to noncontrolling interests |
(84,715 | ) | (84,715 | ) | (18,060 | ) | (18,060 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Change in redeemable amount of noncontrolling interest |
(133,951 | ) | (133,951 | ) | 137,200 | 137,200 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income attributable to MercadoLibre, Inc. Shareholders corresponding to common stock |
$ | 47,324,943 | $ | 47,324,943 | $ | 45,151,002 | $ | 45,151,002 | ||||||||
|
|
|
|
|
|
|
|
11
MercadoLibre, Inc.
Notes to Interim Condensed Consolidated Financial Statements (unaudited)
3. | Net income per share (Continued) |
Net income per share of common stock is as follows for the three and six-month periods ended June 30, 2013 and 2012:
Three Months Ended June 30, | ||||||||||||||||
2013 | 2012 | |||||||||||||||
Basic | Diluted | Basic | Diluted | |||||||||||||
Net income attributable to MercadoLibre, Inc. Shareholders per common share |
$ | 0.67 | $ | 0.67 | $ | 0.57 | $ | 0.57 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Numerator: |
||||||||||||||||
Net income attributable to MercadoLibre, Inc. Shareholders |
$ | 29,628,730 | $ | 29,628,730 | $ | 25,200,094 | $ | 25,200,094 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Denominator: |
||||||||||||||||
Weighted average of common stock outstanding for Basic earnings per share |
44,152,933 | 44,152,933 | 44,147,999 | 44,147,999 | ||||||||||||
Adjustment for stock options |
| | | 4,134 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Adjusted weighted average of common stock outstanding for Diluted earnings per share |
44,152,933 | 44,152,933 | 44,147,999 | 44,152,133 | ||||||||||||
|
|
|
|
|
|
|
|
Six Months Ended June 30, | ||||||||||||||||
2013 | 2012 | |||||||||||||||
Basic | Diluted | Basic | Diluted | |||||||||||||
Net income attributable to MercadoLibre, Inc. Shareholders per common share |
$ | 1.07 | $ | 1.07 | $ | 1.02 | $ | 1.02 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Numerator: |
||||||||||||||||
Net income attributable to MercadoLibre, Inc. Shareholders |
$ | 47,324,943 | $ | 47,324,943 | $ | 45,151,002 | $ | 45,151,002 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Denominator: |
||||||||||||||||
Weighted average of common stock outstanding for Basic earnings per share |
44,152,132 | 44,152,132 | 44,145,038 | 44,145,038 | ||||||||||||
Adjustment for stock options |
| | | 4,140 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Adjusted weighted average of common stock outstanding for Diluted earnings per share |
44,152,132 | 44,152,132 | 44,145,038 | 44,149,178 | ||||||||||||
|
|
|
|
|
|
|
|
During the three and six-month periods ended June 30, 2013 and 2012, there were no anti-dilutive shares.
12
MercadoLibre, Inc.
Notes to Interim Condensed Consolidated Financial Statements (unaudited)
4. | Business combinations, Goodwill and Intangible assets |
Business combinations
On March 22, 2013, the Company completed, through its subsidiaries Meli Participaciones S.L. (ETVE) and MercadoLibre S.R.L. (MercadoLibre Argentina) (together referred to as the Buyer), the acquisition of the 100% of equity interest in a software development company located and organized under the laws of the Province of Cordoba, Argentina. 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 of the 100% of the acquired business was $3,454,497 (settled in Argentine pesos 17,652,480). On such same date, the Buyer paid and agreed to pay the purchase price as follows: i) $2,191,781 in cash; ii) set an escrow amounting to $489,237 for a 24-months period, aiming to cover unexpected liabilities and negative working capital; iii) set an escrow amounting to $547,945 for a 36-months period, aiming to continue the employment relationship of certain key employees; and iv) on June 24, 2013 the Company paid the remaining $225,534 net of certain negative working capital adjustments.
In addition, the Company incurred in certain direct costs of the business combination which were expensed as incurred.
The above mentioned escrow for the continuing employment relationship of $547,945 will be expensed over the 36-months period or a lesser period of time if certain other conditions determined in the Selling and Purchase Agreement (SPA) occur. The escrow will be released at the end of such period, together with the accrued interest.
The purchase price for the acquisition has been measured at its fair value at the acquisition date, and the portion corresponding to the contingent consideration will be subsequently re-measured at fair value with changes through the statement of income.
The Companys interim condensed consolidated statement of income includes the results of operations of the acquired business as from March 22, 2013. The net revenues and net loss of the acquiree included in the Companys condensed consolidated statement of income since the acquisition amounted to $ 500,255 and $50,792, respectively.
13
MercadoLibre, Inc.
Notes to Interim Condensed Consolidated Financial Statements (unaudited)
4. | Business combinations, Goodwill and Intangible assets (Continued) |
Business combinations (Continued)
The following table summarizes the definitive purchase price allocation for the acquisition:
Net assets acquired |
$ | 237,891 | ||
Goodwill |
2,668,661 | |||
|
|
|||
Purchase price |
2,906,552 | |||
|
|
|||
Escrow for employment relationship |
547,945 | |||
|
|
|||
Aggregate price paid |
$ | 3,454,497 | ||
|
|
Supplemental pro-forma information required by U.S. GAAP, is impracticable after making every reasonable effort to do so, however, amounts involved are deemed to be immaterial.
Arising goodwill has been allocated proportionally to each of the segments identified by the Companys management, considering the synergies expected from this acquisition and it is expected that the acquiree will contribute to the earnings generation process of such segments.
The Company recognized goodwill for this acquisition based on management expectation that the acquired business will improve the Companys business.
Goodwill is not deductible for tax purposes.
14
MercadoLibre, Inc.
Notes to Interim Condensed Consolidated Financial Statements (unaudited)
4. | Business combinations, Goodwill and Intangible assets (Continued) |
Goodwill and Intangible assets
The composition of Goodwill and Intangible assets, as of June 30, 2013 and December 31, 2012 was as follows:
June 30, | December 31, | |||||||
2013 | 2012 | |||||||
(Unaudited) | (Audited) | |||||||
Goodwill |
$ | 59,558,023 | $ | 60,366,063 | ||||
Intangible assets with indefinite lives |
||||||||
- Trademarks |
5,251,046 | 5,326,057 | ||||||
Amortizable intangible assets |
||||||||
- Licenses and others |
3,563,361 | 3,829,668 | ||||||
- Non-compete agreement |
1,105,573 | 1,195,509 | ||||||
- Customer list |
1,600,514 | 1,708,770 | ||||||
|
|
|
|
|||||
Total intangible assets |
$ | 11,520,494 | $ | 12,060,004 | ||||
Accumulated amortization |
(4,802,728 | ) | (4,780,139 | ) | ||||
|
|
|
|
|||||
Total intangible assets, net |
$ | 6,717,766 | $ | 7,279,865 | ||||
|
|
|
|
Goodwill
The changes in the carrying amount of goodwill for the six-month period ended June 30, 2013 and the year ended December 31, 2012, are as follows:
Period ended June 30, 2013 (Unaudited) | ||||||||||||||||||||||||||||||||
Brazil | Argentina | Chile | Mexico | Venezuela | Colombia | Other Countries | Total | |||||||||||||||||||||||||
Balance, beginning of period |
$ | 10,706,281 | $ | 18,889,094 | $ | 7,115,211 | $ | 11,404,780 | $ | 4,846,030 | $ | 5,897,136 | $ | 1,507,531 | $ | 60,366,063 | ||||||||||||||||
- Business acquisition |
1,307,644 | 659,159 | | 186,806 | 405,637 | 69,385 | 40,030 | 2,668,661 | ||||||||||||||||||||||||
- Effect of exchange rates change |
(896,673 | ) | (1,561,458 | ) | (337,502 | ) | (63,521 | ) | (20,178 | ) | (477,030 | ) | (120,339 | ) | (3,476,701 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Balance, end of the period |
$ | 11,117,252 | $ | 17,986,795 | $ | 6,777,709 | $ | 11,528,065 | $ | 5,231,489 | $ | 5,489,491 | $ | 1,427,222 | $ | 59,558,023 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Year ended December 31, 2012 (Audited) | ||||||||||||||||||||||||||||||||
Brazil | Argentina | Chile | Mexico | Venezuela | Colombia | Other Countries | Total | |||||||||||||||||||||||||
Balance, beginning of year |
$ | 11,663,443 | $ | 21,583,774 | $ | 6,577,459 | $ | 10,621,839 | $ | 4,846,030 | $ | 5,367,526 | $ | 1,433,877 | $ | 62,093,948 | ||||||||||||||||
- Effect of exchange rates change |
(957,162 | ) | (2,694,680 | ) | 537,752 | 782,941 | | 529,610 | 73,654 | (1,727,885 | ) | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Balance, end of the year |
$ | 10,706,281 | $ | 18,889,094 | $ | 7,115,211 | $ | 11,404,780 | $ | 4,846,030 | $ | 5,897,136 | $ | 1,507,531 | $ | 60,366,063 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
MercadoLibre, Inc.
Notes to Interim Condensed Consolidated Financial Statements (unaudited)
4. | Business combinations, Goodwill and Intangible assets (Continued) |
Goodwill and Intangible assets (Continued)
Intangible assets subject to amortization
Intangible assets subject to amortization are comprised of customer lists and user base, trademarks and trade names, non-compete agreements, acquired software licenses and other acquired intangible assets including developed technologies. Aggregate amortization expense for intangible assets totaled $216,587 and $194,313 for the three-month periods ended June 30, 2013 and 2012, respectively, while for the six-month periods ended at such dates amounted to $437,446 and $462,476, respectively.
The estimated aggregate amortization expense for each of the four succeeding fiscal years, as of June 30, 2013 is as follows:
For year ended 12/31/2013 |
$ | 348,840 | ||
For year ended 12/31/2014 |
582,226 | |||
For year ended 12/31/2015 |
472,090 | |||
For year ended 12/31/2016 |
63,564 | |||
|
|
|||
$ | 1,466,720 | |||
|
|
5. | Segment reporting |
Reporting segments are based upon the Companys internal organizational structure, the manner in which the Companys operations are managed, the criteria used by management to evaluate the Companys performance, the availability of separate financial information, and overall materiality considerations.
Segment reporting is based on geography as the main basis of segment breakdown to reflect the evaluation of the Companys performance defined by the management. The Companys segments include Brazil, Argentina, Mexico, Venezuela and other countries (such as Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Panama, Peru, Portugal, Uruguay and USA).
Direct contribution consists of net revenues from external customers less direct costs. Direct costs include specific costs of net revenues, 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, headcount compensation, third party fees. All corporate related costs have been excluded from the Companys 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.
16
MercadoLibre, Inc.
Notes to Interim Condensed Consolidated Financial Statements (unaudited)
5. | Segment reporting (Continued) |
The following tables summarize the financial performance of the Companys reporting segments:
Three Months Ended June 30, 2013 | ||||||||||||||||||||||||
Brazil | Argentina | Mexico | Venezuela | Other Countries | Total | |||||||||||||||||||
Net revenues |
$ | 51,116,153 | $ | 29,000,836 | $ | 7,823,566 | $ | 17,563,547 | $ | 6,679,258 | $ | 112,183,360 | ||||||||||||
Direct costs |
(27,849,992 | ) | (16,203,748 | ) | (5,122,425 | ) | (6,478,796 | ) | (3,215,003 | ) | (58,869,964 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Direct contribution |
23,266,161 | 12,797,088 | 2,701,141 | 11,084,751 | 3,464,255 | 53,313,396 | ||||||||||||||||||
Operating expenses and indirect costs of net revenues |
(17,864,101 | ) | ||||||||||||||||||||||
|
|
|||||||||||||||||||||||
Income from operations |
35,449,295 | |||||||||||||||||||||||
|
|
|||||||||||||||||||||||
Other income (expenses): |
||||||||||||||||||||||||
Interest income and other financial gains |
2,202,314 | |||||||||||||||||||||||
Interest expense and other financial losses |
(531,668 | ) | ||||||||||||||||||||||
Foreign currency gain |
3,600,866 | |||||||||||||||||||||||
Other gains, net |
1,393 | |||||||||||||||||||||||
|
|
|||||||||||||||||||||||
Net income before income / asset tax expense |
$ | 40,722,200 | ||||||||||||||||||||||
|
|
|||||||||||||||||||||||
Three Months Ended June 30, 2012 | ||||||||||||||||||||||||
Brazil | Argentina | Mexico | Venezuela | Other Countries | Total | |||||||||||||||||||
Net revenues |
$ | 44,205,857 | $ | 20,561,213 | $ | 6,046,812 | $ | 12,417,318 | $ | 5,612,859 | $ | 88,844,059 | ||||||||||||
Direct costs |
(25,066,435 | ) | (9,543,476 | ) | (3,269,574 | ) | (3,728,913 | ) | (2,896,426 | ) | (44,504,824 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Direct contribution |
19,139,422 | 11,017,737 | 2,777,238 | 8,688,405 | 2,716,433 | 44,339,235 | ||||||||||||||||||
Operating expenses and indirect costs of net revenues |
(12,454,315 | ) | ||||||||||||||||||||||
|
|
|||||||||||||||||||||||
Income from operations |
31,884,920 | |||||||||||||||||||||||
|
|
|||||||||||||||||||||||
Other income (expenses): |
||||||||||||||||||||||||
Interest income and other financial gains |
2,982,303 | |||||||||||||||||||||||
Interest expense and other financial losses |
(474,300 | ) | ||||||||||||||||||||||
Foreign currency gain |
749,008 | |||||||||||||||||||||||
Other losses, net |
(7,009 | ) | ||||||||||||||||||||||
|
|
|||||||||||||||||||||||
Net income before income / asset tax expense |
$ | 35,134,922 | ||||||||||||||||||||||
|
|
17
MercadoLibre, Inc.
Notes to Interim Condensed Consolidated Financial Statements (unaudited)
5. | Segment reporting (Continued) |
Six Months Ended June 30, 2013 | ||||||||||||||||||||||||
Brazil | Argentina | Mexico | Venezuela | Other Countries | Total | |||||||||||||||||||
Net revenues |
$ | 98,881,836 | $ | 54,621,583 | $ | 15,613,867 | $ | 32,694,097 | $ | 13,097,724 | $ | 214,909,107 | ||||||||||||
Direct costs |
(58,843,536 | ) | (29,679,458 | ) | (9,239,252 | ) | (12,486,903 | ) | (6,082,984 | ) | (116,332,133 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Direct contribution |
40,038,300 | 24,942,125 | 6,374,615 | 20,207,194 | 7,014,740 | 98,576,974 | ||||||||||||||||||
Operating expenses and indirect costs of net revenues |
(34,556,496 | ) | ||||||||||||||||||||||
|
|
|||||||||||||||||||||||
Income from operations |
64,020,478 | |||||||||||||||||||||||
|
|
|||||||||||||||||||||||
Other income (expenses): |
||||||||||||||||||||||||
Interest income and other financial gains |
5,596,320 | |||||||||||||||||||||||
Interest expense and other financial losses |
(892,020 | ) | ||||||||||||||||||||||
Foreign currency loss |
(2,648,848 | ) | ||||||||||||||||||||||
Other losses, net |
(2,340 | ) | ||||||||||||||||||||||
|
|
|||||||||||||||||||||||
Net income before income / asset tax expense |
$ | 66,073,590 | ||||||||||||||||||||||
|
|
|||||||||||||||||||||||
Six Months Ended June 30, 2012 | ||||||||||||||||||||||||
Brazil | Argentina | Mexico | Venezuela | Other Countries | Total | |||||||||||||||||||
Net revenues |
$ | 86,370,511 | $ | 38,677,682 | $ | 12,630,678 | $ | 23,658,890 | $ | 11,242,304 | $ | 172,580,065 | ||||||||||||
Direct costs |
(50,809,649 | ) | (17,666,411 | ) | (6,916,211 | ) | (8,576,248 | ) | (5,712,094 | ) | (89,680,613 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Direct contribution |
35,560,862 | 21,011,271 | 5,714,467 | 15,082,642 | 5,530,210 | 82,899,452 | ||||||||||||||||||
Operating expenses and indirect costs of net revenues |
(26,083,786 | ) | ||||||||||||||||||||||
|
|
|||||||||||||||||||||||
Income from operations |
56,815,666 | |||||||||||||||||||||||
|
|
|||||||||||||||||||||||
Other income (expenses): |
||||||||||||||||||||||||
Interest income and other financial gains |
6,070,862 | |||||||||||||||||||||||
Interest expense and other financial losses |
(551,617 | ) | ||||||||||||||||||||||
Foreign currency loss |
(283,969 | ) | ||||||||||||||||||||||
Other losses, net |
(11,263 | ) | ||||||||||||||||||||||
|
|
|||||||||||||||||||||||
Net income before income / asset tax expense |
62,039,679 | |||||||||||||||||||||||
|
|
The following table summarizes the allocation of the long-lived tangible assets based on geography, as of June 30, 2013 and December 31, 2012:
June 30, | December 31, | |||||||
2013 | 2012 | |||||||
(Unaudited) | (Audited) | |||||||
US long-lived tangible assets |
$ | 9,519,177 | $ | 6,782,077 | ||||
Other countries long-lived tangible assets |
||||||||
Argentina |
33,568,284 | 16,955,438 | ||||||
Brazil |
3,459,910 | 2,421,618 | ||||||
Mexico |
572,537 | 378,653 | ||||||
Venezuela |
29,755,221 | 8,455,816 | ||||||
Other countries |
3,206,530 | 2,732,620 | ||||||
|
|
|
|
|||||
$ | 70,562,482 | $ | 30,944,145 | |||||
|
|
|
|
|||||
Total long-lived tangible assets |
$ | 80,081,659 | $ | 37,726,222 | ||||
|
|
|
|
18
MercadoLibre, Inc.
Notes to Interim Condensed Consolidated Financial Statements (unaudited)
5. | Segment reporting (Continued) |
Long-lived tangible assets acquired:
Office building acquisition agreement in Buenos Aires
In April 2013, the Company acquired three floors or 3,865 square meters in a new office building located in Buenos Aires for a total amount of $18.0 million plus VAT. The price will be paid in Argentine pesos. At the date of this interim condensed consolidated financial statements the Company paid: i) $0.4 million plus VAT in advance; ii) $3.2 million plus VAT at the date of signing of the purchase agreement and iii) the first two installments in June and in July 2013, for an aggregate amount of $4.1 million.
As of June 30, 2013, the Company recorded a liability for the unpaid balance of this building acquisition for a total amount of $12.2 million.
Office building acquisition agreement in Caracas
In May 2013, the Company acquired 1,158 square meters, 13 parking spaces and 4 storage spaces, in an office building located in Caracas for a total amount of $20.0 million or BF$126.0 million. The price has been paid in Bolivares Fuertes.
The following table summarizes the allocation of the goodwill and intangible assets based on geography, as of June 30, 2013 and December 31, 2012:
June 30, 2013 |
December 31, 2012 |
|||||||
(Unaudited) | (Audited) | |||||||
US intangible assets |
$ | 15,754 | $ | 21,005 | ||||
Other countries goodwill and intangible assets |
||||||||
Argentina |
19,067,487 | 20,328,154 | ||||||
Brazil |
11,129,343 | 10,724,007 | ||||||
Mexico |
14,667,740 | 14,644,795 | ||||||
Venezuela |
6,980,576 | 6,595,117 | ||||||
Other countries |
14,414,889 | 15,332,850 | ||||||
|
|
|
|
|||||
$ | 66,260,035 | $ | 67,624,923 | |||||
|
|
|
|
|||||
Total goodwill and intangible assets |
$ | 66,275,789 | $ | 67,645,928 | ||||
|
|
|
|
19
MercadoLibre, Inc.
Notes to Interim Condensed Consolidated Financial Statements (unaudited)
5. | Segment reporting (Continued) |
Consolidated net revenues by similar products and services for the three and six-months ended June 30, 2013 and 2012 were as follows:
Consolidated Net |
Three Months Ended June 30, | |||||||
Revenues |
2013 | 2012 | ||||||
Marketplace |
$ | 77,915,508 | $ | 61,936,103 | ||||
Non-marketplace (*) |
$ | 34,267,852 | $ | 26,907,956 | ||||
|
|
|
|
|||||
Total |
$ | 112,183,360 | $ | 88,844,059 | ||||
|
|
|
|
|||||
Consolidated Net | Six Months Ended June 30, | |||||||
Revenues |
2013 | 2012 | ||||||
Marketplace |
$ | 149,630,271 | $ | 122,218,201 | ||||
Non-marketplace (*) |
$ | 65,278,836 | $ | 50,361,864 | ||||
|
|
|
|
|||||
Total |
$ | 214,909,107 | $ | 172,580,065 | ||||
|
|
|
|
(*) | Includes, among other things, Ad Sales, Real Estate, Motors, Financing Fees, Off-platform Payment Fees and other ancillary services. |
6. | Fair Value Measurement of Assets and Liabilities |
The following table summarizes the Companys financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2013 and December 31, 2012:
Balances as of June 30, |
Quoted Prices in active markets for identical Assets |
Significant other observable inputs |
Balances as of December 31, |
Quoted Prices in active markets for identical Assets |
Significant other observable inputs |
|||||||||||||||||||
Description | 2013 | (Level 1) | (Level 2) | 2012 | (Level 1) | (Level 2) | ||||||||||||||||||
(Unaudited) | (Audited) | |||||||||||||||||||||||
Assets |
||||||||||||||||||||||||
Cash and Cash Equivalents: |
||||||||||||||||||||||||
Money Market Funds |
$ | 27,712,009 | $ | 27,712,009 | $ | | $ | 23,033,357 | $ | 23,033,357 | $ | | ||||||||||||
Investments: |
||||||||||||||||||||||||
Asset backed securities |
| | | 18,826,833 | | 18,826,833 | ||||||||||||||||||
Sovereign Debt Securities |
26,868,278 | 26,868,278 | | 21,453,141 | 21,453,141 | | ||||||||||||||||||
Corporate Debt Securities |
42,143,785 | 42,143,785 | | 51,991,294 | 51,991,294 | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Financial Assets |
$ | 96,724,072 | $ | 96,724,072 | $ | | $ | 115,304,625 | $ | 96,477,792 | $ | 18,826,833 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
20
MercadoLibre, Inc.
Notes to Interim Condensed Consolidated Financial Statements (unaudited)
6. | Fair Value Measurement of Assets and Liabilities (Continued) |
As of June 30, 2013, the Companys financial assets valued at fair value consisted of assets valued using i) unadjusted quoted prices in active markets (level 1). Level 1 instrument valuations are obtained from observable inputs that reflect quoted prices (unadjusted) for identical assets in active markets. Level 2 instruments are obtained from readily-available pricing sources for comparable instruments (level 2). As of June 30, 2013, the Company did not have any assets without other observable inputs (level 2) or without market values that would require a high level of judgment to determine fair value (level 3).
The unrealized net gains on short term and long term investments are reported as a component of accumulated other comprehensive income. The Company does not anticipate any significant realized losses associated with those investments in excess of the Companys historical cost.
In addition, as of June 30, 2013 and December 31, 2012, the Company had $61,725,464 and $87,379,121 of short-term investments, which consisted of time deposits. Those investments are accounted for at amortized cost which, as of June 30, 2013 and December 31, 2012, approximates their fair values.
As of June 30, 2013 and December 31, 2012, the carrying value of the Companys financial assets and liabilities measured at amortized cost approximated their fair value because of its short term maturity. These assets and liabilities included cash and cash equivalents (excluding money markets funds), accounts receivables, credit card receivables, funds payable to customers, other receivables, other assets, accounts payables, social security payables, taxes payables, loans and provisions and other liabilities.
The proceeds from sales of available-for-sale investments during the period ended June 30, 2013 amounted to $141.2 million, the net realized gain included in the Interim Condensed Consolidated Statement of Income amounted to $518,713 and the reclassification out of the Other Comprehensive Income to Net Income was a loss of $871,702. Also, a substantial portion of those proceeds was subsequently invested in different available-for-sale investments.
21
MercadoLibre, Inc.
Notes to Interim Condensed Consolidated Financial Statements (unaudited)
6. | Fair Value Measurement of Assets and Liabilities (Continued) |
The following table summarizes the fair value level for those financial assets and liabilities of the Company measured at amortized cost as of June 30, 2013 and December 31, 2012:
Balances as
of June 30, 2013 |
Significant other observable inputs (Level 2) |
Balances as of December 31, 2012 |
Significant other observable inputs (Level 2) |
|||||||||||||
(Unaudited) | (Audited) | |||||||||||||||
Assets |
||||||||||||||||
Time Deposits |
$ | 61,725,464 | 61,725,464 | $ | 87,379,121 | 87,379,121 | ||||||||||
Accounts and Credit Cards receivable |
82,942,389 | 82,942,389 | 55,653,528 | 55,653,528 | ||||||||||||
Prepaid expenses and Other assets |
20,874,816 | 20,874,816 | 19,601,417 | 19,601,417 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Assets |
$ | 165,542,669 | $ | 165,542,669 | $ | 162,634,066 | $ | 162,634,066 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities |
||||||||||||||||
Accounts and funds payable |
$ | 145,838,048 | $ | 145,838,048 | $ | 125,449,275 | $ | 125,449,275 | ||||||||
Salaries and social security payable |
15,571,049 | 15,571,049 | 14,994,186 | 14,994,186 | ||||||||||||
Tax payable |
15,371,128 | 15,371,128 | 19,210,568 | 19,210,568 | ||||||||||||
Dividends payable |
6,313,869 | 6,313,869 | 4,812,396 | 4,812,396 | ||||||||||||
Other liabilities |
15,300,420 | 15,300,420 | 2,981,212 | 2,981,212 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Liabilities |
$ | 198,394,514 | $ | 198,394,514 | $ | 167,447,637 | $ | 167,447,637 | ||||||||
|
|
|
|
|
|
|
|
As of June 30, 2013 and December 31, 2012, the Company held no direct investments in auction rate securities, collateralized debt obligations or structured investment vehicles. As of June 30, 2013 and December 31, 2012, the Company does not have any non-financial assets or liabilities measured at fair value.
22
MercadoLibre, Inc.
Notes to Interim Condensed Consolidated Financial Statements (unaudited)
6. | Fair Value Measurement of Assets and Liabilities (Continued) |
As of June 30, 2013 and December 31, 2012, the fair value of short and long-term investments classified as available for sale securities are as follows:
June 30, 2013 (Unaudited) | ||||||||||||||||
Cost | Gross Unrealized Gains |
Gross Unrealized Losses (1) |
Estimated Fair Value |
|||||||||||||
Cash and cash equivalents |
||||||||||||||||
Money Market Funds |
$ | 27,716,592 | $ | | $ | (4,583 | ) | $ | 27,712,009 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Total Cash and cash equivalents |
$ | 27,716,592 | $ | | $ | (4,583 | ) | $ | 27,712,009 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Short-term investments |
||||||||||||||||
Sovereign Debt Securities |
$ | 3,978,872 | $ | 857 | $ | | $ | 3,979,729 | ||||||||
Corporate Debt Securities |
5,604,611 | | (9,862 | ) | 5,594,749 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Short-term investments |
$ | 9,583,483 | $ | 857 | $ | (9,862 | ) | $ | 9,574,478 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Long-term investments |
||||||||||||||||
Sovereign Debt Securities |
$ | 22,908,219 | $ | 27,937 | $ | (47,607 | ) | $ | 22,888,549 | |||||||
Corporate Debt Securities |
36,759,140 | 8,196 | (218,300 | ) | 36,549,036 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Long-term investments |
$ | 59,667,359 | $ | 36,133 | $ | (265,907 | ) | $ | 59,437,585 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 96,967,434 | $ | 36,990 | $ | (280,352 | ) | $ | 96,724,072 | |||||||
|
|
|
|
|
|
|
|
|||||||||
December 31, 2012 (Audited) | ||||||||||||||||
Cost | Gross Unrealized Gains |
Gross Unrealized Losses (1) |
Estimated Fair Value |
|||||||||||||
Cash and cash equivalents |
||||||||||||||||
Money Market Funds |
$ | 23,030,970 | $ | 3,400 | $ | (1,013 | ) | $ | 23,033,357 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Total Cash and cash equivalents |
$ | 23,030,970 | $ | 3,400 | $ | (1,013 | ) | $ | 23,033,357 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Short-term investments |
||||||||||||||||
Corporate Debt Securities |
$ | 6,314,939 | $ | 1,032 | $ | (287 | ) | $ | 6,315,684 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Total Short-term investments |
$ | 6,314,939 | $ | 1,032 | $ | (287 | ) | $ | 6,315,684 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Long-term investments |
||||||||||||||||
Sovereign Debt Securities |
$ | 21,153,227 | $ | 299,914 | $ | | $ | 21,453,141 | ||||||||
Corporate Debt Securities |
45,089,831 | 630,807 | (45,028 | ) | 45,675,610 | |||||||||||
Asset Backed Securities (2) |
18,568,996 | 301,544 | (43,707 | ) | 18,826,833 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Long-term investments |
$ | 84,812,054 | $ | 1,232,265 | $ | (88,735 | ) | $ | 85,955,584 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 114,157,963 | $ | 1,236,697 | $ | (90,035 | ) | $ | 115,304,625 | |||||||
|
|
|
|
|
|
|
|
(1) | Unrealized losses from securities are primarily attributable to market price movements. Management does not believe any remaining unrealized losses represent other-than-temporary impairments based on our evaluation of available evidence including the credit rating of the investments, as of June 30, 2013 and December 31, 2012. |
(2) | Asset backed securities have investment grade credit ratings. |
23
MercadoLibre, Inc.
Notes to Interim Condensed Consolidated Financial Statements (unaudited)
6. | Fair Value Measurement of Assets and Liabilities (Continued) |
Most of the Sovereign Debt Securities are U.S. Treasury Notes, with no significant risk associated.
As of June 30, 2013, the estimated fair values of short-term and long-term investments classified by its contractual maturities were as follows:
One year or less |
$ | 37,286,487 | ||
One year to two years |
24,218,350 | |||
Two years to three years |
18,575,315 | |||
Three years to four years |
9,471,002 | |||
Four years to five years |
5,435,462 | |||
More than five years |
1,737,456 | |||
|
|
|||
Total |
$ | 96,724,072 | ||
|
|
7. | 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. The proceeding-related reserve is based on developments to date and historical information related to actions filed against the Company. As of June 30, 2013, the Company had established reserves for proceeding-related contingencies of $3,367,731 to cover legal actions against the Company. In addition, as of June 30, 2013 the Company and its subsidiaries are subject to certain legal actions considered by the Companys management and its legal counsels to be reasonably possible for an aggregate amount up to $4,036,160. No loss amount has been accrued for such legal actions of which the most significant ones (individually or in the aggregate) are described below.
As of June 30, 2013, 595 legal actions were pending in the Brazilian ordinary courts. In addition, as of June 30, 2013, there were 3,504 cases still pending in Brazilian consumer courts. Filing and pursuing of an action before Brazilian consumer courts do not require the assistance of a lawyer. In most of the cases filed against the Company, the plaintiffs asserted that the Company was responsible for fraud committed against them, or responsible for damages suffered when purchasing an item on the Companys website, when using MercadoPago, or when the Company invoiced them.
24
MercadoLibre, Inc.
Notes to Interim Condensed Consolidated Financial Statements (unaudited)
7. | Commitments and Contingencies (Continued) |
Litigation and Other Legal Matters (Continued)
On August 25, 2010, Citizen Watch do Brasil S/A, or Citizen, sued Brazilian subsidiaries MercadoLivre.com Atividades de Internet Ltda. and eBazar.com.br Ltda. in the 31th Central Civil Court State of São Paulo, Brazil. Citizen alleged that the Brazilian subsidiaries were infringing Citizens trademarks as a result of users selling allegedly counterfeit Citizen watches through the Brazilian page of the Brazilian subsidiaries website. Citizen sought an order enjoining the sale of Citizen-branded watches on the Brazilian subsidiaries Marketplace with a $6,000 daily non-compliance penalty. On September 23, 2010, the Brazilian subsidiaries were summoned of an injunction granted to prohibit the offer of Citizen products on its platform, but the penalty was established at $6,000. On September 26, 2010, the Brazilian subsidiaries presented their defense and appealed the decision of the injunction relief on September 27, 2010. On October 22, 2010 the injunction granted to Citizen was suspended. On May 28, 2012, the Plaintiff filed an appeal related to the injunction relief to the State Court of Appeals and the Brazilian subsidiaries presented their defense on August 16, 2012. The Superior courts ruling is still pending. In September 2012, the Plaintiff filed a legal action against the Brazilian subsidiaries with same arguments alleged in the injunction request and seeking for compensatory and statutory damages and defenses were presented on March 20, 2013. As of June 30, 2013 the lower courts ruling was still pending. In the opinion of the Brazilian subsidiaries management and its legal counsel the risk of loss is reasonably possible but not probable.
State of Rio de Janeiro Customer Service Level Claim
On August 19, 2011, a state prosecutor of the State of Rio de Janeiro, Brazil presented a claim against the Companys Brazilian subsidiary. The state prosecutor alleges that the Brazilian subsidiary should improve its customer service level and provide (among other things) a telephone number for customer support and requested an injunction against our Brazilian subsidiary. On August 23, 2011, the Judge of the first instance court denied the aforementioned injunction. On December 7, 2011, the Company was summoned of the lawsuit. On March 1, 2012 the Company presented its defense. On August 29, 2012 a conciliatory hearing was held, but no agreement was reached. On October 22, 2012, the Lower Court Judges ruled in favor of MercadoLivre and dismissed the claim against MercadoLivre. The Public Prosecutor appealed the decision and MercadoLivre presented its defense on December 12, 2012. On April 9, 2013, the State Court of Appeals ruled in favor of the Company confirming the dismissal of the claim. On May 28, 2013 the decision was appealed by the state prosecutor to the Brazilian Superior Court of Justice and the Company presented its response on July 2, 2013. In the opinion of the Companys management and its legal counsel the risk of loss is remote.
City of São Paulo Tax Claims
In September 2012 São Paulo tax authorities have asserted taxes and fines against our Brazilian subsidiary related to our Brazilian subsidiarys activities in São Paulo for the period from 2007 through 2010 in an approximate amount of R$23 million or $11.4 million according to the exchange rate as of September 30, 2012. In January 2005 we moved our operations to Santana de Parnaíba City, Brazil and began paying taxes to that jurisdiction and therefore we believe we have strong defenses to the claims of the São Paulo authorities with respect to this period. On July 27, 2012, the Company presented administrative defenses against the authorities claim. On February 2, 2013, São Paulo tax authorities ruled against the Brazilian subsidiary maintaining claimed taxes and fines. On March 4, 2013, the Company presented an appeal to the Conselho Municipal de Tributos or São Paulo Municipal Council of Taxes. As of June 30, 2013, the ruling of mentioned appeal was still pending. The Companys management and its legal counsel believe that the risk of loss is remote, and as a result, the Company has not reserved any provisions for this claim.
25
MercadoLibre, Inc.
Notes to Interim Condensed Consolidated Financial Statements (unaudited)
7. | Commitments and Contingencies (Continued) |
City of São Paulo Tax Claims (Continued)
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 Companys 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 Companys 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 Companys business expands and the Company grows larger.
8. | Long Term Retention Plan |
The following table summarizes the 2009, 2010, 2011 and 2012 Long Term Retention Plans (LTRP) accrued compensation expense for the six and three-month periods ended June 30, 2013 and 2012:
Six Months Ended June 30, | Three Months Ended June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012(*) | |||||||||||||
LTRP 2009 |
$ | 1,117,678 | $ | 179,924 | $ | 709,758 | $ | (497,895 | ) | |||||||
LTRP 2010 |
1,017,936 | 532,918 | 624,140 | (51,239 | ) | |||||||||||
LTRP 2011 |
1,006,713 | 686,876 | 595,513 | 119,814 | ||||||||||||
LTRP 2012 |
1,155,216 | 792,088 | 657,381 | 359,637 |
(*) | The negative amount included in the table above represents a gain, mainly as a consequence of the changes in the share prices of the Company. |
26
MercadoLibre, Inc.
Notes to Interim Condensed Consolidated Financial Statements (unaudited)
8. | Long Term Retention Plan (Continued) |
In May 2013 the board of directors, upon the recommendation of the Compensation Committee, approved certain amendments to the 2009, 2010, 2011 and 2012 Long-Term Retention Plans (the Amended LTRPs), to give the Company (through the approval of the Compensation Committee) the option to pay the compensation due under the Amended LTRPs in cash, common stock or a combination thereof. The company has granted the right to any Amended LTRP participant to request settlement in cash. The Amended LTRPs have been considered to be a substantive liability and classified accordingly in the balance sheet.
9. | Cash dividend distribution |
On January 15, 2013, the Company paid the 2012 last quarterly cash dividend distribution of $4.8 million (or $0.109 per share) to stockholders of record as of the close of business on December 31, 2012.
On February 22 and April 30, 2013 the board of directors had approved the first and second, respectively, 2013 quarterly cash dividend of $6.3 million (or $0.143 per share) on our outstanding shares of common stock. The dividends have been paid on April 15 and July 15, 2013, respectively, to stockholders of record as of the close of business on March 29 and June 28, 2013, respectively.
Finally, on July 30, 2013, the board of directors declared the third 2013 quarterly cash dividend of $6.3 million (or $0.143 per share), payable to the holders of the Companys common stock. This third quarterly cash dividend will be paid on October 15, 2013 to stockholders of record as of the close of business on September 30, 2013.
* * * *
27
Item 2 | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Cautionary Statement Regarding Forward-Looking Statements
Certain statements regarding our future performance made or implied in this report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. 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, 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; |
| government regulation; |
| 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; |
| our ability to attract new customers, retain existing customers and increase revenues; |
| seasonal fluctuations; and |
| political, social and economic conditions in Latin America in general, and Venezuela and Argentina in particular, including Venezuelas status as a highly inflationary economy and the changes to its exchange rate system, including the Complementary System for the Administration of Foreign Currencies (SICAD). |
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 companys 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 as well as potentially inaccurate assumptions that could cause actual results to differ materially from our expectations and projections. The material risks and uncertainties (in addition to those referred to above and elsewhere in this report) 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, 2012 filed with the Securities and Exchange Commission on February 28, 2013 and in other reports we file from time to time with the U.S. Securities and Exchange Commission (SEC).
28
You should read that information in conjunction with Managements 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, 2012. 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 a material risk at this time, 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 discussion of our principal trends and results of operations for the three and six-month periods ended June 30, 2013 and 2012; |
| a review of our financial presentation and accounting policies, including our critical accounting policies; |
| a discussion of the principal factors that influence our results of operations, financial condition and liquidity; |
| a discussion of our liquidity and capital resources, a discussion of our capital expenditures and a description of our contractual obligations; and |
| a discussion of the market risks that we face. |
Business Overview
MercadoLibre, Inc. (together with its subsidiaries us, we, our or the Company) hosts the largest online commerce platform in Latin America, which is focused on enabling e-commerce and its related services. Our platforms are designed to provide our users with a complete portfolio of services facilitating e-commerce transactions. We are market leaders in e-commerce in each of Argentina, Brazil, Chile, Colombia, Costa Rica, Ecuador, Mexico, Peru, Uruguay and Venezuela, based on unique visitors and page views. Additionally, we also operate online commerce platforms in the Dominican Republic, Panama and Portugal.
Through our online commerce platform, we provide buyers and sellers with a robust online commerce environment that fosters the development of a large and growing e-commerce community in Latin America, a region with a population of over 584 million people and one of the fastest-growing Internet penetration rates in the world. We believe that we offer a technological and commercial solution that addresses the distinctive cultural and geographic challenges of operating an online commerce platform in Latin America.
We offer our users an eco-system of six related e-commerce services: the MercadoLibre Marketplace, The MercadoLibre Classifieds Service, the MercadoPago payments solution, the MercadoLibre Advertising program, the MercadoShops on-line stores solution and the MercadoLibre Envios shipping service.
The MercadoLibre Marketplace, which we sometimes refer to as our marketplace, is a fully-automated, topically-arranged and user-friendly online commerce service. This service permits both businesses and individuals to list general merchandising items and conduct their sales and purchases online in either a fixed-price or auction-based format. Any Internet user can browse through the various products that are listed on our web site and register with MercadoLibre to list, bid for and purchase items and services.
To complement the MercadoLibre Marketplace, we developed MercadoPago, an integrated online payments solution. MercadoPago is designed to facilitate transactions both on and off the MercadoLibre Marketplace by providing a mechanism that allows our users to securely, easily and promptly send, receive and finance payments online.
Through online classified listings in the motors, real estate and services categories, our users can offer for sale and generate leads on listings in these non-general merchandising categories.
As a further enhancement to the MercadoLibre Marketplace, in 2009, we launched our MercadoLibre Advertising program to enable businesses to promote their products and services on the Internet. Through MercadoLibre Advertising users and advertisers are able to place display and/or text advertisements on our web pages in order to promote their brands and offerings. MercadoLibre Advertising offers advertisers a cost efficient and automated platform that enables advertisers to acquire traffic through advertisements placed on our platform. Advertisers purchase, on a cost per click basis, advertising space that appears around product search results for specific categories and other pages. These advertising placements are clearly differentiated from product search results and direct traffic both to and from our platform depending on the advertiser.
Additionally, during 2010 we launched the MercadoShops on-line stores solution. Through MercadoShops users can set-up, manage and promote their own on-line webstores. These webstores are hosted by MercadoLibre and offer integration with the other marketplace, payments and advertising services we offer. Users can choose from a basic, free webstore or pay monthly subscriptions for enhanced functionality and value added services on their stores.
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To close out our suite of e-commerce services, during 2013 we launched the MercadoLibre Envios shipping solution. Through this solution, we offer cost efficient integration with existing logistics and shipping carriers to sellers on our platforms. Sellers opting into the program are able to offer a uniform and seamlessly integrated shipping experience to their buyers.
Reporting Segments and Geographic information
Our segment reporting is based on geography, which is the current criterion we are using to evaluate our segment performance. Our geographic segments include Brazil, Argentina, Mexico, Venezuela and other countries (including Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Panama, Peru, Portugal, Uruguay and United States of America (real estate classified in the State of Florida)).
The following table sets forth the percentage of consolidated net revenues by segment for the three and six-month periods ended June 30, 2013 and 2012:
Six-month Period Ended |
Three-month Period Ended |
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June 30, | June 30, | |||||||||||||||
(% of total consolidated net revenues) |
2013 | 2012 | 2013 | 2012 | ||||||||||||
Brazil |
46.0 | % | 50.0 | % | 45.6 | % | 49.8 | % | ||||||||
Argentina |
25.4 | 22.4 | 25.9 | 23.1 | ||||||||||||
Venezuela |
15.2 | 13.7 | 15.7 | 14.0 | ||||||||||||
Mexico |
7.3 | 7.3 | 7.0 | 6.8 | ||||||||||||
Other Countries |
6.1 | 6.5 | 6.0 | 6.3 |
(*) | 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 following table summarizes the changes in net revenues by segment for the three and six-month periods ended June 30, 2013 and 2012:
Six-month Period Ended |
Change from 2012 |
Three -month Period Ended |
Change from 2012 |
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June 30, | to 2013 (*) | June 30, | to 2013 (*) | |||||||||||||||||||||||||||||
2013 | 2012 | in Dollars | in % | 2013 | 2012 | in Dollars | in % | |||||||||||||||||||||||||
(in millions, except percentages) | (in millions, except percentages) | |||||||||||||||||||||||||||||||
Net Revenues: |
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Brazil |
$ | 98.9 | $ | 86.4 | $ | 12.5 | 14.5 | % | $ | 51.1 | $ | 44.2 | $ | 6.9 | 15.6 | % | ||||||||||||||||
Argentina |
54.6 | 38.7 | 15.9 | 41.2 | 29.0 | 20.6 | 8.4 | 41.0 | ||||||||||||||||||||||||
Venezuela |
32.7 | 23.7 | 9.0 | 38.2 | 17.6 | 12.4 | 5.1 | 41.4 | ||||||||||||||||||||||||
Mexico |
15.6 | 12.6 | 3.0 | 23.6 | 7.8 | 6.0 | 1.8 | 29.4 | ||||||||||||||||||||||||
Other Countries |
13.1 | 11.2 | 1.9 | 16.5 | 6.7 | 5.6 | 1.1 | 19.0 | ||||||||||||||||||||||||
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Total Net Revenues |
$ | 214.9 | $ | 172.6 | $ | 42.3 | 24.5 | % | $ | 112.2 | $ | 88.8 | $ | 23.3 | 26.3 | % | ||||||||||||||||
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(*) | 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. |
Recent developments
Office building acquisition agreement in Caracas
In May 2013, our Venezuelan subsidiary acquired 1,158 square meters, 13 parking spaces and 4 storage spaces, in an office building located in Caracas, Venezuela for a total purchase price of approximately $20.0 million or BF$126.0 million. Our Venezuelan subsidiary paid the purchase price in Bolivares Fuertes, and funded the transaction with funds from its own operations.
Description of line items
Net revenues
We recognize revenues in each of our five reporting segments. Our reporting segments include our operations in Brazil, Argentina, Mexico, Venezuela and other countries (Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Panama, Peru, Portugal, Uruguay and United States of America).
Within each of our segments, the services we provide generally fall into two distinct revenue streams, Marketplace which includes our core business and Non-Marketplace which includes Ad sales, Real Estate, Motors, Financing fees, Off-Platform Payment fees and other ancillary businesses.
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The following table summarizes consolidated net revenues by revenue stream for the three- and six-month periods ended June 30, 2013 and 2012:
Six-month Period Ended | Three-month Period Ended | |||||||||||||||
Consolidated Net | June 30, | June 30, | ||||||||||||||
Revenues by revenue | 2013 | 2012 | 2013 | 2012 | ||||||||||||
stream | (in millions) | (in millions) | ||||||||||||||
Marketplace |
149.6 | 122.2 | 77.9 | 61.9 | ||||||||||||
Non-Marketplace (*) |
65.3 | 50.4 | 34.3 | 26.9 | ||||||||||||
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Total |
$ | 214.9 | $ | 172.6 | $ | 112.2 | $ | 88.8 | ||||||||
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(*) | Includes, among other things, Ad Sales, Real Estate, Motors, Financing Fees, Off-platform Payment Fees and other ancillary servicies. |
Revenues from MercadoLibre Marketplace transactions are generated by:
| up-front fees ; |
| final value fees; and |
For Marketplace services, final value fees representing a percentage of the sale value are charged to the seller once the item is successfully sold. Up-front fees are charged to the seller in exchange for improved exposure of the listings throughout our platform and are not subject to successful sale of the items listed.
Revenues for the Non-Marketplace services reported within each of our reporting segments, are generated by:
| Financing fees |
| Off-Platform Payment fees |
| Motors up-front fees |
| Advertisement sales |
| Real Estate up-front fees |
| and fees from other ancillary businesses |
For the MercadoPago service, we generate payment related revenues, attributable to:
| commissions representing a percentage of the payment volume processed that are charged to sellers in connection with off-marketplace-platform transactions; and |
| revenues from financing that occur when a buyer elects to pay in installments through our MercadoPago platform, for transactions that occur either on or off our marketplace platform. |
Atlhough we also process payments on our marketplace, we do not charge sellers an added commission for this service, as it is already included in the marketplace final value fee we charge.
In the Motors, Real Estate and Services classifieds offerings we generate revenues attributable to up-front fees. These fees are charged to sellers who opt to give their listings greater exposure throughout our websites.
Finally, our Advertising revenues are generated by selling either display or text link inventory throughout our web-sites to advertisers.
When more than one service is included in one single arrangement with the customer, we recognize revenue according to multiple element arrangements accounting, distinguishing between each of the services provided and allocating revenues based on their respective selling prices.
We have a highly fragmented customer revenue base given the large numbers of sellers and buyers who use our platforms. For the three and six-month periods ended June 30, 2013 and 2012, no single customer accounted for more than 5.0% of our net revenues. Our MercadoLibre Marketplace is available in thirteen countries (Argentina, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Mexico, Panama, Peru, Portugal, Uruguay and Venezuela), and MercadoPago is available in six countries (Argentina, Brazil, Chile, Colombia, Mexico and Venezuela). The functional currency for each countrys operations is the countrys local currency, except for Venezuela where the functional currency is the U.S. dollar due to Venezuelas status as a highly inflationary economy. See Critical accounting policies and estimates Foreign Currency Translation included below. Therefore, our net revenues are generated in multiple foreign currencies and then translated into U.S. dollars at the average monthly exchange rate.
Our subsidiaries in Brazil, Argentina, Venezuela and Colombia are subject to certain taxes on revenues which are classified as a cost of net revenues. These taxes represented 6.0% and 6.1% of net revenues for the three and six-month periods ended June 30, 2013 as compared to 6.4% and 6.5%, respectively, for the same periods in 2012.
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Cost of net revenues
Cost of net revenues primarily represents 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, compensation for customer support personnel, ISP connectivity charges, depreciation and amortization and hosting and site operation fees.
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 marketing costs for our platforms through online and offline advertising, bad debt charges, chargebacks related to our MercadoPago operations, the salaries of employees involved in these activities, public relations costs, marketing activities for our users and depreciation and amortization costs.
We carry out the majority of our marketing efforts on the Internet. In that context, we enter into agreements with portals, search engines, social networks, ad networks and other sites in order to attract Internet users to the MercadoLibre Marketplace and convert them into confirmed registered users and active traders on our platform. Additionally, we occasionally allocate a portion of our marketing budget to cable television advertising in order to improve our brand awareness and to complement our online efforts.
We also work intensively on attracting, developing and growing our seller community through our supply 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 for outside directors, long term retention plan compensation, expenses for legal, accounting and other professional services, insurance expenses, office space rental expenses, travel and business expenses, as well as depreciation and amortization costs. General and administrative expenses include the costs of the following areas of our company: general management, finance, administration, accounting, legal and human resources.
Other (expenses) income, net
Other income (expenses) consists primarily of interest income derived from our investments and cash equivalents, foreign currency gains or losses, and other non-operating results.
Income and asset 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 and asset taxes incurred in these jurisdictions. We account for income taxes following the liability method of accounting. 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 such 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 our 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 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 condensed consolidated financial statements. We believe that the following critical accounting policies reflect the more significant estimates and assumptions used in the preparation of our condensed consolidated financial statements. You should read the following descriptions of critical accounting policies, judgments and estimates in conjunction with our unaudited condensed consolidated financial statements, the notes thereto and other disclosures included in this report.
There have been no significant changes in our critical accounting policies, management estimates or accounting policies followed from the year ended December 31, 2012.
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Foreign Currency Translation
Historically, all of our foreign operations have used the local currency as their functional currency. Accordingly, these foreign subsidiaries translate assets and liabilities from their local currencies to U.S. dollars using period/year-end exchange rates while income and expense accounts are translated at the average rates in effect during the period/year. The resulting translation adjustment is recorded as part of other comprehensive income (loss), a component of equity. Gains and losses resulting from transactions denominated in non-functional currencies are recognized in earnings. Net foreign currency exchange losses or gains are included in the consolidated statements of income under the caption Foreign currency gain/loss.
Venezuelan currency status
In accordance with U.S. GAAP, we have classified our Venezuelan operations as highly inflationary as from January 1, 2010, 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 Venezuelan operations.
On May 14, 2010, the Venezuelan government enacted reforms to its exchange regulations making the Venezuelan Central Bank (BCV) the only institution that could legally authorize the purchase or sale of foreign currency bonds, thereby excluding non-authorized brokers from the foreign exchange market.
Under this system, known as the SITME, entities domiciled in Venezuela could purchase U.S. dollar-denominated securities only through banks authorized by the BCV to import goods, services or capital goods. We began to use the SITME rate and started re-measuring foreign currency transactions using the SITME rate published by BCV, which has been settled at Bolivares Fuertes 5.3.
On February 8, 2013, the Government of Venezuela, through the Foreign Exchange Agreement No. 14, has devalued as from February 9, 2013, the official exchange rate from 4.3 to 6.3 Bolivares Fuertes per U.S. dollar. The devaluation required re-measurement of the Companys Venezuelan subsidiaries non-U.S. dollar denominated monetary assets and liabilities as from February 9, 2013. This devaluation has generated a foreign currency loss of approximately $6.4 million.
In addition, on February 8, 2013, the Government of Venezuela, through Decree No. 9381 (the Decree) has created the Organo Superior para la Optimización del Sistema Cambiario (or the Committee), a committee that will have the authority to design, plan and execute foreign exchange policies. Finally, on February 9, 2013, the BCV eliminated the SITME, which was former system that allowed companies limited access to foreign currencies for payments to foreign suppliers.
On March 19, 2013, the BCV announced the creation of the Sistema Complementario de Administración de Divisas, or SICAD, which will act jointly with the Commission for the Administration of Foreign Exchange Control (CADIVI). In order to operate within this new system, a company should be registered at the Registro Automatizado (Automatized Register, or RUSAD). The acquisition of foreign currencies under this new system is organized under an auction process to obtain foreign currencies for payments to foreign suppliers, where the minimum exchange rate to be offered is 6.30 Bolivares Fuertes per U.S. dollar. At the date of this report, we have been unable to access the auction process and there is no information available on the details or planned frequency of the SICAD mechanism.
Accordingly, as of June 30, 2013, the exchange rate used to re-measure our net monetary assets of our Venezuelan operations was 6.30 Bolivares Fuertes per U.S. dollar.
Until 2010 we were able to obtain U.S. dollars for any purpose, including dividends distribution, using alternative mechanisms other than through the CADIVI. Those U.S. dollars, obtained at a higher exchange rate than the one offered by CADIVI, and held in balance at U.S. bank accounts of our Venezuelan subsidiaries, were used for dividend distributions from our Venezuelan subsidiaries. CADIVI is the only means by which U.S. dollars for dividend distributions can be requested. We did not request authorization to CADIVI in 2012, neither during the six months ended June 30, 2013, to acquire U.S. dollars to make dividend distributions. We have not distributed dividends from our Venezuelan subsidiaries since 2011.
The following table sets forth the assets, liabilities and net assets of our Venezuelan subsidiaries, before intercompany eliminations, as of June 30, 2013 and December 31, 2012 and net revenues for the six-month periods ended June 30, 2013 and 2012.
For the six-month periods ended | ||||||||
June 30, | ||||||||
2013 | 2012 | |||||||
Venezuelan operations |
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Net Revenues |
$ | 32,694,097 | $ | 23,658,890 | ||||
June 30, 2013 |
December 31, 2012 |
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Assets |
74,128,243 | 62,938,728 | ||||||
Liabilities |
(28,719,423 | ) | (22,652,965 | ) | ||||
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Net Assets |
$ | 45,408,820 | $ | 40,285,763 | ||||
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As of June 30, 2013, net assets of our Venezuelan subsidiaries amount to approximately 14.7% of our consolidated net assets, and cash and investments of our Venezuelan subsidiaries held in local currency in Venezuela amount to approximately 13.0% of our consolidated cash and investments.
Our ability to obtain U.S. dollars in Venezuela is negatively affected by the exchange regulations in Venezuela that are described above. In addition, our business and ability to obtain U.S. dollars in Venezuela would be negatively affected by additional material devaluations or the imposition of significant additional and more stringent controls on foreign currency exchange by the Venezuelan government in the future.
Despite the current difficult macroeconomic environment in Venezuela, we continue to actively manage, through our Venezuelan subsidiaries, our investment in and exposure to Venezuela. Based on current operating, political and economic conditions and certain other factors in Venezuela, we currently believe that our business plans and operating strategy in Venezuela will not be materially adversely impacted in the long run.
Argentine currency status
The Argentine government has implemented certain measures that control and restrict the ability of companies and individuals to exchange Argentine pesos for foreign currencies. Those measures include, among other things, the requirement to obtain the prior approval from the Argentine Tax Authority of the foreign currency transaction (for example and without limitation, for the payment of non-Argentine goods and services, payment of principal and interest on non-Argentine debt and also payment of dividends to parties outside of the country), which approval process could delay, and eventually restrict, the ability to exchange Argentine pesos for other currencies, such as U.S. dollars. Those approvals are administered by the Argentine Central Bank through the Local Exchange Market (Mercado Unico Libre de Cambios, or MULC), which is the only market where exchange transactions may be lawfully made.
Further, restrictions also currently apply to the acquisition of any foreign currency for holding as cash within Argentina. Although the controls and restrictions on the acquisition of foreign currencies in Argentina place certain limitations on our current ability to convert cash generated by our Argentine subsidiaries into foreign currencies, based on the current state of Argentine currency rules and regulations, we do not expect that the current controls and restrictions, will have a material adverse effect on our business plans in Argentina or on our overall business, financial condition or results of operations.
Allowances for doubtful accounts and for chargebacks
We are exposed to losses due to uncollectible accounts and credits to sellers. Allowances for these items represent our estimate of future losses based on our historical experience. The allowances for doubtful accounts and for chargebacks are recorded as charges to sales and marketing expenses. Historically, our actual losses have been consistent with our charges. However, future adverse changes to our historical experience for doubtful accounts and chargebacks could have a material impact on our future consolidated statements of income and cash flows.
We believe that the accounting estimate related to allowances for doubtful accounts and for chargebacks is a critical accounting estimate because it requires management to make assumptions about future collections and credit analysis. Our managements assumptions about future collections require significant judgment.
Legal contingencies
In connection with certain pending litigation and other claims, we have estimated the range of probable loss and provided for such losses through charges to our condensed consolidated statement of income. These estimates are based on our assessment of the facts and circumstances and historical information related to actions filed against the Company at each balance sheet date and are subject to change based upon new information and future events.
From time to time, we are involved in disputes that arise in the ordinary course of business. We are currently involved in certain legal proceedings as described in Legal Proceedings in Item 1 of Part II of this report, Item 3 of Part I of our Annual Report on Form 10-K for our fiscal year ended December 31, 2012 and in Note 7 to our unaudited interim condensed consolidated financial statements, included in this report. We believe that we have meritorious defenses to the claims against us, and we will defend ourselves accordingly. However, even if successful, our defense could be costly and could divert managements time. If the plaintiffs were to prevail on certain claims, we might be forced to pay damages or modify our business practices. Any of these consequences could materially harm our business and could have a material adverse impact on our financial position, results of operations or cash flows.
Results of operations for the three-month period ended June 30, 2013 compared to three-month period ended June 30, 2012 and the six-month period ended June 30, 2013 compared to the six-month period ended June 30, 2012
The selected financial data for the three and six-month periods ended June 30, 2013 and 2012 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 three and six-month periods ended June 30, 2013 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2013 or for any other period.
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Statement of income data
Six Months Ended June 30, | Three Months Ended June 30, | |||||||||||||||
2013(*) | 2012(*) | 2013(*) | 2012(*) | |||||||||||||
(In millions) | (Unaudited) | (Unaudited) | ||||||||||||||
Net revenues |
$ | 214.9 | $ | 172.6 | $ | 112.2 | $ | 88.8 | ||||||||
Cost of net revenues |
(59.7 | ) | (45.0 | ) | (31.1 | ) | (23.9 | ) | ||||||||
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Gross profit |
155.2 | 127.6 | 81.1 | 65.0 | ||||||||||||
Operating expenses: |
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Product and technology development |
(19.1 | ) | (13.7 | ) | (9.8 | ) | (6.1 | ) | ||||||||
Sales and marketing |
(43.2 | ) | (34.2 | ) | (20.8 | ) | (16.8 | ) | ||||||||
General and administrative |
(28.9 | ) | (22.8 | ) | (15.1 | ) | (10.1 | ) | ||||||||
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Total operating expenses |
(91.2 | ) | (70.8 | ) | (45.7 | ) | (33.1 | ) | ||||||||
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Income from operations |
64.0 | 56.8 | 35.4 | 31.9 | ||||||||||||
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Other income (expenses): |
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Interest income and other financial gains |
5.6 | 6.1 | 2.2 | 3.0 | ||||||||||||
Interest expense and other financial charges |
(0.9 | ) | (0.6 | ) | (0.5 | ) | (0.5 | ) | ||||||||
Foreign currency losses |
(2.6 | ) | (0.3 | ) | 3.6 | 0.7 | ||||||||||
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Net income before income / asset tax expense |
66.1 | 62.0 | 40.7 | 35.1 | ||||||||||||
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Income / asset tax expense |
(18.5 | ) | (17.0 | ) | (10.7 | ) | (9.7 | ) | ||||||||
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Net income |
$ | 47.5 | $ | 45.0 | $ | 30.0 | $ | 25.4 | ||||||||
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Less: Net Income attributable to Noncontrolling |
0.1 | 0.0 | 0.0 | 0.0 | ||||||||||||
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Net income attributable to Mercadolibre, Inc. shareholders |
$ | 47.4 | $ | 45.0 | $ | 30.0 | $ | 25.4 | ||||||||
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(*) | The table above may not add due to rounding. |
Other Data
Six Months Ended June 30, | Three Months Ended June 30, | |||||||||||||||
(In millions) |
2013 | 2012 | 2013 | 2012 | ||||||||||||
Number of confirmed registered users at end of the period 1 |
90.2 | 73.2 | 90.2 | 73.2 | ||||||||||||
Number of confirmed new registered users during the period 2 |
8.8 | 7.3 | 4.5 | 3.7 | ||||||||||||
Gross merchandise volume 3 |
3,288.7 | 2,620.9 | 1,725.4 | 1,299.2 | ||||||||||||
Number of items sold 4 |
38.2 | 30.8 | 20.1 | 15.8 | ||||||||||||
Total payment volume 5 |
1,110.1 | 781.7 | 577.9 | 411.6 | ||||||||||||
Total payment transactions 6 |
14.1 | 10.4 | 7.4 | 5.5 | ||||||||||||
Capital expenditures |
41.3 | 9.7 | 35.2 | 6.0 | ||||||||||||
Depreciation and amortization |
5.5 | 4.1 | 2.8 | 2.1 |
1- | Measure of the cumulative number of users who have registered on the MercadoLibre Marketplace and confirmed their registration. |
2- | Measure of the number of new users who have registered on the MercadoLibre Marketplace and confirmed their registration. |
3- | Measure of the total U.S. dollar sum of all transactions completed through the MercadoLibre Marketplace, excluding motor vehicles, vessels, aircraft and real estate. |
4- | Measure of the number of items that were sold/purchased through the MercadoLibre Marketplace. |
5- | Measure of the total U.S. dollar sum of all transactions paid for using MercadoPago. |
6- | Measure of the number of all transactions paid for using MercadoPago. |
Net revenues
Six-month Period Ended | Change from 2012 | Three-month Period Ended | Change from 2012 to |
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June 30, | to 2013(*) | June 30, | 2013(*) | |||||||||||||||||||||||||||||
2013 | 2012 | in Dollars | in% | 2013 | 2012 | in Dollars | in % | |||||||||||||||||||||||||
(in millions, except percentages) | (in millions, except percentages) | |||||||||||||||||||||||||||||||
Total Net Revenues |
$ | 214.9 | $ | 172.6 | $ | 42.3 | 24.5 | % | $ | 112.2 | $ | 88.8 | $ | 23.3 | 26.3 | % | ||||||||||||||||
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As a percentage of net revenues (*) |
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. |
35
Six-month Period Ended June 30, |
Change from 2012 to 2013(*) |
Three-month Period Ended June 30, |
Change from 2012 to 2013(*) |
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Consolidated Net Revenues by revenue stream |
2013 | 2012 | in Dollars | in % | 2013 | 2012 | in Dollars | in % | ||||||||||||||||||||||||
Brazil |
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Marketplace |
$ | 67.2 | $ | 59.2 | $ | 8.0 | 13.5 | % | $ | 34.5 | $ | 29.7 | $ | 4.8 | 16.2 | % | ||||||||||||||||
Non-Marketplace |
31.7 | 27.2 | 4.5 | 16.5 | % | 16.6 | 14.5 | 2.1 | 14.5 | % | ||||||||||||||||||||||
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98.9 | 86.4 | 12.5 | 14.5 | % | 51.1 | 44.2 | 6.9 | 15.6 | % | |||||||||||||||||||||||
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Argentina |
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Marketplace |
35.9 | 27.9 | 8.0 | 28.7 | % | 19.1 | 14.7 | 4.4 | 29.9 | % | ||||||||||||||||||||||
Non-Marketplace |
18.7 | 10.8 | 7.9 | 73.1 | % | 9.9 | 5.9 | 4.0 | 67.8 | % | ||||||||||||||||||||||
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54.6 | 38.7 | 15.9 | 41.1 | % | 29.0 | 20.6 | 8.4 | 40.8 | % | |||||||||||||||||||||||
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Venezuela |
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Marketplace |
25.8 | 17.2 | 8.6 | 50.0 | % | 13.9 | 8.9 | 5.0 | 56.2 | % | ||||||||||||||||||||||
Non-Marketplace |
6.9 | 6.5 | 0.4 | 6.2 | % | 3.7 | 3.5 | 0.2 | 5.7 | % | ||||||||||||||||||||||
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32.7 | 23.7 | 9.0 | 38.0 | % | 17.6 | 12.4 | 5.2 | 41.9 | % | |||||||||||||||||||||||
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Mexico |
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Marketplace |
11.8 | 9.7 | 2.1 | 21.6 | % | 5.8 | 4.5 | 1.3 | 28.9 | % | ||||||||||||||||||||||
Non-Marketplace |
3.8 | 2.9 | 0.9 | 31.0 | % | 2.0 | 1.5 | 0.5 | 33.3 | % | ||||||||||||||||||||||
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15.6 | 12.6 | 3.0 | 23.8 | % | 7.8 | 6.0 | 1.8 | 30.0 | % | |||||||||||||||||||||||
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Other countries |
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Marketplace |
8.9 | 8.2 | 0.7 | 8.5 | % | 4.6 | 4.1 | 0.5 | 12.2 | % | ||||||||||||||||||||||
Non-Marketplace |
4.2 | 3.0 | 1.2 | 40.0 | % | 2.1 | 1.5 | 0.6 | 40.0 | % | ||||||||||||||||||||||
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13.1 | 11.2 | 1.9 | 17.0 | % | 6.7 | 5.6 | 1.1 | 19.6 | % | |||||||||||||||||||||||
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Consolidated |
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Marketplace |
149.6 | 122.2 | 27.4 | 22.4 | % | 77.9 | 61.9 | 16.0 | 25.8 | % | ||||||||||||||||||||||
Non-Marketplace (*) |
65.3 | 50.4 | 14.9 | 29.6 | % | 34.3 | 26.9 | 7.4 | 27.5 | % | ||||||||||||||||||||||
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Total |
$ | 214.9 | $ | 172.6 | $ | 42.3 | 24.5 | % | $ | 112.2 | $ | 88.8 | $ | 23.4 | 26.4 | % | ||||||||||||||||
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(*) | Includes, among other things, Ad Sales, Real Estate, Motors, Financing Fees, Off-platform Payment Fees and other ancillary services. |
(*) | 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. |
On a segment basis, our net revenues for the three and six-month periods ended June 30, 2013 and 2012, increased across all geographic segments.
Brazil
Net revenues grew 15.6%, a $6.9 million increase in the second quarter of 2013 as compared to the same period in 2012. Brazilian marketplace business grew 16.2%, a $4.8 million increase, driven by increased units sales, and growth in both final value and up-front fees charged. The non-marketplace business grew 14.5%, a $2.1 million increase, driven by an increase in the volume of financing transactions offered to our users.
Net revenues grew 14.5%, a $12.5 million increase in the first half of 2013 as compared to the same period in 2012. Brazilian marketplace business grew 13.5%, an $8.0 million increase, driven by increased units sales, and growth in both final value and up-front fees charged. The non-marketplace business grew 16.5%, a $4.5 million increase, driven by an increase in the volume of financing transactions offered to our users.
Argentina
Net revenues grew 40.8%, an $8.4 million increase in the second quarter of 2013 as compared to the same period in 2012. Our Argentine marketplace business grew 29.9%, a $4.4 million increase, driven by increased units sales, and growth in both final value and up-front fees charged. The non-marketplace business grew 67.8%, a $4.0 million increase, driven by an increase in the volume of off-platform transactions and in the volume of motors listing fees.
Net revenues grew 41.1%, a $15.9 million increase in the first half of 2013 as compared to the same period in 2012. Our Argentine marketplace business grew 28.7%, an $8.0 million increase, driven by increased units sales, and growth in both final value and up-front fees charged. The non-marketplace business grew 73.1%, a $7.9 million increase, driven by an increase in the volume of off-platform transactions, in the volume of financing transactions and in the volume of motors listing fees.
36
Venezuela
Net revenues grew 41.9%, a $5.2 million increase in the second quarter of 2013 as compared to the same period in 2012. Our Venezuelan marketplace business grew 56.2%, a $5.0 million increase, driven by increased units sales, and growth in both final value and up-front fees charged.
Net revenues grew 38.0%, a $9.0 million increase in the first half of 2013 as compared to the same period in 2012. Our Venezuelan marketplace business grew 50.0%, an $8.6 million increase, driven by increased units sales, and growth in both final value and up-front fees charged.
Mexico
Net revenues grew 30.0%, a $1.8 million increase in the second quarter of 2013 as compared to the same period in 2012. Our Mexican marketplace business grew 28.9%, a $1.3 million increase, driven by increased units sales, and growth in both final value and up-front fees charged. The non-marketplace business grew 33.3%, a $0.5 million increase, driven by an increase in the volume of motors listing fees and by an increase in the volume of advertisings.
Net revenues grew 23.8%, a $3.0 million increase in the first half of 2013 as compared to the same period in 2012. Our Mexican marketplace business grew 21.6%, a $2.1 million increase, driven by increased units sales, and growth in both final value and up-front fees charged. The non-marketplace business grew 31.0%, a $0.9 million increase, driven by an increase in the volume of motors listing fees and by an increase in the volume of advertisings.
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 | ||||||||||||||||
March 31, | June 30, | September 30, | December 31, | |||||||||||||
(in millions, except percentages) | ||||||||||||||||
(*) | ||||||||||||||||
2013 |
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Net revenues |
$ | 102.7 | $ | 112.2 | n/a | n/a | ||||||||||
Percent change from prior quarter |
-1 | % | 9 | % | ||||||||||||
2012 |
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Net revenues |
$ | 83.7 | $ | 88.8 | $ | 97.3 | $ | 103.8 | ||||||||
Percent change from prior quarter |
-3 | % | 6 | % | 9 | % | 7 | % | ||||||||
2011 |
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Net revenues |
$ | 61.5 | $ | 69.4 | $ | 81.6 | $ | 86.5 | ||||||||
Percent change from prior quarter |
-1 | % | 13 | % | 18 | % | 6 | % |
(*) | Percentages have been calculated using whole-dollar amounts rather than rounded amounts that appear in the table. |
The following table sets forth the growth in net revenues in local currencies for the three and six months ended June 30, 2013 as compared to the same periods in 2012:
Change from 2012 to 2013 (*) |
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(% of revenue growth in Local Currency) |
Six months | Three months | ||||||
Brazil |
24.4 | % | 21.6 | % | ||||
Argentina |
64.9 | % | 66.1 | % | ||||
Venezuela |
58.9 | % | 68.1 | % | ||||
Mexico |
17.1 | % | 19.1 | % | ||||
Other Countries |
15.6 | % | 19.1 | % | ||||
Total Consolidated |
37.3 | % | 38.3 | % |
(*) | The local currency revenue growth was calculated by using the average monthly exchange rates for each month during 2012 and applying them to the corresponding months in 2013, so as to calculate what our financial results would have been had exchange rates remained stable from one year to the next. |
37
Cost of net revenues
Six-month Period Ended June 30, |
Change from 2012 to 2013 (*) |
Three-month Period Ended June 30, |
Change from 2012 to 2013 (*) |
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2013 | 2012 | in Dollars | in % | 2013 | 2012 | in Dollars | in % | |||||||||||||||||||||||||
(in millions, except percentages) | (in millions, except percentages) | |||||||||||||||||||||||||||||||
Total cost of net revenues |
$ | 59.7 | $ | 45.0 | $ | 14.7 | 32.8 | % | $ | 31.1 | $ | 23.9 | $ | 7.2 | 30.1 | % | ||||||||||||||||
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As a percentage of net revenues (*) |
27.8 | % | 26.1 | % | 27.7 | % | 26.9 | % |
(*) | Percentages have been calculated using whole-dollar amounts rather than rounded amounts that appear in the table. |
For the three-month period ended June 30, 2013, the increase of $7.2 million in cost of net revenues as compared to the same period in 2012 was primarily attributable to: i) an increase in collection fees amounting to $2.9 million, or 27.5% mainly attributable to our Argentine and Venezuelan operations; ii) an increase of $1.4 million, or 26.3%, in customer support expenses, that was, primarily driven by an increase in compensation and recruitment costs incurred in order to improve our service and our initiatives to combat illegal items and fee evasion, and increased investments in customer service operations to improve our users experience; and iii) an increase in s sales tax amounting to $1.0 million, mainly in Argentina and Brazil, iv) an increase in taxes on banking transactions in Argentina, amounting to $1.0 million and v) an increase in our site operation costs by $0.8 million, mainly driven by an increase in fraud prevention costs.
For the six-month period ended June 30, 2013, the increase of $14.7 million in cost of net revenues as compared to the same period in 2012 was primarily attributable to: i) an increase in collection fees amounting to $6.0 million, or 31.1%. The increase in collection fees was primarily attributable to our Argentine and Venezuelan operations; ii) an increase of $3.2 million, or 30.8%, in customer support expenses, that was, primarily driven by an increase in compensation and recruitment costs incurred in order to improve our service and our initiatives to combat illegal items and fee evasion, and increased investments in customer service operations to improve our users experience; iii) an increase by $2.1 million in site operations, primarily driven by fraud prevention and hosting expenses; iv) an increase of $1.9 million or 17.2%, in sales tax as compared to the same period in 2012, and v) an increase in taxes on banking transactions in Argentina, amounting to $1.5 million, or 59.7% period over period.
Product and technology development
Six-month Period Ended | Change from 2012 | Three-month Period Ended | Change from 2012 |
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June 30, | to 2013(*) | June 30, | to 2013(*) | |||||||||||||||||||||||||||||
2013 | 2012 | in Dollars | in % | 2013 | 2012 | in Dollars | in % | |||||||||||||||||||||||||
(in millions, except percentages) | (in millions, except percentages) | |||||||||||||||||||||||||||||||
Product and technology development |
$ | 19.1 | $ | 13.7 | $ | 5.4 | 39.5 | % | $ | 9.8 | $ | 6.1 | $ | 3.6 | 59.1 | % | ||||||||||||||||
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As a percentage of net revenues (*) |
8.9 | % | 7.9 | % | 8.7 | % | 6.9 | % |
(*) | Percentages have been calculated using whole-dollar amounts rather than rounded amounts that appear in the table. |
For the three and six-month periods ended June 30, 2013, the increase in product and technology development expenses as compared to the same periods in 2012 was primarily attributable to an increase of $1.7 million, or 60.6%, and $2.6 million, or 39.9%, respectively, in compensation costs as a result of: i) increases in LTRP compensation costs as a consequence of an increase in the fair market value of our shares ii) the addition of engineers, as we continue to invest in top quality talent to develop enhancements and new features across our platforms and iii) to the addition of a number of developers that joined our company in connection with our acquisition of a software development company in the first quarter of 2013. We believe product development is one of our key competitive advantages and intend to continue to invest in adding engineers to meet the increasingly sophisticated product expectations of our customer base.
In addition, for the three and six-month periods ended June 30, 2013 as compared to the same periods in 2012, product development expenses grew $1.4 million, and $1.7 million, respectively, as a consequence of an increase in maintenance expenses related to the use of cloud computing (AWS), information technology consulting fees, real-time monitoring of our applications and the use of content distribution network (CDN) and other product development expenses. Finally, depreciation and amortization grew, during the three and six months ended June 30, 2013, by $0.6 million, or 40.8%, and $1.1 million, or 40.9%, respectively, as compared to the same periods in 2012.
Sales and marketing
Six-month Period Ended | Change from 2012 | Three-month Period Ended | Change from | |||||||||||||||||||||||||||||
June 30, | to 2013(*) | June 30, | 2012 to 2013 (*) | |||||||||||||||||||||||||||||
2013 | 2012 | in Dollars | in % | 2013 | 2012 | in Dollars | in % | |||||||||||||||||||||||||
(in millions, except percentages) | (in millions, except percentages) | |||||||||||||||||||||||||||||||
Sales and marketing |
$ | 43.2 | $ | 34.2 | $ | 8.9 | 26.1 | % | $ | 20.8 | $ | 16.8 | $ | 4.0 | 23.9 | % | ||||||||||||||||
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As a percentage of net revenues (*) |
20.1 | % | 19.8 | % | 18.6 | % | 18.9 | % |
(*) | Percentages have been calculated using whole-dollar amounts rather than rounded amounts that appear in the table. |
38
For the three-month period ended June 30, 2013, the $4.0 million increase in sales and marketing expenses when compared to the same period in 2012 was primarily attributable to: i) an increase of $4.0 million associated with off-line marketing expenses, from $0.4 million during the three months ended June 30, 2012 to $4.5 million in the same period of 2013 in connection with new TV and radio campaigns in Latin America ; ii) expenses related to on-line marketing increased by $1.3 million, or 32.3%, as compared to the same period of 2012; and iii) an increase of $0.5 million in compensation costs. In addition, for the three months ended June 30, 2013, as compared to the same period in 2012, bad debt slightly increased by $0.1 million. Bad debt represented 3.9% and 4.9% of net revenues for the three months ended June 30, 2013 and 2012, respectively. These increases have been partially offset by a decrease of $1.9 million in other marketing expenses as a consequence of a decrease in the volume of chargebacks and a $1.0 million reimbursement of chargebacks attributable to our Brazilian operation.
For the six-month period ended June 30, 2013, the increase in sales and marketing expenses as compared to the same period in 2012 was primarily driven by: i) an increase of $5.1 million in off-line marketing expenses, from $0.5 million during the six months ended June 30, 2012 to $5.6 million in the same period of 2013 in connection with new TV and radio campaigns in Latin America; ii) expenses related to on-line marketing increased by $2.3 million, or 28.9%, as compared to the same period of 2012; and iii) an increase of $2.0 million in compensation costs. These increases have been partially offset by a decrease of $0.8 million in bad debt. Bad debt represented 4.0% and 5.4% of net revenues for the six months ended June 30, 2013 and 2012, respectively.
General and administrative
Six-month Period Ended | Change from | Three-month Period Ended | Change from | |||||||||||||||||||||||||||||
June 30, | 2012 to 2013 (*) | June 30, | 2012 to 2013 (*) | |||||||||||||||||||||||||||||
2013 | 2012 | in Dollars | in % | 2013 | 2012 | in Dollars | in % | |||||||||||||||||||||||||
(in millions, except percentages) | (in millions, except percentages) | |||||||||||||||||||||||||||||||
General and administrative |
$ | 28.9 | $ | 22.8 | $ | 6.0 | 26.4 | % | $ | 15.1 | $ | 10.1 | $ | 4.9 | 48.8 | % | ||||||||||||||||
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As a percentage of net revenues (*) |
13.4 | % | 13.2 | % | 13.4 | % | 11.4 | % |
(*) | Percentages have been calculated using whole-dollar amounts rather than rounded amounts that appear in the table. |
For the three-month period ended June 30, 2013, the $4.9 million increase in general and administrative expenses when compared to the same period in 2012 was primarily attributable to: i) an increase of $3.9 million or 70.2%, in compensation costs mainly related to an increase in LTRP compensation costs as a consequence of an increase in the fair market value of our shares; ii) an increase of $0.6 million, or 20.0%, in outside services, mainly related to legal expenses and claims settlements; and iii) an increase of $0.4 million, or 61.4%, in other general and administrative expenses.
For the six-month period ended June 30, 2013, the $6.0 million increase in general and administrative expenses when compared to the same period in 2012 was primarily attributable to: i) an increase of $5.3 million or 42.8%, in compensation costs mainly related to an increase in LTRP compensation costs as a consequence of an increase in the fair market value of our shares, and ii) an increase of $1.1 million, or 20.0%, in outside services, mainly related to legal expenses and claims settlements. These increases were partially offset by a decrease of $0.4 million, or 46.3%, in office expenses.
Other income, net
Six-month Period Ended | Change from 2012 | Three Month Period Ended | Change from 2012 | |||||||||||||||||||||||||||||
June 30, | to 2013(*) | March 31, | to 2013(*) | |||||||||||||||||||||||||||||
2013 | 2012 | in Dollars | in % | 2013 | 2012 | in Dollars | in % | |||||||||||||||||||||||||
(in millions, except percentages) | (in millions, except percentages) | |||||||||||||||||||||||||||||||
Other income, net |
$ | 2.1 | $ | 5.2 | $ | (3.2 | ) | -60.7 | % | $ | 5.3 | $ | 3.3 | $ | 2.0 | 62.2 | % | |||||||||||||||
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As a percentage of net revenues |
1.0 | % | 3.0 | % | 4.7 | % | 3.7 | % |
(*) | Percentages have been calculated using whole-dollar amounts rather than rounded amounts that appear in the table. |
For the three-month period ended June 30, 2013, the $2.0 million increase in other income, net when compared to the same period in 2012 was primarily attributable to an increase of $2.9 million in foreign exchange gain, primarily as a consequence of a devaluation of the local currency in Argentina, Brazil, Mexico and Uruguay against U.S. dollar. This increase has been partially offset by a $0.8 million decrease in interest income, as a consequence of lower interest rates on our investments.
39
For the six-month period ended June 30, 2013, the $3.2 million decrease in other income, net when compared to the same period in 2012 was primarily attributable to an increase in foreign exchange loss of $2.4 million, mainly related to the $6.4 million loss for the devaluation in Venezuela, and partially offset by a $2.0 million gain on foreign exchange in Argentina. The decrease in other income, net has also been consequence of a $0.5 million decrease in interest income, primarily driven by lower interest rates on our investments, as compared to the same period in 2012.
Income and asset tax
Six-month Period Ended | Change from 2012 to | Three-month Period Ended | Change from 2012 to | |||||||||||||||||||||||||||||
June 30, | 2013 (*) | June 30, | 2013(*) | |||||||||||||||||||||||||||||
2013 | 2012 | in Dollars | in % | 2013 | 2012 | in Dollars | in % | |||||||||||||||||||||||||
(in millions, except percentages) | (in millions, except percentages) | |||||||||||||||||||||||||||||||
Income and asset tax |
$ | 18.5 | $ | 17.0 | $ | 1.5 | 8.9 | % | $ | 10.7 | $ | 9.7 | $ | 1.0 | 9.9 | % | ||||||||||||||||
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As a percentage of net revenues (*) |
8.6 | % | 9.9 | % | 9.5 | % | 11.0 | % |
(*) | Percentages have been calculated using whole-dollar amounts rather than rounded amounts that appear in the table. |
During the three and six-month periods ended June 30, 2013 as compared to the same periods in 2012, income and asset tax increased by $1.0 million and $1.5 million, respectively, mainly as a consequence of an increase in taxable income and in permanent differences period over period.
For the six-month period ended June 30, 2013, our income and asset tax expense margin decreased, as compared to the same period in the previous year from 9.9% to 8.6%, driven primarily by the higher pre-tax income in our Argentine subsidiary for the 2013 period, as compared to the rest of our subsidiaries. Our Argentine subsidiary benefits from a lower effective tax rate as a consequence of the software development law.
Our blended tax rate is defined as income and asset tax expense as a percentage of income before income and asset tax. Our effective income tax rate is defined as the provision for income taxes (net of charges related to dividend distributions from foreign subsidiaries that are offset with domestic foreign tax credits) as a percentage of income before income and asset tax. The effective income tax rate excludes the effects of the deferred income tax, and the assets and complementary income tax.
The following table summarizes the changes in our blended and effective tax rate for the three and six-month periods ended June 30, 2013 and 2012:
Six-month Period Ended | Three-month Period Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Blended tax rate |
28.0 | % | 27.4 | % | 26.3 | % | 27.7 | % | ||||||||
Effective tax rate |
31.0 | % | 27.8 | % | 31.9 | % | 26.4 | % |
(*) | Percentages have been calculated using whole-dollar amounts rather than rounded amounts that appear in the table. |
Our blended tax rate decreased in the three months ended June 30, 2013, as compared to the same period in 2012, by 1.4%, due to growth in taxable income generated by our Argentine subsidiary where the income tax rate is lower as compared to other locations.
For the six months ended June 30, 2013, our blended tax rate slightly increased by 0.6% as compared to the same period in 2012. This increase is mainly driven by the foreign exchange loss of $6.4 million related to the devaluation of the Bolivar Fuerte against the U.S. dollar in Venezuela in February 2013, which was considered as non-deductible for tax purposes, and partially offset by higher non-taxable income in Argentina, as a consequence of the prevailing tax relief.
Our effective tax rate increased in the three months ended June 30, 2013, as compared to the same periods in 2012, by 5.5%, driven primarily by a higher income tax provision in Argentina, Brazil and Venezuela.
Our effective tax rate increased in the six months ended June 30, 2013, as compared to the same periods in 2012, by 3.2%, driven primarily by a higher income tax provision in Argentina and Brazil, partially offset by a decrease in income before income and asset tax in Venezuela.
40
The following table sets forth our effective income tax rate related to our main locations for the three and six-month periods ended June 30, 2013 and 2012:
Six-month Period Ended June 30, |
Three-month Period Ended June 30, |
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2013 | 2012 | 2013 | 2012 | |||||||||||||
Effective tax rate by country |
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Argentina |
18.0 | % | 15.0 | % | 18.3 | % | 14.4 | % | ||||||||
Brazil |
34.7 | % | 33.7 | % | 34.7 | % | 30.7 | % | ||||||||
Mexico |
32.6 | % | 33.9 | % | 34.2 | % | 30.6 | % | ||||||||
Venezuela |
48.4 | % | 33.6 | % | 43.6 | % | 33.6 | % |
The Companys Argentine subsidiary is a beneficiary of a software development law that grants it relief of 60% of total income tax determined in each year. Mainly for that reason, our Argentine operations effective income tax rate for the three and six-month periods ended June 30, 2013 and 2012 are currently lower than the local statutory rate of 35%. If we had not been granted the Argentine tax holiday, our Argentine effective income tax rate would have been higher; however, in that case, we would have pursued an alternative tax planning strategy. In addition, the Argentine government issued a new software development law which still waits for the regulatory decree. If the Argentine subsidiary qualifies under the new software development law, it is possible that the current Argentine income tax relief that we benefit from could be reduced slightly. However, under the new law, it is also possible that the tax holiday would be extended for an additional five years while also providing us with certain other fiscal benefits.
The increase in our Argentine operations effective income tax rate for the three and six-month periods ended June 30, 2013 as compared to the same periods in 2012 is a consequence of temporary tax differences.
For the three and six-month periods ended June 30, 2013, our Brazilian effective income tax rate was slightly higher than the local statutory rate of 34% mainly as a consequence of changes in temporary tax differences.
For the three and six-month periods ended June 30, 2013, our Mexican effective income tax rate was higher than the local statutory rate of 30% mainly as a result of changes in temporary tax differences.
For the three and six-month period ended June 30, 2013, our Venezuelan effective income tax rate was significantly higher than the local statutory rate of 34%, mainly due to the impact of the devaluation of the Bolivar Fuerte in February 2013, which is considered a permanent difference for U.S. GAAP reporting purposes.
Our effective tax rate reflects the tax effect of significant operations outside the United States, which are generally taxed at rates lower than the U.S. statutory rate of 35%, especially in the case of Argentina, where we have significant operations with a low effective tax rate as a consequence of an Argentine tax holiday from which we benefit. A future change in the mix of pretax income from these various tax jurisdictions would impact the Companys periodic effective tax rate.
We do not expect in the domestic effective income tax rate related to dividend distributions from foreign subsidiaries to have a significant impact on our company since our strategy is to reinvest our cash surplus in our international operations, and to distribute dividends when they can be offset with available tax credits.
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Segment information
Six Months Ended June 30, 2013 | ||||||||||||||||||||||||
Brazil | Argentina | Mexico | Venezuela | Other Countries | Total | |||||||||||||||||||
Net revenues |
$ | 98,881,836 | $ | 54,621,583 | $ | 15,613,867 | $ | 32,694,097 | $ | 13,097,724 | $ | 214,909,107 | ||||||||||||
Direct costs |
(58,843,536 | ) | (29,679,458 | ) | (9,239,252 | ) | (12,486,903 | ) | (6,082,984 | ) | (116,332,133 | ) | ||||||||||||
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Direct contribution |
40,038,300 | 24,942,125 | 6,374,615 | 20,207,194 | 7,014,740 | 98,576,974 | ||||||||||||||||||
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Margin |