It
em 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward-Looking Statements
Any statements
made or implied
in this report that are not statements of historical fact, including statements about our beliefs and expectations, are forward-looking statements within the meaning of Section 27
A of the Securities Exchange Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended, and should be evaluated as such.
The words “anticipate,” “believe,” “expect,” “intend,” “plan,” “estimate,” “target,” “p
roject,” “should,” “may,” “could,” “will” and similar words and expressions are intended to identify forward-looking statements. Forward-looking statements generally relate to information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities,
future economic, political and social conditions in the countries in which we operate
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:
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our expectations regarding the continued growth of online commerce and Internet usage in Latin America;
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our ability to expand our operations and adapt to rapidly changing technologies;
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government
and central bank regulations;
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litigation
and legal liability;
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·
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systems
interruptions or failures;
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·
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our
ability to attract and retain qualified personnel;
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·
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security
breaches and illegal uses of our services;
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·
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reliance
on third-party service providers;
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enforcement
of intellectual property rights;
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·
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our ability to attract new customers, retain existing customers and increase revenues;
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·
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seasonal
fluctuations; and
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·
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political, social and economic conditions in Latin America in general, and Venezuela and Argentina in particular, including Venezuela’s status as a highly inflationary economy for generally accepted accounting principles in the United States (“U.S. GAAP”), and possible future currency devaluation and other changes to its exchange rate systems such as the “Sistema Marginal de Divisas” (“SIMADI”) or “Sistema Cambiario de Divisas Complementarias” (“DICOM”) and possible further devaluations of the Argentine Peso.
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Many of these risks are beyond our ability to control or predict. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on our company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements
.
These statements are based on currently available information and our current assumptions, expectations and projections about future events. While we believe that our assumptions, expectations and projections are reasonable in view of the currently available information, you are cautioned not to place undue reliance on our forward-looking statements. These statements are not guarantees of future performance. They are subject to future events, risks and uncertainties–many of which are beyond our control-as well as potentially inaccurate assumptions that could cause actual results to differ materially from our expectations and projections.
Some of the material risks and uncertainties that could cause actual results to differ materially from our expectations and projections are described in “Item 1A — Risk Factors” in Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015
filed with the Securities and Exchange Commission
(“SEC”)
on
February 26
, 2016, as updated by those described in “Item 1A — Risk Factors” in Part II of our Form
s
10-Q for the quarter
s
ended March 31, 2016
and June 30, 2016
,
and this report and in other reports we file from time to time with the SEC.
You should read that information in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2 of Part I of this report, our unaudited interim condensed consolidated financial statements and related notes in Item 1 of Part I of this report and our audited consolidated financial statements and related notes in Item 8 of Part II of
our Annual Report on Form 10-K
for the year ended December 31, 201
5
. 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 that could cause results to differ m
aterially 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
presents
the following:
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a brief overview of our company;
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a
discussion
of our principal trends and results of operations for
the nine
and three-month periods ended
September
30, 2016 and 2015
;
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·
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a
review
of our financial presentation and accounting policies, including our critical accounting policies;
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·
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a
discussion
of the principal factors that influence our results of operations, financial condition and liquidity;
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a
discussion
of our liquidity and capital resources and a discussion of our capital expenditures;
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a description of our non-GAAP financial measures; and
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a
discussion
of the market risks that we face.
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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.
Additionally, 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. We also operate online commerce platforms in the Dominican Republic,
Honduras, Nicaragua, Salvador,
Panama
,
Bolivia, Guatemala, Paraguay 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 605 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
(“MercadoClics”), the MercadoShops online webstores solution and the MercadoEnvios 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 in the countries in which we operate can browse through the various products that are listed on our website and register with MercadoLibre to list, bid for and purchase such 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.
MercadoPago is currently available in: Argentina, Brazil, Mexico, Colombia, Venezuela, Peru and Chile.
Through
MercadoLibre Classifieds service, our
online classified listings service, our users can offer for sale and generate leads on listings of motor vehicles
, real estate and services in all counties where we operate.
As a further enhancement to the MercadoLibre Marketplace, we developed our MercadoLibre Advertising program to enable businesses to promote their products and services through a cost efficient and automated platform that
allows
advertisers to acquire traffic
,
both to our platform or to their own websites. Through MercadoLibre Advertising, MercadoLibre`s sellers and large advertisers/brands are able to place display, product and/or text ads on our web pages,
and
other web pages including
our
vertical sites associated in the region.
Additionally,
through
MercadoShops, our online webstores solution, users can set-up, manage and promote their own online 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 webstores.
To further enhance our suite of e-commerce services, during 2013 and 2014, we launched the MercadoEnvios shipping solution in Brazil, Argentina, Mexico, Colombia and Chile. Through MercadoEnvios, we offer a
cost-efficient integration with existing
logistic and
shipping carriers to sellers on our platform. Sellers opting into the program are able to offer a uniform and seamlessly integrated shipping experience to their buyers
at competitive prices
.
In addition
, MercadoLibre
began developing and selling
enterprise software solutions to
e-commerce business clients in Brazil
during the second quarter of 2015.
Reporting Segments and Geographic
I
nformation
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, Venezuela, Mexico and other countries (including Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Panama, Peru, Portugal, Bolivia,
Honduras, Nicaragua, Salvador,
Guatemala, Paraguay, Uruguay and the United States of America (real estate classifieds in the State of Florida only)).
Although we discuss long-term trends in our business, it is our policy to not provide earnings guidance in the traditional sense. We believe that uncertain conditions make the forecasting of near-term results difficult. Further, we seek to make decisions focused primarily on the long-term welfare of our company and believe focusing on short term earnings does not best serve the interests of our stockholders. We believe that execution of key strategic initiatives as well as our expectations for long-term growth in our markets will best create stockholder value. We, therefore, encourage potential investors to consider this strategy before making an investment in our common stock. A long-term focus may make it more difficult for industry analysts and the market to evaluate the value of our company, which could reduce the value of our common stock of permit competitors with short term tactics to grow stronger than us.
The following table sets forth the percentage of our consolidated net revenues by segment for th
e nine and three
-month periods ended
September
3
0
, 201
6
and 201
5
:
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Nine-months Periods Ended
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Three-month Periods Ended
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September 30,
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September 30,
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(% of total consolidated net revenues) (*)
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2016
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2015
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2016
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2015
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Brazil
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53.0
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%
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45.8
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%
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56.7
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%
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44.0
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%
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Argentina
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31.6
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36.4
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30.3
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39.9
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Mexico
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5.8
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6.2
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5.1
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5.9
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Venezuela
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4.5
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6.1
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3.0
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5.3
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Other Countries
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5.1
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5.5
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4.8
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5.0
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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.
The following table summarizes the changes in our net re
venues by segment for the nine and three
-month periods ended
September
3
0
, 201
6
and 201
5
:
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Nine-months Periods Ended
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Change from 2015
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Three-month Periods Ended
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Change from 2015
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September 30,
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to 2016 (*)
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September 30,
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to 2016 (*)
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2016
|
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2015
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in Dollars
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in %
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2016
|
|
2015
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in Dollars
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in %
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(in millions, except percentages)
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(in millions, except percentages)
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Net Revenues:
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Brazil
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$ 311.4
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$ 215.7
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$ 95.8
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44.4
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%
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$ 131.0
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$ 74.3
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$ 56.7
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76.4
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%
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Argentina
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185.9
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171.5
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14.4
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8.4
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70.0
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67.2
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2.7
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4.1
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Mexico
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34.4
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29.3
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5.1
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17.3
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11.8
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9.9
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1.9
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19.5
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Venezuela
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26.5
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28.5
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(2.1)
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(7.3)
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6.9
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8.9
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(2.0)
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(22.3)
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Other Countries
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30.0
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26.1
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3.9
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15.0
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11.2
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8.4
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2.8
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33.3
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Total Net Revenues
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$ 588.1
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$ 471.1
|
|
$ 117.1
|
|
24.9
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%
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$ 230.8
|
|
$ 168.6
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$ 62.2
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36.9
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%
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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
of the quarter
Office building acquisition agreement in Buenos Aires
In August 2016, our Argentine subsidiary acquired 6,057 square meters and 50 parking spaces, in an office building in process of construction located in Buenos Aires, for a total amount of Argentine pesos $481
.4 million or approximately $31.4
million, plus VAT. The price of the transactio
n is payable as follows: i) $9.4
million was paid at the date of signing the purchase agreement and recorded as an advance for fixed assets within non-current Other assets, ii) $19.0 million will be paid in 14 monthly installments as from July 2017, and (iii) 3.0 million will be paid once the properties are delivered by the seller. According to the purchase agreement, 2,224 square meters will be delivered in September 2017 and 3,833 square meters will be delivered in September 2018.
In connection with this acquisition, the Company may be granted with certain sales tax reliefs upon receiving definitive approval of the project from the City of Buenos Aires government.
Description of Line Items
Net revenues
We recognize revenues in each of our five geographical reporting segments.
Within each of our segments, the services we provide generally fall into two distinct revenue streams, “Marketplace” which includes our core business and “Non-Marketplace” which includes ad sales, real estate listings, motor
vehicles
listings, financing fees, off-platform payment fees
, shipping fees
and other ancillary businesses.
The following table summarizes our consolidated net revenues
by revenue stream for the nine and three
-month periods ended
September
3
0
, 201
6
and 201
5
:
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Nine-month Periods Ended
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Three-month Periods Ended
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September 30, (*)
|
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September 30, (*)
|
Consolidated net revenues by revenue stream
|
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2016
|
|
2015
|
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2016
|
|
2015
|
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(in millions)
|
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(in millions)
|
Marketplace
|
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$
|
341.7
|
|
$
|
286.5
|
|
134.4
|
|
$
|
98.6
|
Non-Marketplace (**)
|
|
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246.4
|
|
|
184.5
|
|
96.5
|
|
|
70.1
|
Total
|
|
$
|
588.1
|
|
$
|
471.1
|
|
230.8
|
|
$
|
168.6
|
(*)
The table above may not total due to rounding.
(**)
Includes, among other things, ad sales, real estate listings, motor vehicles listings, financing fees, off-platform payment fees, shipping fees and other ancillary services
.
Revenues from Marketplace transactions are generated from:
For Marketplace services, final value fees representing a percentage of the sale value that 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 the successful sale of the items listed.
Revenues for Non-Marketplace services are generated from:
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·
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off-
platform
payment fees;
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·
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motor vehicles listings up-front fees;
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·
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ad
sales
up-front fees;
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·
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real
estate
listings up-front fees;
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·
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fees
from other ancillary businesses.
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With respect to our MercadoPago service, we generate payment related revenues attributable to:
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·
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commissions representing a percentage of the payment volume processed that are charged to sellers in connection with
Non
-Marketplace-platform transactions;
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·
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commissions
from
additional fees we charge
when a buyer elects to pay in installments through our MercadoPago platform, for transactions that occur either on or off our
Marketplace platform; and
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·
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revenues related to sale of points of sale.
|
Although we also process payments on
the
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
.
Through our classifieds offerings in motor vehicles, real estate and services, we generate revenues from up-front fees. These fees are charged to sellers who opt to give their listings greater exposure throughout our websites
.
Our Advertising revenues are generated by selling either display
product and/
or t
ext link ads throughout our web
site
s
to interested advertisers.
Finally, our shipping revenues are generated when a buyer elects to receive the item through our shipping service.
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
estimated
selling prices.
We have a highly fragmented customer revenue base given the large numbers of sellers and buyers who
use our platforms. For the nine
-month periods ended
September 30
, 201
6
and 201
5
, no single customer accounted for more than 5.0% of our net revenues.
Our MercadoLibre Marketplace is available in
19
countries (Argentina, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Mexico, Panama, Peru, Portugal, Uruguay, Venezuela, Bolivia,
Honduras, Nicaragua, Salvador,
Guatemala
and Paraguay
), and MercadoPago is available in
seven
countries (Argentina, Brazil, Chile,
Peru,
Colombia, Mexico and Venezuela).
Additionally, MercadoEnvios is available in
Argentina, Brazil, Mexico, Colombia and Chile.
The functional currency for each country’s operations is the country’s local currency, except for Venezuela where the functional currency is the U.S. dollar due to Venezuela’s status as
a highly inflationary economy.
Therefore, our net revenues are generated in multiple foreign currencies and then
translated into U.S. dollars at the avera
ge monthly exchange rate. See
“Critical
A
ccounting
P
olicies and
E
stimates — Foreign Currency Translation” for more information.
Our subsidiaries in Brazil, Argentina, Venezuela and Colombia are subject to certain taxes on revenues which are classified as a cost of net revenues.
T
hese taxes represented
9.0
% and
9.5
% of net revenues for the
nine and
three-month periods ended
September 30, 2016, as compared to 8.0% and 8.7%, respectively,
for the same respective periods in
2015,
mainly due to an increase in shipping and finance cost which are
accounted for net of its costs
in net revenues.
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, website operation fees and cost of point of sales (“MPOS”) sold
.
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,
changes related to our buyer protection programs,
compensation 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 regard, we enter into agreements with portals, search engines, social networks, ad networks and other websites in order to attract Internet users to the Marketplace and convert them into confirmed registered users and active traders on our platform.
We also work intensively on attracting, developing and growing our seller community through our customer support efforts for sellers. 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 compensation for management and administrative staff, compensation for our outside directors, long-term retention plan compensation, expenses for legal, accounting, audit and other professional services, insurance expenses, office space rental expenses, travel and business expenses, as well as depreciation and amortization costs. Our general and administrative expenses include the costs of the following areas: general management, finance, administration, accounting, legal and human resources
.
Impairment of l
ong-
l
ived assets
We review long-lived assets
(including non-current other assets)
for impairments whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.
As explained in section “Foreign Currency Translation – Venezuelan Currency Status” below, the exchange markets in Venezuela have been unfavorable to us since December 2013.
Considering these changes in facts and circumstances and the lower U.S. dollar-equivalent cash flows expected from the Venezuelan business, and long
-lived assets expected use, we
concluded that certain real estate investments held in Caracas, Venezuela, should be impaired. As a consequence,
we
estimated the fair value of the impaired long-lived assets, and r
ecorded impairment losses of $13
.
7
million and
$16.2 million on June 30, 2016 and March 31, 2015
, respectively, by using the market approach and considering prices for similar assets.
Other income (expenses), net
Other income (expenses) consists primarily of interest income derived from our investments and cash equivalents, interest expense related to financial liabilities and foreign currency gains or losses
.
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. A valuation allowance is recorded when, based on the available evidence, it is more likely than not that all or a portion of our deferred tax assets will not be realized.
Therefore, our income tax expense consists of taxes currently payable, if any (given that in certain jurisdictions we still have net operating loss carry-forwards), plus the change in our deferred tax assets and liabilities during each period
.
Critical
A
ccounting
P
olicies and
E
stimates
The preparation of our unaudited interim condensed consolidated financial statements and related notes requires us to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We have based our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our management has discussed the development, selection and disclosure of these estimates with our audit committee and our board of directors. Actual results may differ from these estimates under different assumptions or conditions.
An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact our interim condensed consolidated financial statements. We believe that the following critical accounting policies reflect the more significant estimates and assumptions used in the preparation of our interim condensed con
solidated financial statements.
There have been no significant changes in our critical accounting policies, management estimates or accounting policies
since
the year ended December 31, 201
5 and disclosed in the Form 10-K. See Item – “Critical Accounting Policies”
.
Foreign Currency Translation
All of our foreign operations (other than Venezuela since January 1, 2010, as described below) use the local currency as their functional currency. Accordingly, these operating 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 exchange rates in effect during the period
, unless exchange rates fluctuate significantly during the period, in which case the exchange rates at the date of the transaction are used.
The resulting translation adjustment is recorded as 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 gains/ losses”.
Venezuelan Currency Status
Pursuant to
U.S. GAAP, we have
classified our
Venezuelan operations as highly inflationary since
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.
O
n Februa
ry
10, 2015, the Venezuelan government issued a decree that unified the two previous foreign exchange systems “SICAD 1 and SICAD 2” into a new single system
(
SICAD
)
, with an initial public foreign exchange
rate
of
12
BsF per U.S. dollar. The SICAD auction process remains available only to obtain foreign currency to pay for a limited list of goods considered to be of high priority by the Venezuelan government, which does not include those relating to the
our
business. In the same decree the Venezuelan government created the “Sistema Marginal de Divisas” (“SIMADI”), a new foreign exchange system that is separate from SICAD, which publishes a foreign exchange rate from the BCV on a daily basis.
In light of the disappearance of SICAD 2, and we inability to gain access to U.S. dollars under SICAD, we started requesting and was granted U.S. dollars through SIMADI. As a result, we from that moment expected to settle its transactions through SIMADI
going forward
and concluded that the SIMADI exchange rate should be used to re-measure its bolivar-denominated monetary assets and liabilities and to re-measure the revenues and expenses of the Venezuelan subsidiaries effective as of March 31, 2015. In connection with this re-measurement, we reco
rded a foreign exchange loss of $20.4
million during the first quarter of 2015.
Considering this change and the lower U.S. dollar-equivalent cash flows then expected from the Venezuelan business, we reviewed
our
long-lived assets, goodwill and intangible assets with indefinite useful life for impairment and concluded that the carrying value of certain real estate investments in Venezuela as of March 31, 2015 would not be fully recoverable. As a result, we
recorded an impai
rment of long-lived assets of $
16.2 million on March 31, 2015. The carrying amount
was
adjusted to its estimated fair value as of March 31, 2015, by using the market approach, and considering prices for similar assets.
On March 9, 2016 the
Central Bank of Venezuela (“
BCV
”)
issued the Exchange Agreement No.35, which
is effective since
March 10, 2016. The agreement established a “protected” exchange rate (
“
DIPRO
”
) for certain transactions,
such as but not limited to:
imports of goods of the food and health sectors, as well as supplies associated with the production of said sectors; expenses relating to health treatments, sports, culture, scientific research, and other urgent matters defined by the exchange regulations. All foreign currency transactions not expressly provided in Exchange Agreement No.35 will be processed on the alternate foreign currency markets governed by the exchange regulations, at the floating supplementary market exchange rate (
“
DICOM
”
).
Additionally, the agreement established that the alternate foreign currency markets referred to in Exchange Agreement No.33 of February 10, 2015 (SIMADI) will continue to operate until replaced by others. As of the date of issuance of these interim condensed consolidated financial statements, the SIMADI has not been replaced and for that reason, we continued using SIMADI. From March 31, 2016 through June 30, 2016, the SIMADI exchange rate increased from 273 BsF per U.S. dollar to 628 BsF per U.S. dollar, a 130% increase in the exchange rate.
As a consequence of the local currency devaluation
, the Company recorded a foreign exchange loss of
$
4.9
million during the
second
quarter of 201
6
.
Considering
the
significant devaluation and the lower U.S. dollar-equivalent cash flows then expected from the Venezuelan business,
we
reviewed
our
long-lived assets (including non-current other assets), goodwill and intangible assets with indefinite useful life for impairment and concluded that the carrying value of certain real estate investments in Venezuela would not be fully recoverable. As a result, on June 30, 2016,
we
recorded an impairment
of offices and commercial property under construction included within non-current other assets
of $13.7 million. The carrying amount
of offices and commercial property under construction
was adjusted to its estimated fair value of approximately $12.5 million as of June 30, 201
6, by using the market approach
and considering prices for similar assets.
As of
September 30
, 2016, monetary assets and liabilities in Bolivares Fuertes (“BsF”) were re-measured to the U.S. dollar using the SIMADI
closing exchange rate of 659
BsF per U.S. dollar.
Until 2010 we were able to obtain U.S. dollars for any purpose, including dividend distributions, using alternative mechanisms other than through the Commission for the Administration of Foreign Exchange Control (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. We have not distributed dividends from our Venezuelan subsidiaries since 2011
.
The following table sets forth the assets, liabilities and net assets of the
our
Venezuelan subsidiaries, before intercompany eliminations of a net liability of
$
13.4 million and $24.6
million
, as of
September 30
, 201
6 and December
31, 201
5
and net revenues for the
nine-month periods ended September
3
0
, 201
6
and 201
5
:
|
|
|
|
|
|
|
|
|
|
|
|
Nine-month Periods Ended September 30,
|
|
|
2016
|
|
2015
|
Venezuelan operations
|
|
(In millions)
|
Net Revenues
|
|
$ 26.5
|
|
$ 28.5
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
|
(In millions)
|
Assets
|
|
56.6
|
|
65.4
|
Liabilities
|
|
(16.9)
|
|
(36.3)
|
Net Assets
|
|
$ 39.7
|
|
$ 29.1
|
As
of September 30, 2016, the net assets (before intercompany eliminations) of our Venezuelan subsidiaries amounted to approximately 10.0% of our consolidated net assets, and cash and investments of our Venezuelan subsidiaries held in local currency in Venezuela amounted to approximately 1.0%
of our consolidated cash and
investments.
Our ability to obtain U.S. dollars in Venezuela is negatively affected by the exchange restrictions in Venezuela that are described above. If our access to U.S. dollars becomes widely available at a more unfavorable rate than the current SIMADI exchange rate (or if SIMADI exchange rate experiences significant devaluation in the future), and we decided to use that alternative mechanism
considering that exchange rate as the one applicable for re-measurement, our results of operations, earnings and value of our net assets in Venezuela would be negatively impacted, and we cannot assure that the impact would not be material
. In addition, our business and ability to obtain U.S. dollars in Venezuela would be negatively affected by any 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 managing, through our Venezuelan subsidiaries, our investment in Venezuela. Despite the current operating, political and economic conditions and certain other factors in Venezuela, we currently plan to continue supporting our business in Venezuela in the long run
.
In November 2013 the Venezuelan Congress approved an “enabling law” granting the president of Venezuela the authority to enact laws and regulations in certain policy areas by decree. This authority includes the ability to restrict profit margins and impose greater controls on foreign exchange and the production, import, and distribution of certain goods. Among other actions, the president has used this decree power to pass the Law of Costs, Earnings, and Fair Profits, which became effective in January 2014 and, among other provisions, authorizes the Venezuelan government to set “fair prices” and maximum profit margins in the private sector. On October 26, 2015, the decree number 2,074 was published in the Official Gazette of Venezuela, establishing certain definitions related to the determination of prices in that country.
Despite we do not expect that this law together with the decree issued by the Venezuelan Government will have a material adverse impact on our financial condition or results of operations, considering the current difficult macroeconomic environment in Venezuela, the final potential effects remains uncertain. The effects of such potential effects, if any, would be recognized in our financial statements once the mentioned uncertainty is resolved.
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 management’s 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 us at each balance sheet date and are subject to change based upon new information and future events
.
Impairment of long-lived assets
We review long-lived assets for impairments whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. For more information, see “Description of line items
—
Impairment of long-lived assets”
above
.
Convertible Senior Notes
On June 30, 2014, we issued $330 million of 2.25% convertible senior notes due 2019 (the “Notes”). The Notes are unsecured, unsubordinated obligations of the Company, which pay interest in cash semi-annually, on January 1 and July 1, at a rate of 2.25% per annum. The Notes will mature on July 1, 2019 unless earlier repurchased or converted in accordance with their terms prior to such date. The Notes may be converted, under specific conditions, based on an initial conversion rate of 7.9353 shares of common stock per $1,000 principal amount of Notes (equivalent to an initial conversion price of $126.02 per share of common stock), subject to adjustment as described in the indenture governing the Notes.
Holders may convert their notes at their option at any time prior to January 1, 2019 only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on September 30, 2014 (and only during such calendar quarter), if the last reported sale price of the common stock for at least
20
trading days (whether or not consecutive) during a period of
30
consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to
130%
of the conversion price on each applicable trading day; (2) during the
five
business day period after any
five
consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than
98%
of the product of the last reported sale price of the Company’s
common stock and the conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events. On or after January 1, 2019 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their notes at any time, regardless of the foregoing circumstances.
The price of the Company’s common stock was greater than 130% of the conversion price for at least 20 trading days during the 30 consecutive trading days ending on the last trading day of the Company’s fiscal quarter ended September 30, 2016. Therefore, as of September 30, 2016, the conversion threshold had been met and the Notes became convertible at the holders’ option beginning on October 1, 2016 and ending December 31, 2016. The determination of whether or not the Notes are convertible must continue to be performed on a quarterly basis. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash
and shares of the Company’s common stock, at the Company’s election. The intention of the Company is to share-settle the total amount due upon conversion of the Notes
. As of the date of issuance
of this report
, none of the holders had requ
ested conversion of the Notes.
The convertible debt instrument within the scope of the cash conversion subsection was separated into debt and equity components at issuance and a fair value was assigned. The value assigned to the debt component was the estimated fair value, as of the issuance date, of a similar debt without the conversion feature. As of June 30, 2014, we determined the fair value of the liability component of the Notes by reviewing market data that was available for senior, unsecured nonconvertible corporate bonds issued by comparable companies. The difference between the cash proceeds and this estimated fair value, represents the value assigned to the equity component and was recorded as a debt discount. The debt discount is amortized using the effective interest method from the origination date through its stated contractual maturity date.
The initial debt component of the Notes was valued at $283.0 million, based on the contractual cash flows discounted at an appropriate market rate for a non-convertible debt at the date of issuance, which was determined to be 5.55%. The carrying value of the permanent equity component reported in additional paid-in-capital was initially valued at $47.0 million. This amount represents the total unamortized debt discount we recorded at the time of issuance of the Notes. The aggregate debt discount, including the transaction costs related to the debt component, is amortized as interest expense over the contractual term of the Notes using the effective interest method using an interest rate of 6.1%.
In connection with the issuance of the Notes, we paid $19.7 million to enter into capped call transactions with respect to shares of our common stock (the “Capped Call Transactions”), with certain financial institutions. The Capped Call Transactions are expected generally to reduce the potential dilution upon conversion of the Convertible Notes in the event that the market price of our common stock is greater than the strike price of the Capped Call Transactions, initially set at $126.02 per share of common stock, which corresponds to the initial conversion price of the Notes and is subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of the Notes, and have a cap price of $155.78 per share of common stock
.
The $19.7 million cost of the capped call transactions, which net of deferred income tax effect amounts to $12.8 million, is included as a net reduction to additional paid-in capital in the stockholders’ equity section of our consolidated balance sheets.
For more
detailed
information in relation to the Notes and the Capped Call transactions, see
“—
Results of operations for the
nine
-month period ended
September 30, 2016 compared to the nine
-month period ended
September
30, 2015 and the three-month period ended
September
30, 2016 as compared to the three-month period ended
September
30, 2015
—
Debt”
and Note 9 to our unaudited interim condensed consolidated financial statements.
Results of operations for the nine-month period ended September 30, 2016 compared to the nine-month period ended September 30, 2015 and the three-month period ended September 30, 2016 as compared to the three-month period ended September 30, 2015
The selected financial data for the nine and three-month periods ended September 30, 2016 and 2015 discussed herein is derived from our unaudited interim condensed consolidated financial statements included in Item 1 of Part I of this report. These statements include all normal recurring adjustments that management believes are necessary to fairly state our financial position, results of operations and cash flows. The results of operations for the nine and three-month periods ended September 30,
2016 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2016 or for any other period.
Statement of income data
|
|
|
|
|
|
|
|
|
|
Nine-months Periods Ended
September 30,
|
|
Three-month Periods Ended
September 30,
|
(In millions)
|
2016 (*)
|
|
2015 (*)
|
|
2016 (*)
|
|
2015 (*)
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
Net revenues
|
$588.1
|
|
$471.1
|
|
$230.8
|
|
$168.6
|
|
Cost of net revenues
|
(214.0)
|
|
(151.8)
|
|
(85.2)
|
|
(56.8)
|
|
Gross profit
|
374.1
|
|
319.2
|
|
145.6
|
|
111.8
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product and technology development
|
(72.2)
|
|
(53.9)
|
|
(26.1)
|
|
(17.0)
|
|
Sales and marketing
|
(107.7)
|
|
(86.4)
|
|
(39.7)
|
|
(31.1)
|
|
General and administrative
|
(64.1)
|
|
(57.1)
|
|
(26.2)
|
|
(18.4)
|
|
Impairment of Long-Lived Assets
|
(13.7)
|
|
(16.2)
|
|
-
|
|
-
|
|
Total operating expenses
|
(257.7)
|
|
(213.7)
|
|
(91.9)
|
|
(66.5)
|
|
Income from operations
|
116.4
|
|
105.5
|
|
53.7
|
|
45.3
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
Interest income and other financial gains
|
25.2
|
|
14.8
|
|
9.9
|
|
5.8
|
|
Interest expense and other financial charges
|
(18.8)
|
|
(16.2)
|
|
(6.5)
|
|
(6.0)
|
|
Foreign currency (loss) gain
|
(5.1)
|
|
(6.6)
|
|
(4.8)
|
|
2.6
|
|
Net income before income / asset tax expense
|
117.7
|
|
97.5
|
|
52.3
|
|
47.6
|
|
|
|
|
|
|
|
|
|
|
Income / asset tax expense
|
(32.7)
|
|
(30.6)
|
|
(13.4)
|
|
(2.0)
|
|
Net income
|
$85.0
|
|
$66.8
|
|
$38.9
|
|
$45.6
|
|
(*)
The table above may not total due to rounding.
Principal trends in results of operations
Growth in net revenues
Since our inception, we have consistently generated revenue growth from our Marketplace and Non-Marketplace streams, driven by the strong growth of our key operational met
rics. Our net revenues grew 24.9% in the nine
-month period ended
September
30, 2016 as compared to the same period in 2015. Our successful items sold and total payment volume increased 4
1.3
% and 4
6.3%, respectively, in the nine
-month period ended
September
30, 2016 as compared to the same period in 2015. Additionally, our number of confirmed registered users was
a 20.2
% higher as of
September
30, 2016 as compared to the number of confirmed registered users as of
September
30, 2015.
Furthermore, our GMV
increased
13.2% in the nine
-month period ended
September
30, 2016 as compared to the same period in 2015
.
Our net revenues grew 36.9
% in the
three
-month period ended
September
30, 2016 as compared to the same period in 2015. Our successful items sold and t
otal payment volume increased 40.0
% and
52.7%, respectively, in the three
-month period ended
September
30, 2016 as compared to the same period in 2015. Additionally, our number of confirmed registered users was a
20.2
% higher as of
September
30, 2016 as compared to the number of confirmed registered users as of
September
30, 2015.
Furthermore, our GMV
increased
10.8% in the three
-month period ended
September
30, 2016 as compared to the same period in 2015
.
We believe that the growth in net revenues should continue in the future. However, despite this positive historical trend, current weak global macro-economic environment, coupled with devaluations of certain local currencies in Latin America versus the U.S. dollar, the effects of Venezuelan translations of local currencies into U.S. dollar, Venezuelan Government limits to prices and high interest rates in those countries, could cause
a
decline
year-to-year
of our
net revenues, particularly as measured in U.S. dollars.
Gross profit margins
During the past year, our business has experienced decreasing gross profit margins, as defined by total net revenues minus total cost of net revenues, as a percentage of net revenues.
Our gross profit margins were
63.6
% and 6
7.8% for the nine
-month periods ended
September
30, 2016 and 2015, respectively.
For the three-month periods ended September 30, 2016 and 2015, our gross profit margins were 63.1% and 66.3%, respectively.
The decrease in our gross profit margins resulted primarily from:
(i) Higher penetration of our payments and shipping
solution into our Argentine, Brazilian and Mexican marketplaces. For the nine and three-month period ended September 30, 2016, total volume of payments on marketplace represented 66.4% and 74.5% of our total gross merchandise volume (“GMV”) (excluding motor vehicles, vessels, aircraft and real estate), respectively; as compared to 51.6% and 54.4 % for the nine and three-month period ended September 30, 2015
, respectively
. Additionally, for the
nine and three
-month period ended
September
30, 2016,
the
total number of items shipped through our shipping solution represented 4
6
.8%
and 48.5%
of our total number of successful items sold,
respectively;
as compared to 3
3
.
2
%
and 36.5%
for the
nine and three
-month period
s
ended
September
30, 2015
, respectively
. Transactions that include such services intrinsically incur incremental costs such as collection fees, which result in lower gross profit margins. In addition, our financing and shipping revenues are disclosed net of third party provider costs while sales taxes are paid on the gross amount of revenues, thus, decreasing our gross profit margins. Fo
r the nine
-month period ended
September
30, 2016, collection fees and sales taxes increased $
26.0
million and $
15.3
million, resp
ectively, as compared to the nine
-month period ended
September
30, 2015.
For the
three
-month period ended
September
30, 2016, collection fees and sales taxes increased $
11.3
million and $
7.2
million, respectively, as compared to the
same period in 2015.
(ii) Increased customer support costs of
$10.7
million
and
$
5
.8
million
for the nine and three-month periods ended September 30, 2016, respectively, as compared in each case
with the same period in 2015; mainly as a consequence of salaries and wages. The number of employees related to customer support were 1,740 as of
September
30, 2016 as compared with
1,375
as of
September
30, 2015.
In the future, gross profit margins could decline if the penetration of our payment solution and shipping grows faster than our marketplace.
Operating income margins
For the
nine-month period ended September 30, 2016
as compared to the
same period in 2015,
our operating income margin decreased from
22.4
% to
19.8
%
,
as a consequence of increases in costs of net revenues, as described in Gross profit margins section above,
increases in product
and technology
development
expenses (driven mainly salaries and wages and maintenance expenses)
and in sales and marketing
expenses
(driven mainly by portal deals and buyer protection program expenses
)
.
For the
three-month period ended September 30, 2016
as compared to the
same period in 2015,
our operating income margin decreased from
26.8
% to
23.3
%
, as a consequence of
increases in costs of net revenues, as described in Gross profit margins section above,
increases in product
and technology
development
expenses (driven mainly salaries and wages and maintenance expenses),
in sales and marketing
(driven mainly by portal deals and buyer protection program expenses
), and in general and administrative expenses (mainly driven by salaries and wages)
.
We anticipate that as we continue to invest in
product development, sales,
marketing and human resources in order to promote our services and capture the long-term business opportunity offered by the Internet in Latin America, it is increasingly difficult to sustain growth in operating income margins, and at some point we could continue experiencing decreases in operating income margins.
Other Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-months Periods Ended
September 30,
|
|
|
Three-month Periods Ended
September 30,
|
(in millions)
|
|
|
2016 (*)
|
|
|
2015 (*)
|
|
|
2016 (*)
|
2015 (*)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of confirmed registered users at end of period
(1)
|
|
|
166.3
|
|
|
138.4
|
|
|
166.3
|
|
|
138.4
|
Number of confirmed new registered users during period
(2)
|
|
|
21.7
|
|
|
17.4
|
|
|
7.7
|
|
|
6.1
|
Gross merchandise volume
(3)
|
|
$
|
5,826.0
|
|
$
|
5,144.6
|
|
$
|
2,040.2
|
|
$
|
1,842.1
|
Number of successful items sold
(4)
|
|
|
129.6
|
|
|
91.7
|
|
|
47.6
|
|
|
34.0
|
Number of successful items shipped
(5)
|
|
|
60.7
|
|
|
30.4
|
|
|
23.1
|
|
|
12.4
|
Total payment volume
(6)
|
|
$
|
5,306.9
|
|
$
|
3,627.7
|
|
$
|
2,114.0
|
|
$
|
1,384.4
|
Total volume of payments on marketplace
(7)
|
|
$
|
3,867.6
|
|
$
|
2,655.3
|
|
$
|
1,519.9
|
|
$
|
1,002.3
|
Total payment transactions
(8)
|
|
|
96.2
|
|
|
54.9
|
|
|
36.8
|
|
|
22.0
|
Capital expenditures
|
|
$
|
69.0
|
|
$
|
83.4
|
|
$
|
24.1
|
|
$
|
13.2
|
Depreciation and amortization
|
|
$
|
20.7
|
|
$
|
17.0
|
|
$
|
7.5
|
|
$
|
6.0
|
|
(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 number of items that were shipped through our shipping service.
|
|
(6)
|
|
Measure of the total U.S. dollar sum of all transactions paid for using MercadoPago, including marketplace and non-marketplace transactions.
|
|
(7)
|
|
Measure of the total U.S. dollar sum of all
marketplace
transactions paid for using MercadoPago, excluding shipping and financing fees.
|
|
(8)
|
|
Measure of the number of all transactions paid for using MercadoPago.
|
Net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-month Periods Ended
|
|
Change from 2015
|
|
Three-month Periods Ended
|
|
Change from 2015
|
|
September 30,
|
|
to 2016 (*)
|
|
September 30,
|
|
to 2016 (*)
|
|
2016
|
|
2015
|
|
in Dollars
|
|
in %
|
|
2016
|
|
2015
|
|
in Dollars
|
|
in %
|
|
(in millions, except percentages)
|
(in millions, except percentages)
|
Total Net Revenues
|
$ 588.1
|
|
$ 471.1
|
|
$ 117.1
|
|
24.9%
|
|
$ 230.8
|
|
$ 168.6
|
|
$ 62.2
|
|
36.9%
|
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. The table above may not total due to rounding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-month Periods Ended
|
|
|
Change from 2015
|
|
Three-month Periods Ended
|
|
Change from 2015
|
|
|
September 30,
|
|
|
to 2016 (**)
|
|
September 30,
|
|
to 2016 (**)
|
Consolidated Net Revenues by revenue stream
|
|
2016
|
|
2015
|
|
2010
|
in Dollars
|
|
in %
|
|
2016
|
|
2015
|
|
in Dollars
|
|
in %
|
|
|
(in millions, except percentages)
|
|
(in millions, except percentages)
|
Brazil
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketplace
|
|
$ 172.7
|
|
$ 120.6
|
|
|
$ 52.0
|
|
43.1%
|
|
$ 74.7
|
|
$ 39.4
|
|
$ 35.3
|
|
89.6%
|
Non-Marketplace
|
|
138.8
|
|
95.0
|
|
|
43.8
|
|
46.1%
|
|
56.3
|
|
34.9
|
|
21.4
|
|
61.3%
|
|
|
311.4
|
|
215.7
|
|
|
95.8
|
|
44.4%
|
|
131.0
|
|
74.3
|
|
56.7
|
|
76.4%
|
Argentina
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketplace
|
|
$ 112.8
|
|
$ 109.8
|
|
|
$ 3.0
|
|
2.7%
|
|
$ 41.2
|
|
$ 42.1
|
|
$ (0.9)
|
|
-2.2%
|
Non-Marketplace
|
|
73.1
|
|
61.7
|
|
|
11.4
|
|
18.5%
|
|
28.8
|
|
25.1
|
|
3.7
|
|
14.6%
|
|
|
185.9
|
|
171.5
|
|
|
14.4
|
|
8.4%
|
|
70.0
|
|
67.2
|
|
2.7
|
|
4.1%
|
Mexico
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketplace
|
|
$ 20.0
|
|
$ 17.5
|
|
|
$ 2.4
|
|
13.8%
|
|
$ 7.6
|
|
$ 5.2
|
|
$ 2.3
|
|
44.9%
|
Non-Marketplace
|
|
14.4
|
|
11.8
|
|
|
2.6
|
|
22.4%
|
|
4.3
|
|
4.7
|
|
(0.4)
|
|
-8.9%
|
|
|
34.4
|
|
29.3
|
|
|
5.1
|
|
17.3%
|
|
11.8
|
|
9.9
|
|
1.9
|
|
19.5%
|
Venezuela
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketplace
|
|
$ 24.0
|
|
$ 25.9
|
|
|
$ (2.0)
|
|
-7.6%
|
|
$ 6.1
|
|
$ 8.0
|
|
$ (2.0)
|
|
-24.4%
|
Non-Marketplace
|
|
2.5
|
|
2.6
|
|
|
(0.1)
|
|
-4.6%
|
|
0.8
|
|
0.8
|
|
(0.0)
|
|
-1.8%
|
|
|
26.5
|
|
28.5
|
|
|
(2.1)
|
|
-7.3%
|
|
6.9
|
|
8.9
|
|
(2.0)
|
|
-22.3%
|
Other countries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketplace
|
|
$ 12.4
|
|
$ 12.6
|
|
|
$ (0.2)
|
|
-1.8%
|
|
$ 4.8
|
|
$ 3.8
|
|
$ 1.0
|
|
26.5%
|
Non-Marketplace
|
|
17.6
|
|
13.5
|
|
|
4.1
|
|
30.7%
|
|
6.4
|
|
4.6
|
|
1.8
|
|
38.9%
|
|
|
30.0
|
|
26.1
|
|
|
3.9
|
|
15.0%
|
|
11.2
|
|
8.4
|
|
2.8
|
|
33.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketplace
|
|
341.7
|
|
286.5
|
|
|
55.2
|
|
19.3%
|
|
134.4
|
|
98.6
|
|
35.8
|
|
36.3%
|
Non-Marketplace (*)
|
|
246.4
|
|
184.5
|
|
|
61.8
|
|
33.5%
|
|
96.5
|
|
70.1
|
|
26.4
|
|
37.7%
|
Total
|
|
$ 588.1
|
|
$ 471.1
|
|
|
$ 117.1
|
|
24.9%
|
|
$ 230.8
|
|
$ 168.6
|
|
$ 62.2
|
|
36.9%
|
(*)
Includes, among other thing
s, ad sales, real estate listings, motor vehicles listings
, financing fees, off-platform payment fees
, shipping 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
total
net revenues for the
nine and
three-month periods ended
September 30
, 201
6
and 201
5
, increased
in our three main geographic segments
.
Brazil
Marketplace revenue in Brazil
increased
43.1
% in the
nine-month period ended September 30, 2016
as compared to the same period in 201
5
.
The increase was primarily a consequence of a
58.9
% increase in
local
currency volume
and a 1.2
%
increase
in our take rate
(which we define as net revenues as a percentage of gross merchandise volume)
, partially offset by a
11
.0
%
devaluation
of local currency.
The Non-Marketplace business grew
46.1
%, a $
43.8
million increase, during the same period, mainly driven by increases in the volume of financing transactions offered to our users
, volume of items shipped
and in
ad sales
.
Marketplace revenue in Brazil
increased
89.6
% in the
three-month period ended September 30, 2016
as compared to the same period in 201
5
.
The increase was primarily a consequence of a
53.8
% increase in local currency volume,
a 13.0
%
increase
in our take rate
(which we define as net revenues as a percentage of gross merchandise volume)
and a
9.1
%
appreciation
of local currency.
The Non-Marketplace business grew
61.3
%, a $
21.4
million increase, during the same period, mainly driven by increases in the volume of financing
and shipping
transactions and in
ad sales
.
A
rgentina
Marketplace revenues of our Argentine segment
increased
2.7
%
in the
nine-month period ended September 30, 2016
a
s
compared to the same period in 2015
.
The increase was primarily a consequence of a
57.2
% increase in
local
currency volume
and an increase of 6.4% in our take rate
(which we define as net revenues as a percentage of gross merchandise volume), partially offset by
a 38.6
%
devaluation
of local currency.
The Non-Marketplace business grew
18.5
%, a $
11.4
million i
ncrease, during the same period,
mainly driven by increases in the volume of
payments of off-platform
tr
ansactions offered to our users,
the volume of shipped items
and ad sales.
Marketplace revenues of our Argentine segment
decreased 2.2
%
in the
three-month period ended September 30, 2016
a
s
compared to the same period in 2015
.
The
decrease
was primarily a consequence of a
38.1% devaluation
of local currency
, partially offset by a 35.8
% increase in
local
currency volume
and an increase of 16.3% in our take rate
(which we define as net revenues as a percentage of gross merchandise volume)
.
The Non-Marketplace business grew
14.6
%, a $
3.7
million i
ncrease, during the same period,
mainly driven by increases in the volume of
payments of off-platform
transactions
and financing
offered to our users and the volume of shipped items.
Mexico
Marketplace revenues of our Mexican segment
increased
by approximately
13.8
%
in the
nine-month period ended September 30, 2016, as
compared to the same period in 201
5
,
mainly due to
a 14.4% increase in local currency volume and a 17.0
%
increase
in our take rate
(which we define as net revenues as a percentage of gross merchandise volume)
,
partially offset by
a local currency devaluation of
14.9
%
.
The Non-Marketplace business increased
22.4
% or $
2.6
million during the same period, mainly driven by increases in the volume of financing transactions offered to our users
and shipping transactions
.
Marketplace revenues of our Mexican segment d by approximately 44.9% in the three-month period ended September 30, 2016, as compared to the same period in 2015,
mainly due to a 17.1% increase in local currency volume and a 41.1% increase in our take rate
(which we define as net revenues as a percentage of gross merchandise volume)
, partially offset by a local currency devaluation of 12.3%.
The Non-Marketplace business decreased 8.9% or $0.4 million during the same period, mainly driven a decrease in our classified fees.
Venezuela
Marketplace revenues of our Venezuelan segment
decreased
by approximately
7.6
%
in the
nine-month period ended September 30, 2016,
as
compared to the same period in 2015,
mainly due
to local currency devaluation of 65.6%, partially offset by a 157.1% increase in local currency volume and a 4.7% increase in our take rate
(which we define as net revenues as a percentage of gross merchandise volume)
.
The Non-Marketplace business decreased
4.6
%, or $0.
1
million during the same period, mainly
due to
the devaluation mentioned above,
which was
partially offset by an increase in the volume of transactions.
Marketplace revenues of our Venezuelan segment
decreased
by approximately
24.4
%
in the
three-month period ended September 30, 2016,
when compared to the same period in 2015,
mainly due
to local currency devaluation of 69.2%, partially offset by a 93.1% increase in local currency volume and a 27.0% increase in our take rate
(which we define as net revenues as a percentage of gross merchandise volume).
The Non-Marketplace business
decreased 1.8% mainly due to the local currency devaluation.
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)
|
|
(*)
|
2016
|
|
|
|
|
Net revenues
|
$ 157.6
|
$ 199.6
|
$ 230.8
|
n/a
|
Percent change from prior quarter
|
-13%
|
27%
|
16%
|
|
2015
|
|
|
|
|
Net revenues
|
$ 148.1
|
$ 154.3
|
$ 168.6
|
$ 180.7
|
Percent change from prior quarter
|
-8%
|
4%
|
9%
|
7%
|
2014
|
|
|
|
|
Net revenues
|
$ 115.4
|
$ 131.8
|
$ 147.9
|
$ 161.4
|
Percent change from prior quarter
|
-14%
|
14%
|
12%
|
9%
|
(*)
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 nine and three-month period ended September 30, 2016 as compared to the same period in 2015:
|
|
|
|
|
|
|
|
|
|
|
|
Changes from 2015 to 2016 (*)
|
(% of revenue growth in Local Currency)
|
|
Nine-months
|
|
Three-months
|
Brazil
|
|
59.7%
|
|
62.5%
|
Argentina
|
|
75.8%
|
|
68.0%
|
Mexico
|
|
37.8%
|
|
36.4%
|
Venezuela
|
|
181.7%
|
|
152.1%
|
Other Countries
|
|
27.1%
|
|
33.0%
|
Total Consolidated
|
|
71.1%
|
|
66.3%
|
(*)
The
local
currency revenue growth was calculated by using the average monthly exchange rates for each month during 201
5
and applying them to the corresponding months in 201
6
, so as to calculate what our financial results would have been had exchange rates remained stable from one year to the next.
In Venezuela, the increase in our net revenues is mainly due to higher average selling prices pos
ted by sellers during the nine and three-month period
ended
September 30
, 201
6
, which we do not control. The increase in average selling prices is a consequence of: (i)
high
inflation rate in that country; (ii) a shortage of products in Venezuela and (iii) changes in the mix of categ
ories of the items sold in our M
arketplace.
In the case of Argentina, the increase in
our net revenues is due to an increase in the Argentine successful items volume during the nine and
three-month period
ended
September 30
,
2016
. Additionally
,
the increase
in
our net revenues
is
a consequence of
an increase in
shipped items
volume and increases in
our
MercadoPago
transactions.
In Brazil, the significant increase in local currency growth, as compared to U.S. dollar growth, is a consequence of an increase of our Brazilian Marketplace volume and our shipped items volume and increases in
our
MercadoPago transactions.
Cost of net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-month Periods Ended
|
|
Change from 2015
|
|
Three-month Periods Ended
|
|
Change from 2015
|
|
September 30,
|
|
to 2016 (*)
|
|
September 30,
|
|
to 2016 (*)
|
|
2016
|
|
2015
|
|
in Dollars
|
|
in %
|
|
2016
|
|
2015
|
|
in Dollars
|
|
in %
|
|
(in millions, except percentages)
|
|
(in millions, except percentages)
|
Total cost of net revenues
|
$ 214.0
|
|
$ 151.8
|
|
$ 62.2
|
|
40.9%
|
|
$ 85.2
|
|
$ 56.8
|
|
$ 28.4
|
|
50.0%
|
As a percentage of net revenues (*)
|
36.4%
|
|
32.2%
|
|
|
|
|
|
36.9%
|
|
33.7%
|
|
|
|
|
(*) 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.
For the nine
-month period ended
September 30
, 201
6
as compared to the
same period of
201
5
, the increase of $
62.2
million in cost of net revenues was primarily attributable to
: i)
an increase in collection fees
of
$
26.0
million,
or
32.6
%, which was mainly attributable to our Argentine and Brazilian operations as a result of the higher penetration of
MercadoPago in those countries
; ii) an increase in sales taxes amounting to $
15.3
million, mainly related to
the growth of
our Argentine and Brazilian operations; iii) a $
10.7
million increase in
customer support costs mainly as a consequence of salaries and wages, iv) $3.1 million in hosting costs; and v) a $4.0 million increase in mobile points of sale costs.
For the three
-month period ended
September 30
, 201
6
as compared to the
same period of
201
5
, the increase of $
28.4
million in cost of net revenues was primarily attributable to
: i)
an increase in collection fees amounting to $
11.3
million,
or
36.8
%, which was mainly attributable to our Argentine and Brazilian operations as a result of the higher penetration of MercadoPago in those countries; ii) an increase in sales taxes amounting to $
7.2
million, mainly related to
the growth of
our Argentine and Brazilian operations; iii) a $
5.8
million increase in
customer support costs mainly as a consequence of salaries and wages; iv) $0.9 million in hosting costs; and v) a $1.6 million increase in mobile points of sale costs.
Product and technology development expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-month Periods Ended
|
|
Change from 2015
|
|
Three-month Periods Ended
|
|
Change from 2015
|
|
September 30,
|
|
to 2016 (*)
|
|
September 30,
|
|
to 2016 (*)
|
|
2016
|
|
2015
|
|
in Dollars
|
|
in %
|
|
2016
|
|
2015
|
|
in Dollars
|
in %
|
|
(in millions, except percentages)
|
|
(in millions, except percentages)
|
Product and technology development
|
$ 72.2
|
|
$ 53.9
|
|
$ 18.3
|
|
33.9%
|
|
$ 26.1
|
|
$ 17.0
|
|
$ 9.0
|
53%
|
As a percentage of net revenues (*)
|
12.3%
|
|
11.4%
|
|
|
|
|
|
11.3%
|
|
10.1%
|
|
|
|
(*) 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.
For
the
nine
and three-month periods
ended
September
30, 201
6
, the increase in product and technology development expenses as compared to the same periods in 201
5
amounted to $
18.3
million and $
9.0
million respectively. These increases were primarily attributable to
: i)
an increase of $
8.0
million and $
4.8
million in salaries and wages
, respectively
; ii)
a
n
increase in maintenance expenses
of
$
3.1
and $1.0
million
, respectively
; ii
i
) an increase in depreciation and amortization expenses of $
3.2
million
and $1.2 million, respectively; and iv) an increase in other
product and technology development
expenses of $3.9 million and $2.0 million, respectively.
We believe development is one of our key competitive advantages and intend to continue to invest in hiring engineers to meet the increasingly sophisticated product expectations of our customer base.
Sales and marketing expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-month Periods Ended
|
|
Change from 2015
|
|
Three-month Periods Ended
|
|
Change from 2015
|
|
September 30,
|
|
to 2016 (*)
|
|
September 30,
|
|
to 2016 (*)
|
|
2016
|
|
2015
|
|
in Dollars
|
|
in %
|
|
2016
|
|
2015
|
|
in Dollars
|
in %
|
|
(in millions, except percentages)
|
|
(in millions, except percentages)
|
Sales and marketing
|
$ 107.7
|
|
$ 86.4
|
|
$ 21.3
|
|
24.6%
|
|
$ 39.7
|
|
$ 31.1
|
|
$ 8.6
|
27.6%
|
As a percentage of net revenues (*)
|
18.3%
|
|
18.4%
|
|
|
|
|
|
17.2%
|
|
18.5%
|
|
|
|
(*) 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.
For the
nine-
month period ended
September
30, 201
6
, the $
21.3
million increase
in sales and marketing expenses
when comp
ared to the same period in 2015
was primarily attributable to: i) an increase of $
9.4
million in on
line portal deals expenses; ii) a $4.
3
million in our buyer protection program expense; iii) a $
5 million
increase in salaries and wages
;
and iv) a $
4
.
7 million de
crease in other marketing expenses
; partially offset by a $2.6 million decrease in our offline advertising expenses
.
For the
three-
month period ended
September
30, 201
6
, the $
8.6
million increase
in sales and marketing expenses
when comp
ared to the same period in 2015
was primarily attributable to: i) an increase of $
4.6
million in on
line portal deals expenses; ii) a $
2.7 million
increase in salaries and wages
and iii
) a $
0.6 million de
crease in other marketing expenses
; partially offset by a $2.0 million decrease in our offline advertising expenses
.
General and administrative
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-month Periods Ended
|
|
Change from 2015
|
|
Three-month Periods Ended
|
|
Change from 2015
|
|
September 30,
|
|
to 2016 (*)
|
|
September 30,
|
|
to 2016 (*)
|
|
2016
|
|
2015
|
|
in Dollars
|
|
in %
|
|
2016
|
|
2015
|
|
in Dollars
|
in %
|
|
(in millions, except percentages)
|
|
(in millions, except percentages)
|
General and administrative
|
$ 64.1
|
|
$ 57.1
|
|
$ 6.9
|
|
12.1%
|
|
$ 26.2
|
|
$ 18.4
|
|
$ 7.8
|
42.3%
|
As a percentage of net revenues (*)
|
10.9%
|
|
12.1%
|
|
|
|
|
|
11.3%
|
|
10.9%
|
|
|
|
(*) 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.
For the nine-month period ended September 30, 2016, the $6.9 million increase in general and administrative expenses when compared to the same period in 2015 was primarily attributable to a $7.6 million increase in salaries and wages. This increase was partially offset by: i) a $2.9 million decrease in other general and administrative expenses; ii) a $0.6 million decrease in depreciation and amortization expenses;
iii) a $0.2 million decrease in audit and legal fees; and iv) a $0.3 million decrease in tax and other fees.
For the three-month period ended September 30, 2016, the $7.8 million increase in general and administrative expenses when compared to the same period in 2015 was primarily attributable to: i) a $8.0 million increase in salaries and wages; and ii) a $0.3 million increase in audit and legal fees. This increase was partially offset by a $0.6 million decrease in tax and other fess.
Impairment of Long-Lived assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-month Periods Ended
|
|
Change from 2015
|
|
Three-month Periods Ended
|
|
Change from 2015
|
|
September 30,
|
|
to 2016 (*)
|
|
September 30,
|
|
to 2016 (*)
|
|
2016
|
|
2015
|
|
in Dollars
|
|
in %
|
|
2016
|
|
2015
|
|
in Dollars
|
|
in %
|
|
(in millions, except percentages)
|
|
(in millions, except percentages)
|
Impairment of Long-Lived Assets
|
$ 13.7
|
|
$ 16.2
|
|
$ (2.5)
|
|
-15.5%
|
|
$ —
|
|
$ —
|
|
$ —
|
|
0.0%
|
As a percentage of net revenues (*)
|
2.3%
|
|
3.4%
|
|
|
|
|
|
0.0%
|
|
0.0%
|
|
|
|
|
(*) Percentages have been calculated using whole-dollar amounts rather than rounded amounts that appear in the table. The table above may not total due to rounding.
We recorded an impairment of certain real estate investments owned by our Venezuelan subsidiaries of $16.2 million during the first quarter of 2015 and $13.7 million during the second quarter of 2016. For further information, see section “Foreign Currency
Translation—
Venezuelan currency status.
”
Other income / (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-month Periods Ended
|
|
Change from 2015
|
|
Three-month Periods Ended
|
|
Change from 2015
|
|
September 30,
|
|
to 2016 (*)
|
|
September 30,
|
|
to 2016 (*)
|
|
2016
|
|
2015
|
|
in Dollars
|
|
in %
|
|
2016
|
|
2015
|
|
in Dollars
|
|
in %
|
|
(in millions, except percentages)
|
|
(in millions, except percentages)
|
Other income (expense), net
|
$ 1.3
|
|
$ (8.0)
|
|
$ 9.4
|
|
-116.5%
|
|
$ (1.4)
|
|
$ 2.3
|
|
$ (3.8)
|
|
-160.9%
|
As a percentage of net revenues (*)
|
0.2%
|
|
-1.7%
|
|
|
|
|
|
-0.6%
|
|
1.4%
|
|
|
|
|
(*) 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.
For the
nine
-month period ended
September 30
, 2016
, the $
9.4
million
increase in other income
(expense)
, net when compared to the same period in 201
5
was
primarily attributable to:
i) a $10.5
million increase in interest income
arising from our financial investments in Brazil and Argentina; and
i
i
) a
decrease
in foreign exchange loss
of $
1.6
million
,
from $6.6 million in 2015 to $5.1 million in 2016.
The 2015 foreign exchange l
oss was a consequence of a $20.7
million foreign
exchange loss in Venezuela as a
result of start using the SIMADI exchange rate since March 31, 2015, partially offset by a
foreign exchange gain of
$
14.5
million
arising from the Reais revaluation over our U.S. Dollar net liability position in Brazil
.
The 2016 foreign exchange loss was a consequence of a $7.4 million loss arising from the U.S. Dollar revaluation over our Bolivares Fuertes net asset position in Venezuela and a $3.7 million loss arising from the Mexican Peso devaluation over our U.S. Dollar net liability position in Mexico, partially offset by a $6.5 million gain arising from the Argentine Peso devaluation over our U.S. Dollar net asset position in Argentina and a $0.8 million gain arising from the Reais revaluation over our U.S. Dollar net liability position in Brazil. These increases were
partially offset by
a
$
2
.
6
million increase in interest expens
e due mainly to the mortgage loan entered into in the third quarter of 2015 for the acquisition of real estate in Venezuela
,
and other financial charges in Brazil
.
F
or the
three
-month period ended
September 30
, 2016
, the $
3.8
million
decrease
in other income
(expense)
, net when compared to the same period in 201
5
was
primarily attributable to:
i) a $0.5 million increase in interest
expense due mainly to the mortgage loan entered into in Venezuela in the third quarter of 2015, and other financial charges in Br
azil, and
i
i
) a
n increase in foreign exchange loss
of $
7.4
million
,
from a $2.6 million gain in 2015 to a $4.8 million loss in 2016.
The 2015 foreign exchange gain was mainly as a consequence of a $5.7 million gain arising from the Reais revaluation over our U.S. Dollar net liability position in Brazil, partially offset by a $2.3 million loss arising from the Mexican Peso devaluation over our U.S. Dollar net liability position in Mexico.
The 2016 foreign exchange loss was mainly as a consequence of a $2.1 million loss arising from the Reais devaluation over our U.S. Dollar net liability position in Brazil and a $1.7 million loss arising from the Mexican Peso devaluation over our U.S. Dollar net liability position in Mexico. These decreases were
partially offset by
a
$
4.1
million increase
in interest income arising from our financial investments in Brazil and Argentina.
Income and asset tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-month Periods Ended
|
|
Change from 2015
|
|
Three-month Periods Ended
|
|
Change from 2015
|
|
September 30,
|
|
to 2016 (*)
|
|
September 30,
|
|
to 2016 (*)
|
|
2016
|
|
2015
|
|
in Dollars
|
|
in %
|
|
2016
|
|
2015
|
|
in Dollars
|
|
in %
|
|
(in millions, except percentages)
|
|
(in millions, except percentages)
|
Income and asset tax
|
$ 32.7
|
|
$ 30.6
|
|
$ 2.1
|
|
6.7%
|
|
$ 13.4
|
|
$ 2.0
|
|
$ 11.4
|
|
576.8%
|
As a percentage of net revenues (*)
|
5.6%
|
|
6.5%
|
|
|
|
|
|
5.8%
|
|
1.2%
|
|
|
|
|
(*) 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.
During the nine and three-month periods ended September 30, 2016 as compared to the same periods in 2015, income and asset tax increased by $2.1 million and $11.4 million, respectively, mainly as a consequence of: i) an increase in our pre-tax gains mainly in our Argentine and Brazilian subsidiaries; and ii) the tax holiday granted to our Argentine subsidiary related to the new software development law recorded in the third
quarter of 2015
that was proportionally higher than the tax holiday granted in 2016, as it
included a retroactive application from September 18, 2014.
As a result of the application of this tax benefit, we recorded an income tax benefit
of $16
.0 million and
$6.8
million for the nine and three-month periods ended September 30, 2016, respectively. Furthermore, the Company recorded a labor cost benefit of
$4.2 million and $2.2 million for the nine and three-month periods ended September 30, 2016, respectively. Additionally, $1.4 million and $0.6
million were accrued to pay software development law audit fees during the nine and three-month periods ended September 30, 2016, respectively.
During the third quarter of 2015, we recorded an income tax benefit of $
16.0
million, a labor cost benefit of $
4.2
million and $
1.4
million were accrued to pay software development law audit fees.
Labor cost benefits and software development law audit fees are not included within “Income and asset tax” line item.
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 our blended and effective tax rates for the nine and three-month periods ended September 30, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-month Periods Ended
|
|
Three-month Periods Ended
|
|
September 30,
|
|
September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Blended tax rate
|
27.8%
|
|
31.4%
|
|
25.6%
|
|
4.1%
|
Effective tax rate
|
31.4%
|
|
31.4%
|
|
28%
|
|
4.0%
|
Our blended and effective tax rate for the nine-month period ended September 30, 2016 decreased as compared to the same period in 2015 mainly due to
the one-time loss
recorded in our Venezuelan subsidiaries during the first quarter of 2015 related to the impairment of long-lived assets (which is not deductible for tax purposes) and the devaluation of the BsF net asset position. The 2015 effect was higher to the one-time loss recorded in the second quarter of 2016 and for that reason our blended and effective tax rate decreased.
Our blended and effective tax rate for the three-month period ended September 30, 2016 increased as compared to the same period in 2015, mainly due to
the
tax holiday granted to our Argentine subsidiary related to the new software development law recorded in the third
quarter of 2015
,
which was
proportionally higher than the tax holiday granted in 2016, as it
included a retroactive application from September 18, 2014.
The following table sets forth our effective income tax rate related to our main segments for the nine and three-month periods ended September 30, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-month Periods Ended
|
Three-month Periods Ended
|
|
|
|
September 30,
|
September 30,
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Effective tax rate by country
|
|
|
|
|
|
|
|
|
|
|
Argentina
|
|
|
20.2%
|
|
13.2%
|
|
21.2%
|
|
-19.6%
|
|
Brazil
|
|
|
26.1%
|
|
30.1%
|
|
23.5%
|
|
35.3%
|
|
Venezuela
|
|
|
-0.6%
|
|
-0.7%
|
|
20.9%
|
|
1.2%
|
|
Mexico
|
|
|
-9.0%
|
|
-25.1%
|
|
-6.3%
|
|
-0.8%
|
|
The increase in the effective income tax rate in our Argentine subsidiaries during the nine and three-month periods ended September 30, 2016 as compared to the same periods in 2015, is due to the tax holiday granted during third quarter of 2015 to our Argentine subsidiary related to the new software development law,
which was
higher to the tax holiday recorded in
the third quarter of 2016
, as it
included a retroactive application from September 18, 2014.
.
On August 17, 2011, the Argentine government issued a new software development law and on September 9, 2013
a
regulatory decree was issued, which established the new requirements to become
a
beneficiary of the new software development law. The new decree establishes compliance requirements with annual incremental ratios related to exports of services and research and development expenses that must be achieved to remain within the tax holiday. The Argentine operation will have to achieve certain required ratios annually under the new software development law. During May 2014, we presented all the required documentation in order to apply for the new software development law.
On September 17, 2015, the Argentine Industry Secretary issued Resolution 1041/2015 approving the Company’s application for eligibility under the new software development law
for the Company’s Argentinean subsidiary, Mercadolibre S.R.L. Furthermore, on September 18, 2016,
the Argentine Industry Secretary issued Resolution
s
93/2016 and 97/2016
approving the Company’s application for eligibility under the new software development law
for the Company’s Argentinean subsidiaries, Neosur S.RL. and Business Vision S.A.
As a result, the Company’s Argentinean
subsidiaries have
been granted a tax holiday retro
active from September 18, 2014 for its software developments activities. A portion of the benefits available to beneficiaries of the new law is a relief of 60% of total income tax related to software development activities and a 70% relief in payroll taxes related to software development activities.
The decrease in our Brazilian effective income tax rate for the nine and three-month periods ended September 30, 2016 as compared to the same periods in 2015, was mainly related to temporary differences deducted in the current period.
The
increase
in our Mexican
effective income tax rate for
the
nine-
month period ended
September
30, 2016 as compared with the same period in 2015, is due to the
higher
pre-tax loss
es
recorded during 201
6 as
a result of the devaluation in that country. The foreign exchange loss is a consequence of U.S. dollars liabilities assumed to acquire an online classified business. The
decrease
in our Mexican
effective income tax rate for
the
three-
month period ended
September
30, 2016 as compared with the same period in 2015
, is due to the use of previous tax loss carryforwards during the third quarter of 2015.
For the nine and three-month periods ended September 30, 2016 and 2015, our Venezuelan effective income tax rate was driven by losses recorded in our Venezuelan subsidiaries related to the impairment of long-lived assets and foreign exchange losses, which generated a net loss before income tax. The impairment of long-lived assets charge is non-deductible for tax purposes. The main difference year over year is that in the three-month period ended
September 30, 2016, the loss carryforward generated by the devaluation of the local currency was considered not recoverable for tax purposes, while in 2015 it was considered recoverable and for that reason we record a deferred tax asset.
We do not expect 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
.
Segment information
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except for percentages)
|
Nine-month Period Ended September 30, 2016
|
|
|
|
|
|
Brazil
|
|
Argentina
|
|
Mexico
|
|
Venezuela
|
|
Other Countries
|
|
Total
|
Net revenues
|
$ 311.4
|
|
$ 185.9
|
|
$ 34.4
|
|
$ 26.5
|
|
$ 30.0
|
|
$ 588.1
|
Direct costs
|
(188.8)
|
|
(105.2)
|
|
(29.0)
|
|
(12.7)
|
|
(21.3)
|
|
(357.0)
|
Impairment of Long-lived Assets
|
—
|
|
—
|
|
—
|
|
(13.7)
|
|
—
|
|
(13.7)
|
Direct contribution
|
122.7
|
|
80.7
|
|
5.4
|
|
0.0
|
|
8.7
|
|
217.4
|
Margin
|
39.4%
|
|
43.4%
|
|
15.6%
|
|
0.2%
|
|
29.0%
|
|
37.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-month Period Ended September 30, 2015
|
|
|
|
|
|
Brazil
|
|
Argentina
|
|
Mexico
|
|
Venezuela
|
|
Other Countries
|
|
Total
|
Net revenues
|
$ 215.7
|
|
$ 171.5
|
|
$ 29.3
|
|
$ 28.5
|
|
$ 26.1
|
|
$ 471.1
|
Direct costs
|
(127.4)
|
|
(92.5)
|
|
(21.2)
|
|
$ (10.5)
|
|
(16.4)
|
|
(268.1)
|
Impairment of Long-lived Assets
|
—
|
|
—
|
|
—
|
|
(16.2)
|
|
—
|
|
(16.2)
|
Direct contribution
|
88.2
|
|
78.9
|
|
8.1
|
|
1.8
|
|
9.6
|
|
186.8
|
Margin
|
40.9%
|
|
46.0%
|
|
27.8%
|
|
6.3%
|
|
37.0%
|
|
39.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change from the Nine-month Period Ended September 30, 2015 to September 30, 2016 (*)
|
|
|
|
|
|
Brazil
|
|
Argentina
|
|
Mexico
|
|
Venezuela
|
|
Other Countries
|
|
Total
|
Net revenues
|
|
|
|
|
|
|
|
|
|
|
|
in Dollars
|
$ 95.8
|
|
$ 14.4
|
|
$ 5.1
|
|
$ (2.1)
|
|
$ 3.9
|
|
$ 117.1
|
in %
|
44.4%
|
|
8.4%
|
|
17.3%
|
|
-7.3%
|
|
15.0%
|
|
24.9%
|
Direct costs
|
|
|
|
|
|
|
|
|
|
|
|
in Dollars
|
$ (61.4)
|
|
$ (12.7)
|
|
$ (7.8)
|
|
$ (2.2)
|
|
$ (4.9)
|
|
$ (88.9)
|
in %
|
48.2%
|
|
13.7%
|
|
37.0%
|
|
20.9%
|
|
29.5%
|
|
33.2%
|
Impairment of Long-Lived Assets
|
|
|
|
|
|
|
|
|
|
|
|
in Dollars
|
$ —
|
|
$ —
|
|
$ —
|
|
$ 2.5
|
|
$ —
|
|
$ 2.5
|
in %
|
0.0%
|
|
0.0%
|
|
0.0%
|
|
-15.5%
|
|
0.0%
|
|
-15.5%
|
Direct contribution
|
|
|
|
|
|
|
|
|
|
|
|
in Dollars
|
$ 34.4
|
|
$ 1.7
|
|
$ (2.8)
|
|
$ (1.8)
|
|
$ (0.9)
|
|
$ 30.7
|
in %
|
39.0%
|
|
2.2%
|
|
-34.0%
|
|
-97.6%
|
|
-9.8%
|
|
16.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except for percentages)
|
Three-month Period Ended September 30, 2016
|
|
|
|
|
|
Brazil
|
|
Argentina
|
|
Mexico
|
|
Venezuela
|
|
Other Countries
|
|
Total
|
Net revenues
|
$ 131.0
|
|
$ 70.0
|
|
$ 11.8
|
|
$ 6.9
|
|
$ 11.2
|
|
$ 230.8
|
Direct costs
|
(77.0)
|
|
(39.0)
|
|
(10.4)
|
|
(3.5)
|
|
(7.9)
|
|
(137.8)
|
Direct contribution
|
54.0
|
|
31.0
|
|
1.5
|
|
3.4
|
|
3.2
|
|
93.1
|
Margin
|
41.2%
|
|
44.2%
|
|
12.3%
|
|
49.7%
|
|
28.9%
|
|
40.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-month Period Ended September 30, 2015
|
|
|
|
|
|
Brazil
|
|
Argentina
|
|
Mexico
|
|
Venezuela
|
|
Other Countries
|
|
Total
|
Net revenues
|
$ 74.3
|
|
$ 67.2
|
|
$ 9.9
|
|
$ 8.9
|
|
$ 8.4
|
|
$ 168.6
|
Direct costs
|
(43.7)
|
|
(38.7)
|
|
(8.6)
|
|
(3.7)
|
|
(5.3)
|
|
(100.0)
|
Direct contribution
|
30.6
|
|
28.5
|
|
1.3
|
|
5.2
|
|
3.0
|
|
68.6
|
Margin
|
41.1%
|
|
42.4%
|
|
13.4%
|
|
58.6%
|
|
36.2%
|
|
40.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change from the Three-month Period Ended September 30, 2015 to September 30, 2016 (*)
|
|
|
|
|
|
Brazil
|
|
Argentina
|
|
Mexico
|
|
Venezuela
|
|
Other Countries
|
|
Total
|
Net revenues
|
|
|
|
|
|
|
|
|
|
|
|
in Dollars
|
$ 56.7
|
|
$ 2.7
|
|
$ 1.9
|
|
$ (2.0)
|
|
$ 2.8
|
|
$ 62.2
|
in %
|
76.3%
|
|
4.1%
|
|
19.5%
|
|
-22.3%
|
|
33.3%
|
|
36.9%
|
Direct costs
|
|
|
|
|
|
|
|
|
|
|
|
in Dollars
|
$ (33.3)
|
|
$ (0.3)
|
|
$ (1.8)
|
|
$ 0.2
|
|
$ (2.6)
|
|
$ (37.8)
|
in %
|
76.1%
|
|
0.8%
|
|
20.9%
|
|
-5.5%
|
|
48.6%
|
|
37.8%
|
Direct contribution
|
|
|
|
|
|
|
|
|
|
|
|
in Dollars
|
$ 23.4
|
|
$ 2.4
|
|
$ 0.1
|
|
$ (1.8)
|
|
$ 0.2
|
|
$ 24.4
|
in %
|
76.7%
|
|
8.5%
|
|
10.2%
|
|
-34.1%
|
|
6.3%
|
|
35.6%
|
(*) 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.
Net revenues
Net revenues for the
nine and
three-month period
s
ended
September 30
, 201
6 as compared to the same periods
in 201
5
, are described above in “Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Net revenues”.
Direct costs and Impairment of Long-Lived Assets
Brazil
For the nine
-month period ended
September 30
, 2016 as compared to the same period in 2015
, direct costs increased by 48.2%, mainly driven by: i) a 61.7
% increase in cost of net revenues, mainly attributable to an increase in collection fees as a consequence of higher penetration of
our
MercadoPago
business
, sales tax costs
an
d salaries and wages; ii) a 75.7
% increase in product and technology development expenses, mainly due to an increase in salaries and wages
and
higher deprecia
tion and amortization expenses; iii) a 32.8
% increase in sales and marketing expenses, mainly due to an increase in buyer protection program expenses, online marketing expenses
, salaries and wages
and other marketing expenses
; and iv) a
14.2
% increase in general and administrative expenses.
For the three-month period ended September 30, 2016 as compared to the same period in 2015, direct costs increased by 76.1%, mainly driven by: i) a 98.7% increase in cost of net revenues, mainly attributable to an increase in collection fees as a consequence of higher penetration of our
MercadoPago business, sales tax costs and salaries and wages; ii) a
84.1
% increase in product and technology development expenses, mainly due to an increase in salaries and wages and higher depreciation and amortization expenses; iii) a
43.3
% increase in sales and marketing expenses, mainly due to an increase in buyer protection program expenses, online marketing expenses, salaries and wages and other marketing expenses; and iv) a
59.9
% increase in general and administrative expenses
, mainly due to an increase in salaries and wages
.
Argentina
For the
nine
-month period ended
September 30
, 201
6
as compared to the same period in 201
5, direct costs increased by 13.7
%, mainly driven by: i) a
19.7
% increase in cost of net revenues, mainly attributable to an increase in collection fees
as a consequence of a higher penetration of MercadoPago business
, customer support costs and sales taxes;
and ii)
a
83.2
%
increase in product and technology development expenses, mainly due
to
higher depreciation and amortization expenses
. These increases were partially offset by: i) a 26.8% decrease in general and administrative expenses; and ii) a 3.2% decrease in sales and marketing expenses.
For the three-month period ended September 30, 2016 as compared to the same period in 2015, direct costs increased by 0.8%, mainly driven by: i) a 8.3% increase in cost of net revenues, mainly attributable to an increase in collection fees as a consequence of a higher penetration of MercadoPago, and customer support costs; and ii) a 46.7%
increase in product and technology development expenses, mainly due to higher depreciation and amortization expenses. These increases were partially offset by: i) a 52% decrease in general and administrative expenses, mainly attributable to a decrease in tax and other fees; and ii) a 16.5% decrease in sales and marketing expenses, mainly attributable to a decrease in offline and online marketing expenses.
Mexico
For the
nine
-month period ended
September 30, 2016
as compared to the same period in 201
5
, direct costs increased by
37.0
%, mainly driven by: i) a
60
.
1
% i
ncrease in cost of net revenues,
mainly attributable to an increase in collection fees due to higher MercadoPa
go penetration and customer support costs; ii) a 33.3
% increase in sales and marketing expenses, mainly due to increases in online marketing expenses;
iii)
a
44.4
% increase in product and technology development expenses as a result of increases in salaries and wages and depreciation
and amortization expenses and iv
) a
12.1
% increase in general and administrative expenses, mainly attributable to an increase in salaries and wages.
For the three-month period ended September 30, 2016 as compared to the same period in 2015, direct costs increased by 20.9%, mainly driven by: i) a 16.5% increase in sales and marketing expenses, mainly due to increases in online marketing expenses, salaries and wages, chargeback expenses and higher buyer protection program expenses; and ii) a 59.6% increase in cost of net revenues, mainly attributable to an increase in collection fees due to higher MercadoPago penetration and customer support costs. These increases were partially offset by: i) a 11.5% decrease
in general and administrative expenses;
and ii) a 10.1% decrease in product and technology development expenses.
Venezuela
During first quarter of 2015 and the second quarter of 2016, we recorded an impairment of long-lived assets of $16.2 million and $13.7 million respectively in our Venezuelan subsidiaries.
F
or the
nine
-month period ended
September 30, 2016
as compared to the same period in 201
5
, direct costs increased by
20.9
%, mainly driven by:
i)
a
30.7% in
crease in sales and marketing expenses that was mainly attributable to a
n
increase
in bad debt
expenses
and chargeback
expenses
;
ii)
a
14.5
% increase in cost of net revenues that was mainly attributable to an increase in customer support costs
and certain new taxes on payment business; and ii
i) a
423.7
%
in
crease in product and technology development expenses attributable to a
n
increase in
depreciation and amortization expenses
. These increases were partially offset by a 15.3% de
crease in general and administrative expenses
, mainly due to decreases in depreciation and amortization expenses.
For the three-month period ended September 30, 2016 as compared to the same period in 2015, direct costs decreased by 5.5%, mainly driven by: i) a 34.9% decrease in general and administrative expenses, mainly attributable to a decrease in depreciation and amortization expenses; ii) a 7.2% decrease in cost of revenues, mainly attributable to a decrease in collection fees and customer services expenses; and iii) a 4.0% decrease in sales and marketing expenses. These decreases were partially offset by
a
262.8
%
in
crease in product and technology development expenses attributable to a
n
increase
in
depreciation and amortization expenses
.
Liquidity and Capital Resources
Our main cash requirement historically has been working capital to fund MercadoPago financing operations in Brazil. We also require cash for capital expenditures relating to technology infrastructure, software applications, office space,
business acquisitions, to fund the payment of quarterly cash dividends on shares of our common stock and to fund the
interest
payments on our Convertible Notes.
Since our inception, we have funded our operations primarily through contributions received from our stockholders during the first two years of operations, from funds raised during our initial public offering, and from cash generated from our operations.
W
e issued on June 30, 2014, $330 million principal balance of Convertible Notes for net proceeds to us of approximately $321.7 million. We have funded MercadoPago
mainly
by discounting credit card receivables and through cash advances derived from our business.
As of September 30
, 201
6
, our main source of liquidity, amounting to $
471.6
million of cash and cash equivalents and short-term investments and $
155.2
million of long-term investments
,
was
provided by cash generated from operations and from the issuance of the Convertible Notes. We
consider our long-term investments as part of our liquidity because long-term investments are comprised of available-for-sale securities classified as long-term as a consequence of their contractual maturities.
The significant components of our working capital are cash and cash equivalents, short-term investments, accounts receivable, accounts payable and accrued expenses, funds receivable from and payable to MercadoPago users, and short-term debt. As long as we continue transferring credit card receivables to financial institutions in return for cash, we will continue generating cash.
As of
September 30, 2016
cash and investments of foreign subsidiaries amounted to $
343.5
million, or
54.8
% of our consolidated cash and investments, and approximately
41.7
% of our consolidated cash and investments were held outside the U.S., mostly in Brazil and Argentina. Our strategy is to reinvest the undistributed earnings of our foreign operations in those operations and to distribute dividends when they can be offset with available tax credits. We do not expect a material impact in any repatriation of undistributed earnings of foreign subsidiaries on our operations since the taxable domestic gains generated by any dividend distributions will be mostly offset with foreign tax credits that arise from income tax paid in our foreign operations, which we are allowed to compute for domestic income tax purposes.
In the event we change the way we manage our business, our working capital needs could be funded, as we did in the past, through a combination of the sale of credit card coupons to financial institutions and cash advances from our business.
The following table presents our cash flows from operating activities, investing activities and financing activities for the
nine
-month periods ended
September
3
0
, 201
6
and 201
5
:
|
|
|
|
|
|
|
|
|
|
Nine-month Periods Ended
|
|
|
|
|
September 30, (*)
|
(In millions)
|
|
|
|
2016
|
|
2015
|
Net cash provided by (used in):
|
|
|
|
|
|
|
Operating activities
|
|
|
|
$ 147.7
|
|
$ 111.3
|
Investing activities
|
|
|
|
(91.9)
|
|
(94.9)
|
Financing activities
|
|
|
|
(20.4)
|
|
(18.7)
|
Effect of exchange rates on cash and cash equivalents
|
|
|
|
(14.3)
|
|
(47.8)
|
Net decrease in cash and cash equivalents
|
|
|
|
$ 21.1
|
|
$ (50.1)
|
(*) The table above may not total due to rounding.
Net cash
provided by
operating activities
Cash provided by operating activities consists of net income adjusted for certain non-cash items, and the effect of changes in working capital and other activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-month Periods Ended
|
|
|
|
|
|
|
September 30,
|
|
Change from 2015 to 2016 (*)
|
|
|
2016
|
|
2015
|
|
in Dollars
|
|
in %
|
|
|
(in millions, except percentages)
|
Net Cash (used in) provided by:
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$ 147.7
|
|
$ 111.3
|
|
$ 36.4
|
|
32.7%
|
(*) 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 $
36.4
million
increase
in net cash provided by operating activities during the
nine
-month period ended
September
30, 2016, as compared to the same period in 2015, was primarily driven by a
$47.7
million
decrease
in accounts receivables
, a $29.5 million decrease in credit card receivables
and a $18.2 million increase in our net income
; which was partially offset by a $
53.0
million decrease in accounts
payables and accrued expenses.
Net cash
used in
investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-month Periods Ended
|
|
|
|
|
|
|
September 30,
|
|
Change from 2015 to 2016 (*)
|
|
|
2016
|
|
2015
|
|
in Dollars
|
|
in %
|
|
|
(in millions, except percentages)
|
Net Cash provided by:
|
|
|
|
|
|
|
|
|
Investing activities
|
|
$ (91.9)
|
|
$ (94.9)
|
|
$ 2.9
|
|
-3.1%
|
(*) 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.
Net cash
used in
investin
g activities in the nine
-month period ended
September
30, 2016 resulted mainly from purchases of investments of $
2,548
.1 million, which was partially offset by proceeds from the sale and maturity of investments of $
2,525.1
million, as part of our financial strategy. We used $
55.6
million in the purchase of property plant and equipment (mainly in our Argentine and Brazilian offices and in information technology in Argentina and Brazil), $7.3 million to fund the acquisitions of Monits S.A. and Axado, and $
6.1
million in advances for property and equipment.
Net cash used in financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-month Periods Ended
|
|
|
|
|
|
|
September 30,
|
|
Change from 2015 to 2016 (*)
|
|
|
2016
|
|
2015
|
|
in Dollars
|
|
in %
|
|
|
(in millions, except percentages)
|
Net Cash used in:
|
|
|
|
|
|
|
|
|
Financing activities
|
|
$ (20.4)
|
|
$ (18.7)
|
|
$ (1.6)
|
|
8.8%
|
(*) 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.
For the nine-month period ended
September
30, 2016, our primary use of cash was to fund $1
7.8
million in cash di
vidends and $6.5
million for the payments on loans payable and other financing.
In addition, we generated $3.9 million proceeds from our loans payable and other financial liabilities.
In the event that we decide to pursue strategic acquisitions in the future, we may
fund them with available cash, third
-
party debt financing, or by raising equity capital, as market conditions allow.
Debt
On June 30, 2014, we issued $330 million of 2.25% convertible senior notes due 2019 (the “Notes”). The Notes are unsecured, unsubordinated obligations of our Company, which pay interest in cash semi-annually, on January 1 and July 1, at a rate of 2.25% per annum. The Notes will mature on July 1, 2019 unless earlier repurchased or converted in accordance with their terms prior to such date. The Notes may be converted, under the conditions specified below, based on an initial conversion rate of 7.9353 shares of common stock per $1,000 principal amount of Notes (equivalent to an initial conversion price of approximately $126.02 per share of common stock), subject to adjustment as described in the indenture governing the Notes.
Holders may convert their notes at their option at any time prior to January 1, 2019 only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on September 30, 2014 (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events. On or after January 1, 2019 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their notes at any time, regardless of the foregoing circumstances.
The price of our common stock was greater than 130% of the conversion price for at least 20 trading days during the 30 consecutive trading days ending on the last trading day of our fiscal quarter ended September 30, 2016. Therefore, as of September 30, 2016, the conversion threshold had been met and the Notes became convertible at the holders’ option beginning on October 1, 2016 and ending December 31, 2016. The determination of whether or not the Notes are convertible must continue to be performed on a quarterly basis.
As of the date of issuance of
this report
, none of the holders had requ
ested conversion of the Notes.
The total estimated fair value of the Notes was
$511.9
million
and
$364.
7 million
as of September 30, 2016 and December 31, 2015, respectively. The fair value was determined based on the closing trading price per
$100
of the Notes as of the last day of trading for the period.
Based on the $
185.0
closing price of
the Company’s
common stock on September 30, 2016, the if-converted value of
the
Notes exceeded their principal amount by approximately
$154.4
million
.
Capped
C
all
T
ransactions
The net proceeds from the Notes were approximately $321.7 million after considering the transaction costs in an amount of $8.3 million. In connection with the issuance of the Notes, we paid approximately $19.7 million to enter into capped call transactions with respect to its common stock (the “Capped Call Transactions”), with certain financial institutions. The Capped Call Transactions are expected generally to reduce the potential dilution upon conversion of the Convertible Notes in the event that the market price of our common stock is greater than the strike price of the Capped Call Transactions, initially set at $126.02 per common share, which corresponds to the initial conversion price of the Notes and is subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of the Notes, and have a cap price of approximately $155.
78
per common share. Therefore, as a result
of executing the Capped Call Transactions, we will reduce our exposure to potential dilution once the market price of its common shares exceeds the strike price of $126.02 and up to a ca
p price of approximately $155.78
per common share. The Capped Call Transactions allow us to receive shares of our common stock and/or cash related to the excess conversion value that we would pay to the holders of the Notes upon conversion, up to the above mentioned cap price.
Office building acquisition agreement
s
in Caracas
During the third quarter of 2015, we obtained (through our
Venezuelan
subsidiary) a mortgage loan from Banco del Caribe, C.A. Banco Universal to fund a portion of the acquisition of five offices under construction in Caracas, Venezuela
,
of BsF $1,000 million
to be paid in monthly installments over five
years and which bears a fixed interest rate of 24% per annum.
The mortgage was constituted over the offices acquired up to an amount of BsF $2,000 million to cover the
amo
unts due to the bank. As of September
30, 2016, the amount due in relation to the mentioned
mortgage loan amounts to BsF $793
million, or $
1
million.
Cash Dividends
In each of February, April, July and November of 2015, our
b
oard of
d
irectors declared quarterly cash dividends of
$4
.5
million
(or
$0.103
per share on our outstanding shares of common stock). The dividends were paid on
April 16, July 16,
October 16, 2015
and
January 15, 2016
to stockholders of record as of the close of business on
March 31, June 30, September 30, and
December 31, 2015
, respectively
.
On February 19, 2016,
May 4, 2016 and August 2, 2016, our
board of directors approved a quarterly cash dividend of
$6.
6
million
(or
$0.150
per share) on our
outstanding
shares of common stock. The first quarterly dividend
was
paid
on
April 15, 2016
to stockholders of record as of the close of business on
March 31, 2016.
The second
quarterly
cash
dividend
was paid
on
July
15
, 2016
to stockholders of record as of the close of business on
June 30, 2016.
The third
quarterly
cash dividend was paid
on
October
14
, 2016
to stockholders of record as of the close of business on
September 30, 2016.
On November 1, 2016,
our board of directors
approved a quarterly cash dividend of
$6,6 million
(or
$0.150
per share) on our
outstanding
shares of common stock. This quarterly dividend is payable on
January
16, 201
7
to stockholders of record as of the close of business on
December 31
, 2016.
We currently expect to continue paying comparable cash dividends on a quarterly basis. However, any future determination as to the declaration of dividends on our common stock will be made at the discretion of our board of directors and will depend on our earnings, operating and financial condition, capital requirements and other factors deemed relevant by our board of directors, including the applicable requirements of the Delaware General Corporation Law
.
Capital expenditures
Our capital expenditures (comprised by our payments for property and equipment, intangible assets and acquired business) for the
nine
-month periods ended
September 30, 2016 and 2015
amounted to $69.0 million and $83.4
million, respectively.
During the nine
-month
period ended September 30, 2016 we invested $27.6 million in our Brazilian, Colombian and Argentinean offices, and $17.5 million in Information Technology in Argentina and Brazil.
During 2015, our Venezuelan subsidiary acquired five offices under construction, in Caracas, Venezuela for a total purchase price of BsF $4,645.6 million, or $23.4 million, for investment purposes and included in non-current other assets. Our Venezuelan subsidiary paid the purchase price in BsF, and funded the transaction with funds from its own operations and with a mortgage loan amounting to BsF $1,000 million to be paid in monthly installments over five years, and included in current and non-current liabilities
under the caption “Loans payable and other financial liabilities”. The offices
are expected to be completed
in
August 2017.
During April 2016, our Venezuelan subsidiary acquired
commercial properties
in process of construction for a total of
135.81
square meters, in Caracas, Venezuela for a total purchase price of approximately
BF$1,359 million, or $3.7 million
, for investment purposes and included in non-current other assets. The Venezuelan subsidiary paid the purchase price in Bolivares Fuertes.
According to the purchase agreements, t
he
commercial properties
will be delivered
in September 2017
.
On February 12, 2016, through
our
subsidiaries Meli Participaciones S.L. and Marketplace Investment LLC,
we acquired 100% of the issued and outstanding shares of capital stock
of Monits S.A., a software development company located a
nd organized under the laws of
Buenos Aires, Argentina
, for the purchase price of $3.1 million,
measured at its fair value.
We believe this acquisition will allow us to enhance our software development capabilities.
On June 1
, 2016, through
our
subs
idiary Ebazar.com.br Ltda., we
acquired 100% of the issued and outstanding shares of capital stock of
Axado,
a company that develops
logistic
software for the e-commerce industry in Brazil
, for the purchase price of $5.5 million,
measured at its fair value.
We believe this acquisition will allow us to enhance our software development capabilities on Transportation Management System and will contribute to our shipping business performance.
In
August 2016, our Argentine subsidiary acquired 6,057 square meters and 50 parking spaces, in an office building in process of construction located in Buenos Aires, for a total amount of Argentine pesos $481
.4
million or approx
imately $31.4
million, plus VAT. The price of the transactio
n is payable as follows: i) $9.4
million was paid at the date of signing the purchase agreement and recorded as an advance for fixed assets within non-current Other assets, ii) $19.0 million will be paid in 14 monthly installments as from July 2017, and (iii) 3.0 million will be paid once the properties are delivered by the seller. According to the purchase agreement, 2,224 square meters will be delivered in September 2017 and 3,833 square meters will be delivered in September 2018.
In connection with this acquisition, the Company may be granted with certain sales tax reliefs upon receiving definitive approval of the project from the City of Buenos Aires government.
We are permanently increasing the level of investment on hardware and software licenses necessary to improve and update the technology of our platform and cost of computer software developed internally. We anticipate continued investments in capital expenditures related to information technology in the future as we strive to maintain our position in the Latin American e-commerce market.
We believe that our existing cash and cash equivalents, including the sale of credit card receivables and cash generated from operations will be sufficient to fund our operating activities, property and equipment expenditures and to pay or repay obligations going forward.
Off-balance sheet arrangements
As of
September
30
, 201
6
, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources.
Recently issued accounting pronouncements
On March 8, 2016 the FASB issued the ASU 2016-04.
When an entity sells a prepaid stored-value product (such as gift cards, telecommunication cards, and traveler’s checks), it recognizes a financial liability for its obligation to provide the product holder with the ability to purchase goods or services at a third-party merchant. When a prepaid stored-value product goes unused wholly or
partially
for an indefinite time period, the amount that remains on the product is referred to as breakage. There currently is diversity in the methodology used to recognize breakage. Subtopic 405-20 includes derecognition guidance for both financial liabilities and nonfinancial liabilities, and Topic 606, Revenue from Contracts with Customers, includes authoritative breakage guidance but excludes financial liabilities.
The amendments in this Update provide a narrow scope exception to the guidance in Subtopic 405-20 to require that breakage be accounted for consistent with the breakage guidance in Topic 606.
The new standard is effective for fiscal years beginning after December 15, 2017. We are assessing the effects that the adoption of this accounting pronouncement may have on our financial statements.
On March 14, 2016 the FASB issued the ASU 2016-06.
Topic 815 requires that embedded derivatives be separated from the host contract and accounted for separately as derivatives if certain criteria are met, including the “clearly and closely related” criterion. The amendments in this Update clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. The amendments apply to all entities that are issuers of or investors in debt instruments (or hybrid financial instruments that are determined to have a debt host) with embedded call (put) options.
The new standard is effective for fiscal years beginning after December 15, 2017. We are assessing the effects that the adoption of this accounting pronouncement may have on our financial statements
.
On March 17, 2016 the FASB issued the ASU 2016-08.
This update releases Accountin
g Standards Update No. 2016-08 -
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). The amendments in this Update will clarify the implementation guidance on principal versus agent considerations.
The new standard is effective for fiscal years beginning after December 15, 2017. We are assessing the effects that the adoption of this accounting pronouncement may have on our financial statements.
On March 30, 2016 the FASB issued the ASU 2016-09.
The Board is issuing this Update as part of its initiative to reduce complexity in accounting standards. The areas for simplification in this Update involve several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or
liabilities, and classification on the statement of cash flows. Some of the areas for simplification apply only to nonpublic entities. In addition, the amendments in this Update eliminate the guidance in Topic 718 that was indefinitely deferred shortly after the issuance of FASB Statement No. 123 (revised 2004), Share-Based Payment.
This Accounting Standards Update is the final version of Proposed Accounting Standards Update—Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which has been deleted.
The new standard is effective for fiscal years beginning after December 15, 2016. We are assessing the effects that the adoption of this accounting pronouncement may have on our financial statements.
On April 14, 2016 the FASB issued the ASU 2016-10.
This update releases Accounting Standards Update No. 2016-10—Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. This Update clarifies guidance related to identifying performance obligations and licensing implementation guidance contained in the new revenue recognition standard.
The Update includes targeted improvements based on input the Board received from the Transition Resource Group for Revenue Recognition and other stakeholders. The Update seeks to proactively address areas in which diversity in practice potentially could arise, as well as to reduce the cost and complexity of applying certain aspects of the guidance both at implementation and on an ongoing basis
. The new standard is effective for fiscal years beginning after December 15, 2016. We are assessing the effects that the adoption of this accounting pronouncement may have on our financial statements.
On May 3, 2016 the FASB issued the ASU 2016-11 on Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815). The amendments in this Update eliminate some guidance related to revenue recognition and derivatives.
The new standard is effective for fiscal years beginning after December 15, 2016. We are assessing the effects that the adoption of this accounting pronouncement may have on our financial statements.
On May 9, 2016 the FASB issued the ASU 2016-12 “Revenue from Contracts with Customers (Topic 606)—Narrow-Scope Improvements and Practical Expedients”. The amendments in this update address narrow-scope improvements to the guidance on collectability, noncash consideration, and completed contracts at transition. Additionally, the amendments in this update provide a practical expedient for contract modifications at transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers.
The new standard is effective for fiscal years beginning after December 15, 2016. We are assessing the effects that the adoption of this accounting pronouncement may have on our financial statements.
On June 16, 2016 the FASB issued the ASU 2016-13 “Financial Instruments-Credit Losses (Topic 326): Measurement of credit losses on financial instruments”. This update
amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities.
For assets held at amortized cost basis,
this update
eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect
it’s
current estimate of all expected credit losses. For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP, however
this topic
will require that credit losses be presented as an allowance rather than as a write-down.
The new standard is effective for fiscal years beginning after December 15, 2019. We are
assessing the effects that the adoption of this accounting pronouncement may have on
our
financial statements
.
On August 26, 2016 the FASB issued the “
ASU 2016-15—Statement of cash flows (Topic 230): Classification of certain cash receipts and cash payments
”.
This
update
addresses the following e
ight specific cash flow issues: d
ebt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (COLIs) (including bank-owned life insurance policies (BOLIs)); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle.
The new standard is effective for fiscal years
beginning after December 15, 201
7. We are
assessing the effects that the adoption of this accounting pronouncement may have on
our
financial statements
.
On October 24, 2016 the FASB issued the “
ASU 2016-1
6
—
Income Taxes (Topic 740):
Intra-Entity Transfers of Assets Other Than Inventory
”. This update eliminates
the exception that prohibits recognizing current and deferred income tax consequences for an intra-entity asset transfer until the asset or assets have been sold to an outside party. Consequently, this update
requires to
recognize the current and deferred income tax consequences of an intra-entity asset transfer when the transfer occurs.
The new standard is effective for fiscal years
beginning after December 15, 201
7. We are
assessing the effects that the adoption of this accounting pronouncement may have on
our
financial statements
.
Non-GAAP Financial Measures
To supplement our condensed consolidated financial statements presented in accordance with
U.S.
GAAP, we use free cash flows and foreign exchange
(“FX”) neutral measures,
adjusted net income before income / asset tax, adjusted income / asset tax, adjusted net income, adjusted blended tax rate and adjusted earnings per share
as non-GAAP measures.
These non-GAAP measures should not be considered in isolation or as a substitute for measures of performance prepared in accordance with
U.S.
GAAP and may be different from non-GAAP measures used by other companies. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. Non-GAAP measures have limitations in that they do not reflect all of the amounts associated with our results of operations as determined in accordance with
U.S.
GAAP. These non-GAAP financial measures should only be used to evaluate our results of operations in conjunction with the most comparable
U.S.
GAAP financial measures.
Reconciliation of these non-GAAP financial measures to the most comparable
U.S.
GAAP financial measures can be found in the tables included in this quarterly report.
Non-GAAP financial measures are provided to enhance investors’ overall understanding of our current financial performance. Specifically, we believe that f
ree cash flow provides useful information to both management and investors by excluding payments f
or the acquisition of property and
equipment, of intangible assets
and of b
usinesses net of cash acquired,
that may not be indicative of our core operating results. In addition, we report free cash flows to investors because we believe that the inclusion of this measure provides consistency in our financial reporting.
Free cash flow represents cash from operating activities less payment
and advances
for the acquisition of property
and
equipment
net of financial liabilities,
intangible assets
and acquired businesses net of cash acquired. We consider free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by our operations after the purchases of property and equipment, of intangible assets and of acquired businesses net of cash acquired. A limitation of the utility of free cash flow as a measure of financial performance is that it does not represent the total increase or decrease in our cash balance for the period.
The following table shows a
r
econciliation of Operating Cash Flows to Free Cash Flows
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-month Periods Ended
|
|
Three-month Periods Ended
|
|
|
|
|
September 30,
|
|
September 30,
|
(In millions)
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash provided by Operating Activities
|
|
|
|
$ 147.7
|
|
$ 111.3
|
|
$ 102.8
|
|
$ 14.4
|
Payment for acquired business, net of cash acquired
|
|
|
|
(7.3)
|
|
(45.0)
|
|
-
|
|
-
|
Advance for property and equipment
|
|
|
|
(6.1)
|
|
(17.8)
|
|
(1.2)
|
|
(10.3)
|
Financial liabilities for acquisition of property and equipment
|
|
-
|
|
5.0
|
|
-
|
|
5.0
|
Purchase of intangible assets
|
|
|
|
(0.0)
|
|
(1.5)
|
|
(0.0)
|
|
(0.1)
|
Purchase of property and equipment
|
|
|
|
(55.5)
|
|
(19.1)
|
|
(22.9)
|
|
(2.8)
|
Free cash flow
|
|
|
|
78.7
|
|
32.9
|
|
78.7
|
|
6.3
|
(*) The table above may not total due to rounding.
W
e believe
that
reconciliation of FX neutral measures to the most directly comparable GAAP measure provides investors an overall understanding of our current financial performance and its prospects for the future. Specifically, we believe these non-GAAP measures provide useful information to both management and investors by excluding the foreign currency exchange rate impact that may not be indicative of our core operating results and business outlook.
The
FX neutral measures were
calculated by using the average monthly exchange rates for each month during 201
5
and applying them to the corresponding months in 201
6
,
so as to calculate what our results would have been had exchange rates remained stable from one year to the next.
The table below excludes intercompany allocation FX effects. Finally, these measures do not include any other macroeconomic effect such as local currency inflation effects, the impact on impairment calculations or any price adjustment to compensate local currency inflation or devaluations.
The following table se
ts forth the FX neutral measures
related
to our reported
results of the
operations for the
nine and three-month
period
s ended September 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-months Periods Ended
September 30, (*)
|
|
|
|
As reported
|
|
FX Neutral Measures
|
(In millions, except percentages)
|
|
2016
|
|
|
2015
|
|
Percentage Change
|
|
2016
|
|
2015
|
|
Percentage Change
|
Net revenues
|
|
$ 588.1
|
|
|
$ 471.1
|
|
24.9%
|
|
$ 805.9
|
|
$ 471.1
|
|
71.1%
|
Cost of net revenues
|
|
(214.0)
|
|
|
(151.8)
|
|
40.9%
|
|
(284.4)
|
|
(151.8)
|
|
87.3%
|
Gross profit
|
|
374.1
|
|
|
319.2
|
|
17.2%
|
|
521.5
|
|
319.2
|
|
63.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
(244.0)
|
|
|
(197.5)
|
|
23.6%
|
|
(338.0)
|
|
(197.5)
|
|
71.1%
|
Impairment of Long-Lived Assets
|
|
(13.7)
|
|
|
(16.2)
|
|
-15.5%
|
|
(13.7)
|
|
(16.2)
|
|
-15.3%
|
Total operating expenses
|
|
(257.7)
|
|
|
(213.7)
|
|
20.6%
|
|
(351.7)
|
|
(213.7)
|
|
64.6%
|
Income from operations
|
|
116.4
|
|
|
105.5
|
|
10.3%
|
|
169.8
|
|
105.5
|
|
60.9%
|
(*) The table above may not total due to rounding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-months Periods Ended
September 30, (*)
|
|
|
As reported
|
|
FX Neutral Measures
|
(In millions, except percentages)
|
|
2016
|
|
2015
|
|
Percentage Change
|
|
2016
|
|
2015
|
|
Percentage Change
|
Net revenues
|
|
$ 230.8
|
|
$ 168.6
|
|
36.9%
|
|
280.5
|
|
$ 168.6
|
|
66.3%
|
Cost of net revenues
|
|
(85.2)
|
|
(56.8)
|
|
50.0%
|
|
(102.5)
|
|
(56.8)
|
|
80.5%
|
Gross profit
|
|
145.6
|
|
111.8
|
|
30.2%
|
|
178.0
|
|
111.8
|
|
59.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
(91.9)
|
|
(66.5)
|
|
38.2%
|
|
(117.9)
|
|
(66.5)
|
|
77.2%
|
Total operating expenses
|
|
(91.9)
|
|
(66.5)
|
|
38.2%
|
|
(117.9)
|
|
(66.5)
|
|
77.2%
|
Income from operations
|
|
53.7
|
|
45.3
|
|
18.6%
|
|
60.0
|
|
45.3
|
|
32.6%
|
Moreover, we believe that adjusted net income before income / asset tax, adjusted income / asset tax, adjusted net income, adjusted blended tax rate and adjusted earnings per share provide useful information to both management and investors by excluding the foreign exchange loss attributable to the devaluation in Venezuela and the impairment of long-lived assets, because it may not be indicative of the ordinary course of our business. In addition, we report adjusted net income before income / asset tax, adjusted income / asset tax, adjusted net income, adjusted blended tax rate and adjusted earnings per share to investors because we believe that the inclusion of these measures provides consistency in the Company’s financial reporting and because these financial measures provide useful information to management and investors about what our adjusted net income before income / asset tax, adjusted income / asset tax, adjusted net income, adjusted blended tax rate and adjusted earnings per share, would have been, had the foreign exchange loss in Venezuela and the impairment of long-lived assets not occurred. A limitation of the utility of adjusted net income before income / asset tax, adjusted income / asset tax, adjusted net income, adjusted blended tax rate and adjusted earnings per share, as measures of financial performance, is that these measures do not represent the total foreign exchange effect in our Income Statement for the
nine and
three-month periods
ended
September
3
0
, 201
6
and 201
5
:
|
Nine-month periods ended (**)
|
|
Three-month periods ended (**)
|
|
September 30, 2016
|
September 30, 2015
|
|
September 30, 2016
|
|
September 30, 2015
|
Net income before income / asset tax expense
|
$
|
117.7
|
$
|
97.5
|
|
$
|
52.3
|
|
$
|
47.6
|
|
Devaluation loss in Venezuela
|
|
7.4
|
|
20.7
|
|
|
0.2
|
|
|
0.1
|
|
Impairment of long-lived assets in Venezuela
|
|
13.7
|
|
16.2
|
|
|
—
|
|
|
—
|
|
Adjusted Net income before income / asset tax expense
|
$
|
138.8
|
$
|
134.4
|
|
$
|
52.5
|
|
$
|
47.7
|
|
Income and asset tax expense
|
$
|
(32.7)
|
$
|
(30.6)
|
|
$
|
(13.4)
|
|
$
|
(2.0)
|
|
Income tax effect on devaluation loss in Venezuela
|
|
(4.8)
|
|
(3.8)
|
|
|
—
|
|
|
—
|
(1)
|
Adjusted Income and asset tax
|
$
|
(37.5)
|
$
|
(34.4)
|
|
$
|
(13.4)
|
|
$
|
(2.0)
|
|
Net Income
|
$
|
85.0
|
$
|
66.8
|
|
$
|
38.9
|
|
$
|
45.6
|
|
Devaluation loss in Venezuela
|
|
7.4
|
|
20.7
|
|
|
0.2
|
|
|
0.1
|
|
Impairment of long-lived assets in Venezuela
|
|
13.7
|
|
16.2
|
|
|
—
|
|
|
—
|
|
Income tax effect on devaluation loss in Venezuela
|
|
(4.8)
|
|
(3.8)
|
|
|
—
|
|
|
—
|
(1)
|
Adjusted Net Income
|
$
|
101.3
|
$
|
100.0
|
|
$
|
39.1
|
|
$
|
45.7
|
|
Weighted average of outstanding common shares
|
|
44,157,215
|
|
44,155,303
|
|
|
44,157,341
|
|
|
44,155,830
|
|
Adjusted Earnings per share
|
$
|
2.29
|
$
|
2.26
|
|
$
|
0.89
|
|
$
|
1.03
|
|
Adjusted Blended Tax Rate (2)
|
|
27.0%
|
|
25.6%
|
|
|
25.5%
|
|
|
4.1%
|
|
(**)
Stated in millions of U.S. dollars, except for share dat
a.
The table above may not total due to rounding.
|
|
|
|
|
(1)
|
|
Deferred i
ncome tax charge related to the Venezuela devaluation under local tax norms.
|
|
(2)
|
|
Adjusted Income and asset tax over Adjusted Net income before income / asset tax expense.
|
It
em 3 — Qualitative and Quantitative Disclosure About Market Risk
We are exposed to market risks arising from our business operations. These market risks arise m
ainly from the possibility that
changes in interest rates and the U.S. dollar exchange rate with local currencies, particularly the Brazilian
r
eal and Argentine
p
eso due to Brazil’s and Argentine’s respective share of our revenues, may affect the value of our financial assets and liabilities.
Foreign currencies
As of
September 30
, 201
6
, we hold cash and cash equivalents in local currencies in our subsidiaries, and have receivables denominated in local currencies in all of our operations. Our subsidiaries generate revenues and incur most of their expenses in
the respective
local currencies
of the countries in which they operate
. As a result, our subsidiaries use their local currency as their functional currency, except for our Venezuelan subsidiaries
,
which use the U.S. dollar as if it is the functional currency due to Venezuela being a highly inflationary
environment
.
As of
September 30
, 201
6
, the total cash and cash equivalents denominated in foreign currencies totaled $
133.7
million, short-term investments denominated in foreign currencies totaled $
127.3
million and accounts receivable and credit cards receivables in
foreign currencies totaled $257.9
million. As of
September 30
, 201
6
, we had no long-term investments denominated in foreign currencies. To manage exchange rate risk, our treasury policy is to transfer most cash and
cash equivalents in excess of working capital requirements into U.S. dollar-denominated accounts in the United States. As of
September 30
, 201
6
, our U.S. dollar-denominated cash and cash equivalents and short-term investments totaled $
210.6
million and our U.S. dollar-denominated l
ong-term investments totaled $155.2
million.
For the
nine
-month period ended
September 30
, 201
6
,
we had a consolidated loss on foreign currency of $5.1
million
primarily
as a result of a $7.4 million loss arising from the U.S. Dollar revaluation over our Bolivares Fuertes net asset position in Venezuela and a $3.7 million loss arising from the Mexican Peso devaluation over our U.S. Dollar net liability position in Mexico,
partially offset by a $6.5 million gain arising from the Argentine Peso devaluation over our U.S. Dollar net asset position in Argentina and a $0.8 million gain arising from the Reais revaluation over our U.S. Dollar net liability position in Brazil
If the U.S. dollar weakens against foreign currencies, the translation of these foreign-currency-denominated transactions will result in increased net revenues, operating expenses, and net income while the re-measurement of our net asset position in U.S. dollars will have a negative impact in our Statement of Income. Similarly, our net revenues, operating expenses and net income will decrease if the U.S. dollar strengthens against foreign currencies, while the re-measurement of our net asset position in U.S. dollars will have a positive impact in our Statement of Income.
The following table sets forth the percentage of consolidated net revenues by segment for the
nine and
three-month periods ended
September
3
0
, 201
6
and 201
5
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-months Periods Ended
|
|
Three-month Periods Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
(% of total consolidated net revenues) (*)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Brazil
|
|
53.0
|
%
|
|
45.8
|
%
|
|
56.7
|
%
|
|
44.0
|
%
|
|
Argentina
|
|
31.6
|
|
|
36.4
|
|
|
30.3
|
|
|
39.9
|
|
|
Mexico
|
|
5.8
|
|
|
6.2
|
|
|
5.1
|
|
|
5.9
|
|
|
Venezuela
|
|
4.5
|
|
|
6.1
|
|
|
3.0
|
|
|
5.3
|
|
|
Other Countries
|
|
5.1
|
|
|
5.5
|
|
|
4.8
|
|
|
5.0
|
|
|
(*)
Percentages have been calculated using
whole
-dollar amounts
.
Foreign Currency Sensitivity Analysis
The table below shows the impact on our net revenues, expenses, other expenses and income tax, net income and equity for a positive and a negative 10% fluctuation on all the foreign currencies to which we are exposed to for the
nine-month period
ended
September 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Sensitivity Analysis (*)
|
(In millions)
|
|
|
-10%
|
Actual
|
+10%
|
|
|
|
(1)
|
|
(2)
|
Net revenues
|
|
|
$ 653.4
|
$ 588.1
|
$ 534.7
|
Expenses
|
|
|
(523.8)
|
(471.7)
|
(429.2)
|
Income from operations
|
|
|
129.6
|
116.4
|
105.5
|
|
|
|
|
|
|
Other expenses and income tax related to P&L items
|
|
|
(28.2)
|
(26.3)
|
(24.8)
|
|
|
|
|
|
|
Foreign Currency impact related to the remeasurement of our Net Asset position
|
|
|
(5.6)
|
(5.1)
|
(4.6)
|
Net income
|
|
|
95.8
|
85.0
|
76.2
|
|
|
|
|
|
|
Total Shareholders' Equity
|
|
|
$ 352.9
|
$ 395.0
|
$ 375.8
|
|
(1)
|
|
Appreciation of the subsidiaries local currency against U.S. Dollar
|
|
(2)
|
|
Depreciation of the subsidiaries local currency against U.S. Dollar
|
(*) The table above may not total due to rounding.
The table above shows an increase in our net income w
hen the U.S. dollar weakens against foreign currencies because the re-measurement of our net asset position in U.S. dollars has a lesser impact than the increase in our net revenues, operating expenses, and other expenses, net and income tax lines related to the translation effect. Similarly, the table above shows a decrease in our net income when the U.S. dollar strengthens against foreign currencies because the re-measurement of our net asset position in U.S. dollars has a lesser impact than the decrease in our net revenues, operating expenses, and other expenses, net and income tax lines related to the translation effect.
D
uring the
nine and three-month period
ended
September 30
, 201
6, we did not enter
into any such hedging transactions.
Venezuelan Segment
In accordance with U.S. GAAP, we have
classified
our Venezuelan operations
as
highly inflationary
since
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.
As of
September
3
0
, 201
6
, monetary assets and liabilities in BsF were re-measured to the U.S. dollar using the
SIMADI
closing exchange rate of
659
BsF per U.S. dollar
.
The following table sets forth the assets, l
iabilities and net assets of our
Venezuelan subsidiaries, before intercompany eliminations of a net liability of
$
13.4
million
and $
24.6
million
, as of
September
3
0
, 201
6 and December
31, 201
5, respectively
and net revenues for the
nine
-month periods ended
September
3
0
, 201
6
and 201
5
:
|
|
|
|
|
|
|
|
|
|
|
|
Nine-month Periods Ended September 30,
|
|
|
2016
|
|
2015
|
Venezuelan operations
|
|
(In millions)
|
Net Revenues
|
|
$ 26.5
|
|
$ 28.5
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
|
(In millions)
|
Assets
|
|
56.6
|
|
65.4
|
Liabilities
|
|
(16.9)
|
|
(36.3)
|
Net Assets
|
|
$ 39.7
|
|
$ 29.1
|
As of
September
3
0
, 201
6
, the net assets of our Venezuelan subsidiaries amount
ed
to approximately
10
.
0% of our
consolidated net assets, and cash and investments of our Venezuelan subsidiaries held in local currency in Venez
uela amounted to approximately 1.0
% of our
consolidated cash and investments.
O
n Februa
ry
10, 2015, the Venezuelan government issued a decree that unified the two previous foreign exchange systems “SICAD 1 and SICAD 2” into a new single system denominated SICAD, with an initial public foreign exchange
rate
of
12
BsF per U.S. dollar. The SICAD auction process remains available only to obtain foreign currency to pay for a limited list of goods considered to be of high priority by the Venezuelan government, which does not include those relating to the Company’s business. In the same decree the Venezuelan government created the “Sistema Marginal de Divisas” (“SIMADI”), a new foreign exchange system that is separate from SICAD, which publishes a foreign exchange rate from the BCV on a daily basis.
In light of the disappearance of SICAD 2, and we inability to gain access to U.S. dollars through the new single system under SICAD, we started requesting and was granted U.S. dollars through SIMADI. As a result, we from that moment expected to settle its transactions through SIMADI and concluded that the SIMADI exchange rate should be used to re-measure its bolivar-denominated monetary assets and liabilities and to re-measure the revenues and expenses of the Venezuelan subsidiaries effective as of March 31, 2015. In connection with this re-measurement, we reco
rded a foreign exchange loss of $20.4
million during the first quarter of 2015.
Considering this change in facts and circumstances and the lower U.S. dollar-equivalent cash flows then expected from the Venezuelan business, we reviewed
our
long-lived assets, goodwill and intangible assets with indefinite useful life for impairment and concluded that the carrying value of certain real estate investments in Venezuela as of March 31, 2015 would not be fully recoverable. As a result, we recorded an impai
rment of long-lived assets of $
16.2 million on March 31, 2015. The carrying amount
was
adjusted to its estimated fair value as of March 31, 2015, by using the market approach, and conside
ring prices for similar assets.
As of September 30, 2016, the SIMADI exchange rate was
658.9
BsF per U.S. dollar
.
On March 9, 2016 the
Central Bank of Venezuela (“
BCV
”)
issued the Exchange Agreement No.35, which
is effective as from
March 10, 2016. The agreement established a “protected” exchange rate (
“
DIPRO
”
) for certain transactions,
such as but not limited to:
imports of goods of the food and health sectors, as well as supplies associated with the production of said sectors; expenses relating to health treatments, sports, culture, scientific research, and other urgent matters defined by the exchange regulations. All foreign currency transactions not expressly provided in Exchange Agreement No.35 will be processed on the alternate foreign currency markets governed by the exchange regulations, at the floating supplementary market exchange rate (
“
DICOM
”
).
Additionally, the agreement established that the alternate foreign currency markets referred to in Exchange Agreement No.33 of February 10, 2015 (SIMADI) will continue to operate until replaced by others. As of the date of issuance of these interim condensed consolidated financial statements, the SIMADI has not been replaced and for that reason, we continued using SIMADI. From March 31, 2016 through June 30, 2016, the SIMADI exchange rate increased from 273 BsF per U.S. dollar to 628 BsF per U.S. dollar, a 130% increase in the exchange rate.
As a
consequence of the local currency devaluation
, the Company recorded a foreign exchange loss of
$
4.9
million during the
second
quarter of 201
6
.
Considering
the
significant devaluation and the lower U.S. dollar-equivalent cash flows then expected from the Venezuelan business,
we
reviewed
our
long-lived assets (including non-current other assets), goodwill and intangible assets with indefinite useful life for impairment and concluded that the carrying value of certain real estate investments in Venezuela as of June 30, 2016 would not be fully recoverable. As a result, on June 30, 2016,
we
recorded an impairment
of offices under construction included within non-current other assets
of $13.7 million. The carrying amount
of offices under construction
was adjusted to its estimated fair value of approximately $12.5 million as of June 30, 2016, by using the market approach, and considering prices for similar assets.
Until 2010 we were able to obtain U.S. dollars for any purpose, including dividend distributions, using alternative mechanisms other than through the Commission for the Administration of Foreign Exchange Control (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. Our Venezuelan subsidiaries have not requested authorization since 2012 to acquire U.S. dollars to make dividend distributions and we have not distributed dividends from our Venezuelan subsidiaries since 2011
.
Although the current mechanisms available to obtain U.S. dollars for dividend distributions to shareholders outside of Venezuela imply increased restrictions, we do not expect that the current restrictions to purchase U.S. dollars will have a significant adverse effect on our business
strategy
with regard to the investment in Venezuela.
In order to assist investors in their overall understanding of the impact on our Venezuelan segment reporting, we developed a scenario that considers a 100
% additional devaluation over the SIMADI rate as of the date of this report, applied for the period starting on
January 1, 2016 to September 30, 2016
.
These disclosures may help investors to project sensitivities, on segment information captions, to devaluations of whatever order of magnitude they choose by simple arithmetic calculations. The information is just a scenario and does not represent a forward-looking statement about our expectations or projections related to future events in Venezuela. The investors and other readers or users of the financial information presented in this caption are cautioned not to place undue reliance on this scenario. This information is not a guarantee of future events.
The information disclosed below does not include any inflation effect, nor the devaluation impact related to the assumed devaluation or any other effect derived from the assumed devaluation
, such as further impairments of long-lived assets
. The information below should not be considered in isolation or as a substitute for measures of performance prepared in accordance with
U.S.
GAAP. In addition, this information is not based on any comprehensive set of accounting rules or principles.
The evolution of the Venezuelan economy and any future governmental interventions in the Venezuelan economy are beyond our ability to control or predict. New events could happen in the future in Venezuela and it is not possible for management to predict all such events, nor can it assess the impact of all such events on our Venezuelan business.
The table below provides specific sensitivity information of our Venezuelan segment reporting for the period indicated assuming
approximately a 100% additional devaluation over the SIMADI rate as of the date of this report, applied for the period starting on
January 1, 2016 to September 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
Nine-month period ended
September 30, 2016
|
|
|
|
Three-month period ended September 30, 2016
|
|
Actual (*)(***)
|
|
Sensitivity (**)(***)
|
|
|
|
Actual (*)(***)
|
|
Sensitivity (**)(***)
|
|
(In million)
|
|
|
|
(In million)
|
Net revenues
|
$26.5
|
|
$7.8
|
|
|
|
$6.9
|
|
$3.4
|
Direct costs
|
(12.7)
|
|
(6.4)
|
|
|
|
(3.5)
|
|
(2.3)
|
Direct contribution
|
$13.8
|
|
$1.4
|
|
|
|
$3.4
|
|
$1.1
|
Direct Contribution Margin before impairment %
|
52.0%
|
|
17.9%
|
|
|
|
49.7%
|
|
32.4%
|
Non-current other assets impairment
|
$(13.7)
|
|
$(13.7)
|
|
|
|
$ -
|
|
$ -
|
Direct Contribution Margin after impairment %
|
0.0
|
|
$(12.3)
|
|
|
|
$3.4
|
|
$1.1
|
|
0.2%
|
|
-157.9%
|
|
|
|
49.7%
|
|
32.4%
|
(*) As reported.
(**) Computing a hypothetical devaluation of the Venezuelan segment from January 1 to
September 30
, 2016
assuming an exchange rate of 1,317.77 BsF per U.S. dollar (100
% of the exchange rate as of
September 30
, 2016).
(***) The table above may not total due to rounding.
Despite the continued uncertainty and restrictions relating to foreign currency exchange in Venezuela as described above, we believe that our underlying business in that country is competitively well-positioned and continues to exhibit solid growth, in terms of units sold, even while economic conditions in the Venezuelan economy remain difficult. As economic conditions in that country improve, we expect that our business in Venezuela will benefit accordingly. Although during the first half of 2016, we experienced a strong devaluation of our business in Venezuela, we cannot assure you that the BsF will not experience further devaluations or that the Venezuelan government will not default on its obligations to creditors in the future, which may be significant and could have a material negative impact on our future financial results of our Venezuela segment and value of our bolivar denominated net assets. However, for the reasons stated at the beginning of this paragraph, we remain strongly committed to our business and investment in Venezuela.
Argentine Segment
During December 2015 the Argentine peso exchange rate increased by approximately 37% against the U.S. dollar, to 13.30 Argentine pesos per U.S. dollar as of December 31, 2015. Due to such increase in the Argentine peso exchange rate against the U.S. dollar, during the fourth quarter of 2015,
we
recognized a foreign exchange gain of $18.2 million
(as a result of having a net asset position in U.S. dollars)
and the reported Other Comprehensive Loss increased by $22.8
million (as a result of having a net asset position in Argentine pesos).
As of
September 30
, 2016
,
the Argentine Peso exchange rate against the U.S. dollar was 1
5
.
3
.
Had a hypothetical devaluation of 10% of the Argentine peso against the U.S. dollar occurred on September 30, 2016, the reported net assets in our Argentine subsidiaries would have decreased by approximately $11.8 million with a related impact on Other Comprehensive Income. Additionally, we would have recorded a foreign exchange gain amounting to approximately $4.4 million in our Argentine subsidiaries.
Brazilian
Segment
During
2015, the
Brazilian
real
exchange rate against the U.S. dollar increased in approximately
44
%, from
2.7
Brazilian Reais
per U.S.dollar as of December 31, 2014
to
3.90
Brazilian Reais
per U.S. dollar
as of December 31, 2015. Due to the abovementioned devaluation, during the
year ended December 31, 2015, the reported Other Comprehensive Loss of the Brazilian segment
increased
in
$9.0
million as a result of having a net asset position in Brazilian Reais; and
we
recognized a foreign exchange gain of
$14.6
million during the same period.
As of
September
30
, 2016
,
the
Brazilian
Reais
exchange rate against the U.S. dollar was
3
.
2
.
Had a hypothetical devaluation of 10% of the Brazilian Reais against the U.S. dollar occurred on September 30, 2016, the reported net assets in our Brazilian subsidiaries would have decreased by approximately $6.7 million with the related impact in Other Comprehensive Income. Additionally, we would have recorded a foreign exchange gain amounting to approximately $0.2 million in our Brazilian subsidiaries.
Interest
Our earnings and cash flows are also affected by changes in interest rates. These changes could have an impact on the interest rates that financial institutions charge us prior to the time we sell our MercadoPago receivables. As of
September
3
0, 2016
, MercadoPago’s funds receivable from customers totaled $
226.8
million. Interest rate fluctuations could also negatively affect certain of our fixed rate and floating rate investments comprised primarily of time deposits, money market funds, investment grade corporate debt secur
ities
and sovereign debt securities. Investments in both fixed rate and floating rate interest earning products carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than predicted if interest rates fall.
Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes. As of
September
3
0
, 201
6
, the average duration of our available for sale securities, defined as the approximate percentage change in price for a 100-basis-point change in yield, was 1.
25
%. If interest rates were to instantaneously increase (decrease) by 100 basis points, the fair market value of our available for sale securities as of
September
3
0
, 201
6
could decrease (increase) by approximately $4.
1
million.
As
of
September
3
0
, 201
6
, our short-term investments amounted to $
283.7
million and our long-term investments amounted to $
155.2
million
. These investments can be readily converted at any time into cash or into securities with a shorter remaining time to maturity. We determine the appropriate classification of our investments at the time of purchase and re-evaluate such designations as of each balance sheet date.
Equity Price Risk
Our board of directors adopted the 2009, 2010, 2011 and 2012 long-term retention plans (the “2009, 2010, 2011 and 2012 LTRPs”, respectively), under which certain eligible employees receive awards (“LTRP Awards”), which are payable as follows:
|
·
|
|
eligible employees will receive a fixed payment equal to 6.25% of his or her LTRP Award under the 2009, 2010, 2011, and/or 2012 LTRP, respectively, once a year for a period of eight years. The 2009 LTRP awards began paying out starting in 2010, the 2010 LTRP Awards starting in 2011, the 2011 LTRP Awards starting in 2012 and the 2012 LTRP Awards starting in 2013(the “2009, 2010, 2011 or 2012 Annual Fixed Payment”,
respectively
); and
|
|
·
|
|
on each date we pay the respective Annual Fixed Payment to an eligible employee, he or she will also receive a payment (the “2009, 2010, 2011 or 2012 Variable Payment”, respectively) equal to the product of (i) 6.25% of the applicable 2009, 2010, 2011 and/or 2012 LTRP Award and (ii) the quotient of (a) divided by (b), where (a), the numerator, equals the Applicable Year Stock Price (as defined below) and (b), the denominator, equals the 2008 (with respect to the 2009 LTRP), 2009 (with respect to the 2010 LTRP), 2010 (with respect to the 2011 LTRP) and 2011 (with respect to the 2012 LTRP) Stock Price, ($13.81, $45.75, $65.41 and $77.77 for the 2009, 2010, 2011 and 2012 LTRP, respectively, which was the average closing price of the Company’s common stock on the NASDAQ Global Market during the final 60 trading days of 2008, 2009, 2010 and 2011, respectively. The “Applicable Year Stock Price” equals the average closing price of the Company’s common stock on the NASDAQ Global Market during the final 60 trading days of the year preceding the applicable payment date.
|
The 2009, 2010, 2011 and 2012 LTRPs are filed as Exhibits 10.01, 10.02, 10.03 and 10.04, respectively, to
our Quarterly Report on Form 10-Q filed with the SEC on August 5, 2016
, and the above description of such LTRPs is qualified in its entirety by reference to such exhibits.
On September 27, 2013, our Board of Directors, upon the recommendation of the compensation committee, approved the 2013 Long Term Retention Plan (the “2013 LTRP”), on March 31, 2014, the Board of Directors, upon the recommendation of the compensation committee, approved the 2014 employee retention plan (the “2014 LTRP”) and on August 4, 2015, the Board of Directors, upon the recommendation of the compensation committee, approved the 2015 employee retention plan (the “2015 LTRP”).
In order to receive an award under the 2013, 2014 and/or 2015 LTRP, each eligible employee must satisfy the performance conditions established by the Board of Directors for such employee. If these conditions are satisfied, the eligible employee will, subject to his or her continued employment as of each applicable payment date, receive the full amount of his or her 2013, 2014 and/or 2015 LTRP award, payable as follows:
|
·
|
|
the eligible
employee
will receive a fixed payment, equal to 8.333% of his or her 2013, 2014 and/or 2015 LTRP bonus once a year for a period of six years starting in March 2014, 2015 and/or 2016 respectively (the “2013, 2014 or 2015 Annual Fixed Payment”, respectively); and
|
|
·
|
|
on each date we pay the Annual Fixed Payment to an eligible employee, he or she will also receive a payment (the “2013, 2014 or 2015 Variable Payment”, respectively)
equal
to the product of (i) 8.333% of the applicable 2013, 2014 and/or 2015 LTRP award and (ii) the quotient of (a) divided by (b), where (a), the numerator, equals the Applicable Year Stock Price (as defined below) and (b), the denominator, equals the 2012 (with respect to the 2013 LTRP), 2013 (with respect to the 2014 LTRP) and 2014 (with respect to the 2015 LTRP) Stock Price,
d
efined as $79.57, $118.48 and
$127.29
for the 2013, 2014 and 2015 LTRP, respectively, which was the average closing price of our common stock on the NASDAQ Global Market during the final 60 trading days of 2012, 2013, 2014 and 2015 respectively. The “Applicable Year Stock Price” shall equal the average closing price of our common stock on the NASDAQ Global Market during the final 60 trading days of the year preceding the applicable payment date.
|
The 2013, 2014 and 2015 LTRPs are filed as Exhibits 10.05, 10.06 and 10.07, respectively, to our Quarterly Report on Form 10-Q filed with the SEC on August 5, 2016, and the above description of such LTRPs is qualified in its entirety by reference to such exhibits.
On August 2, 2016, the Board of Directors, upon the recommendation of the Compensation Committee, adopted the 2016 LTRP which provides for the grant to eligible employees of a fixed award (the 2016 LTRP Fixed Award) and a variable award (the 2016 LTRP Variable Award). In order to receive awards under the 2016 LTRP, each eligible employee must satisfy the performance conditions established by the Board of Directors for such employee, which generally are expected to be based on pre-set goals for the Company’s financial and operational performance. If these conditions are satisfied, the eligible employee will, subject to his or her continued employment as of each applicable payment date, receive the full amount of his or her 2016 LTRP Awards, payable as follows:
|
·
|
|
Fixed award: The eligible employee will receive a fixed payment equal to 16.66% of his or her 2016 LTRP Fixed Award once a year for a period of six years starting in March 2017 (the “Annual Fixed Payment”); and
|
|
·
|
|
Variable award: On each date the Company pays the Annual Fixed Award to the eligible employee, he or she will also receive the 2016 LTRP Variable Award payment equal to the product of (i) 16.66% of the applicable 2016 LTRP Variable Award
|
and (ii) the quotient of (a) divided by (b), where (a), the numerator, equals the Applicable Year Stock Price (as defined below) and (b), the denominator, equals the 2015 Stock Price (as defined below). For purposes of the 2016 LTRP, the “2015 Stock Price” shall equal $111.02 (the average closing price of the Company´s common stock on the NASDAQ Global Market during the final 60 -trading days of 2015) and the “Applicable Year Stock Price” shall equal the average closing price of the Company´s common stock on the NASDAQ Global Market during the final 60-trading days of the year preceding the applicable payment date for so long as the Company´s common stock is listed on the NASDAQ.
|
The 2016 LTRP is filed as Exhibit 10.08 to our Quarterly Report on Form 10-Q filed with the SEC on August 5, 2016, and the description of the 2016 LTRP above is qualified in its entirety by reference to such exhibit.
The 2009, 2010, 2011, 2012, 2013, 2014, 2015 and 2016 variable payment LTRP liability subjects us to equity price risk. The following table shows a sensitivity analysis of the risk associated with our contractual obligations related to the 2009, 2010, 2011, 2012, 2013, 2014, 2015 and 2016 Variable Payments if our common stock price per share were to increase or decrease by up to
40%:
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2016
|
|
|
MercadoLibre, Inc
|
|
2009, 2010, 2011, 2012, 2013, 2014, 2015 and 2016
|
|
|
Equity Price
|
|
variable LTRP liability
|
(In thousands, except equity price)
|
|
|
Change in equity price in percentage
|
|
|
|
|
|
|
|
|
|
40%
|
|
234.43
|
|
61,820
|
30%
|
|
217.69
|
|
57,405
|
20%
|
|
200.94
|
|
52,989
|
10%
|
|
184.20
|
|
48,573
|
Static
|
(*)
|
167.45
|
|
44,157
|
-10%
|
|
150.71
|
|
39,742
|
-20%
|
|
133.96
|
|
35,326
|
-30%
|
|
117.22
|
|
30,910
|
-40%
|
|
100.47
|
|
26,494
|
(*)
Average closing stock price for the last 60 trading days of the closing date.
It
em 4 — Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Evaluation of disclosure controls and procedures
Based on the evaluation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) required by Exchange Act Rules 13a-15(b) or 15d-15(b), our chief executive officer and our chief financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.
Changes in Internal Controls Over Financial Reporting
There were no changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the
nine
-month
period ended
September
30
, 201
6
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PA
RT II. OTHER INFORMATION
It
em 1 — Legal Proceedings
From time to time, we are involved in disputes that arise in the ordinary course of our business. The number and significance of these disputes is increasing as our business expands and our Company grows. Any claims against us, whether meritorious or not, may be time consuming, result in costly litigation, require significant amounts of management time, result in the diversion of significant operational resources or require expensive implementations of changes to our business methods to respond to these claims. See “Item 1A — Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 as filed with the Securities and Exchange Commission on February 26, 2016.
As of
September
30, 2016, our total reserves for proceeding-related contingencies and other estimated contingencies were approximately $
5
.
6
million to cover legal actions against us in which we have determined that a loss is probable. The proceeding-related reserve is based on developments
to date and historical information related to actions filed against us. We do not reserve for losses we determine to be possible or remote. Expected legal costs related to litigations are accrued when the legal service is actually provided.
As of
September 30, 2016, there were 687
lawsuits pending against our Brazilian subsidiaries in the Brazilian ordinary courts. In addition, as of
September 30, 2016, there were 2,904
lawsuits pending against our Brazilian subsidiaries in the Brazilian consumer courts, where a lawyer is not required to file or pursue a claim.
As of
September
30, 2016, there were 5
8
lawsuits pending against our Argentine subsidiaries in the Argentine ordinary courts and 1,3
79
pending claims in the Argentine Consumer Protection Agencies, where a lawyer is not required to file or pursue a claim.
As of
September 30, 2016, there were seven
claims pending against our Mexican subsidiaries in the Mexican ordinary courts and
156
claims pending against our Mexican subsidiaries in the Mexican Consumer Protection Agencies, where a lawyer is not required to file or pursue a claim.
In most of these cases, the plaintiffs asserted that we were responsible for fraud committed against them, or responsible for damages suffered when purchasing an item on our website, when using MercadoPago, or when we invoiced them. We believe we have meritorious defenses to these claims and intend to continue defending them.
Set forth below is a description of the legal proceedings that we have determined to be material to our business. We have excluded ordinary routine legal proceedings incidental to our business. In each of these proceedings we also believe we have meritorious defenses, and intend to continue defending ourselves in these actions. We have established a reserve for those proceedings which we have considered that a loss is probable. The disclosure below updates and supplements the information set forth in “Item 3 — Legal Proceedings” in our Annual Report on Form 10-K for the fiscal year ended December 31,
2
015:
In 2007
,
São Paulo tax authorities asserted taxes and fines against our Brazilian subsidiary relating to the period from 2005 to 2007 in an amount of
$5.9
million according to the exchange rate in effect at that time. As of the date of these consolidated financial statements
and following an administrative determination reducing the fine
, the total amount of the claim is
$4.2
million including surcharges and interest. On August 15, 2011, the Company made a deposit in court of
R$9.5
million, which including accrued interests amounted to
R$13.5
million or
$4.2
million, according to the exchange rate at
September
30, 2016
. The company continues to contest the assessment.
On May 31, 2016, a lower court judge ruled in favor of the Company and the São Paulo Municipal Council presented a motion to clarify mentioned decision.
As of the date of issuance of this report, the Company is still waiting for a decision.
On November 6, 2014 the Company’s Brazilian subsidiaries requested a preliminary injunction against Receita Federal Do Brasil in order to avoid the income tax withholding over payments remitted by Brazilian subsidiaries to the Argentine subsidiary for the provision of IT support and assistance services; and requested the reimbursement of the amounts improperly withheld in the last five years. The injunction was granted
on the grounds
that such withholding violates the provisions of the convention signed between the Federative Republic of Brazil and the Argentine Republic to prevent double taxation. In August 2015, such injunction was revoked by the first instance judge decision of merit, which was favorable to Receita Federal Do Brasil. The Company presented an appeal in September 2015 and
,
as of
September 30, 2016, the Company is waiting fo
r the second instance decision. As a result, the Company started making deposits in court for the controversial a
mounts. As of
September
30, 2016, the Company recorded in the balance s
heet deposits in court for R20.4 million or $6.3
million, according to the exchange rate at
September
30, 2016 under the caption non-current other assets.
The Company’s management, based on the external legal counsel opinion, believes that the tax position adopted is more likely than not, based on the technical merits of the tax position and the existence of favorable decisions of the Federal Regional Courts. For that reason, the Company has not recorded any expense or liability for the controversial amounts.
On September 2, 2011, the Brazilian Federal tax authority has asserted taxes and fines against our Brazilian subsidiary relating to the income tax for the 2006 period in an approximate amount of
R$5.1
million or $1.5
million, according to the exchange rate at
September
30, 2016. On September 30, 2011
,
the Company presented administrative defenses against the authorities’ claim. On August 24, 2012
,
the Company presented its appeal to the Board of Tax Appeals (CARF — Conselho Administrativo de Recursos Fiscais) against the tax authorities’ claims. On December 5, 2013, the Board of Tax Appeals ruled against MercadoLivre’s appeal. The same Board of Tax Appeals recognized as due part of the tax compensation made by the Company, decreasing the outstanding debit to R$2.0 million or $616 thousands
,
according to the exchange rate at September 30, 2016. On November 21, 2014, the Company appealed to the Superior Administrative Court of Tax Appeals.
On September
8, 2016
,
our appeal was not accepted. MercadoLivre filed an appeal
to the
Superior Administrative Court of Tax Appeals. As of the date of this report
,
the Superior Administrative Court of Tax Appeals ruling was still pending.
Our management, based on the external legal counsel opinion, believes that the tax position adopted is more likely than not, based on the technical merits of the tax position.
For that reason, the Company has not recorded any expense or liability for the controversial amounts.
Intellectual Property Claims
In the past third parties have from time to time claimed, and others may claim in the future, that we have infringed their intellectual property rights. We have been notified of several potential third-party claims for intellectual property infringement through our website. These claims, whether meritorious or not, are time consuming, can be costly to resolve, could cause service upgrade delays, and could require expensive implementations of changes to our business methods to respond to these claims.
Item 1A — Risk
Factors
As of
September
30, 2016, there have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 and in our Form
s
10-Q for the quarter
s
ended March 31, 2016
and June 30, 2016
.
It
em 6 — Exhibits
The information set forth under “Index to Exhibits” below is incorporated herein by reference.
Sign
atures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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MERCADOLIBRE, INC.
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Registrant
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Date: November 4
, 2016.
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By:
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/s/ Marcos Galperin
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Marcos Galperin
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President and Chief Executive Officer
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By:
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/s/ Pedro Arnt
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Pedro Arnt
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Executive Vice President and Chief Financial Officer
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Mer
cadoLibre, Inc.
INDEX TO EXHIBITS
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3.1
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Registrant’s Amended and Restated Certificate of Incorporation.
(1)
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3.2
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Registrant’s Amended and Restated Bylaws.
(1)
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4.1
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Form of Specimen Certificate for the Registrant’s Common Stock.
(2)
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4.2
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Second Amended and Restated Registration Rights Agreement, dated September 24, 2001, by and among the Registrant and the investors named therein.
(1)
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4.
3
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Indenture with respect to the Registrant’s 2.25% Convertible Senior Notes due 2019, dated as of June 30, 2014, between the Registrant and Wilmington Trust, National Association, as trustee.
(3)
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31.1
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Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
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31.2
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Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
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32.1
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Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
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32.2
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Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
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101.INS
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XBRL Instance Document
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101.SCH
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XBRL Taxonomy Extension Schema Document
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101.CAL
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XBRL Taxonomy Extension Calculation Linkbase Document
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101.LAB
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XBRL Taxonomy Extension Label Linkbase Document
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101.PRE
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XBRL Taxonomy Extension Presentation Linkbase Document
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101.DEF
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XBRL Taxonomy Extension Definition Linkbase
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*
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Filed or furnished herewith, as applicable.
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(1)
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Incorporated by reference to the Registration Statement on Form S-1 filed on May 11, 2007.
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(2)
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Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009.
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(3)
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Incorporated by reference to the Registrant’s
C
urrent
R
eport on form 8-K filed on June 30, 2014.
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