Cautionary Statement Regarding Forward-Looking Statements
Any statements made or implied in this report that are not statements of historical fact, including statements about our beliefs and expectations, are forward-looking statements within the meaning of Section 27 A of the Securities Exchange Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and should be evaluated as such. The words "anticipate," "believe," "expect," "intend," "plan," "estimate," "target," "project," "should," "may," "could," "will" and similar words and expressions are intended to identify forward-looking statements. Forward-looking statements generally relate to information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities, future economic, political and social conditions in the countries in which we operate and their possible impact on our business, and the effects of future regulation and the effects of competition. Such forward-looking statements reflect, among other things, our current expectations, plans, projections and strategies, anticipated financial results, future events and financial trends affecting our business, all of which are subject to known and unknown risks, uncertainties and other important factors (in addition to those discussed elsewhere in this report) that may cause our actual results to differ materially from those expressed or implied by these forward-looking statements. These risks and uncertainties include, among other things:
?our expectations regarding the continued growth of online commerce and Internet
usage in
?our ability to expand our operations and adapt to rapidly changing technologies;
?our ability to attract new customers, retain existing customers and increase revenues;
?the impact of government and central bank regulations on our business;
?litigation and legal liability;
?systems interruptions or failures;
?our ability to attract and retain qualified personnel;
?consumer trends;
?security breaches and illegal uses of our services;
?competition;
?reliance on third-party service providers;
?enforcement of intellectual property rights;
?seasonal fluctuations;
?political, social and economic conditions in
?the current and potential impact of COVID-19 on our net revenues, gross profit margins, operating margins and liquidity due to future disruptions in operations as well as the macroeconomic instability caused by the pandemic. Many of these risks are beyond our ability to control or predict. New risk factors emerge from time to time and it is not possible for Management to predict all such risk factors, nor can it assess the impact of all such risk factors on our company's business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. These statements are based on currently available information and our current assumptions, expectations and projections about future events. While we believe that our assumptions, expectations and projections are reasonable in view of the currently available information, you are cautioned not to place undue reliance on our forward-looking statements. These statements are not guarantees of future performance. They are subject to future events, risks and uncertainties-many of which are beyond our control- as well as potentially inaccurate assumptions that could cause actual results to differ materially from our expectations and projections. Some of the material risks and uncertainties that could cause actual results to differ materially from our expectations and projections are described in "Item 1A - Risk Factors" in Part I of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 filed with theSecurities and Exchange Commission ("SEC") onFebruary 14, 2020 , as updated by those described in "Item 1A - Risk Factors" in Part II of our report on Form10-Q for the quarter endedMarch 31, 2020 and in other reports we file from time to time with theSEC . 36
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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 endedDecember 31, 2019 . We note such information for investors as permitted by the Private Securities Litigation Reform Act of 1995. There also may be other factors that we cannot anticipate or that are not described in this report, generally because they are unknown to us or we do not perceive them to be material that could cause results to differ materially from our expectations. Forward-looking statements speak only as of the date they are made, and we do not undertake to update these forward-looking statements except as may be required by law. You are advised, however, to review any further disclosures we make on related subjects in our periodic filings with theSEC .
The discussion and analysis of our financial condition and results of operations has been organized to present the following:
?a brief overview of our company;
?a review of our financial presentation and accounting policies, including our critical accounting policies;
?a discussion of our principal trends and results of operations for the six and
three-month periods ended
?a discussion of the principal factors that influence our results of operations, financial condition and liquidity;
?a discussion of our liquidity and capital resources and a discussion of our capital expenditures; and
?a description of our non-GAAP financial measures.
Other Information
We routinely post important information for investors on our Investor Relations website, http://investor.mercadolibre.com. We use this website as a means of disclosing material, non-public information and for complying with our disclosure obligations under SEC Regulation FD (Fair Disclosure). Accordingly, investors should monitor our Investor Relations website, in addition to following our press releases,SEC filings, public conference calls and webcasts. The information contained on, or that may be accessed through, our website is not incorporated by reference into, and is not a part of, this report.
Business Overview
MercadoLibre, Inc. (together with its subsidiaries "us", "we", "our" or the "Company") is the largest online commerce ecosystem inLatin America . Our platform is designed to provide users with a complete portfolio of services to facilitate commercial transactions. We are a market leader in e-commerce in each ofArgentina ,Brazil ,Chile ,Colombia ,Costa Rica ,Ecuador ,Mexico ,Peru ,Uruguay andVenezuela , based on the number of unique visitors and page views. We also operate online commerce platforms in theDominican Republic ,Honduras ,Nicaragua ,El Salvador ,Panama ,Bolivia ,Guatemala andParaguay . Through our platform, we provide buyers and sellers with a robust environment that fosters the development of a large e-commerce community inLatin America , a region with a population of over 644 million people and with one of the fastest-growing Internet penetration rates in the world. We believe that we offer technological and commercial solutions that address the distinctive cultural and geographic challenges of operating an online commerce platform inLatin America .
We offer our users an ecosystem of six integrated e-commerce services: the
The Mercado Libre Marketplace , which we sometimes refer to as our marketplace, is a fully-automated, topically-arranged and user-friendly online commerce platform, which can be accessed through our website and mobile app. This platform enables both businesses and individuals to list merchandise and conduct sales and purchases online.Mercado Pago is our financial technology (FinTech) solution, designed to facilitate transactions both on and off our marketplaces by providing a mechanism that allows our users to securely, easily and promptly send and receive payments online. Outside of our marketplaces,Mercado Pago allows merchants to process transactions via their websites and mobile apps, as well as in their brick-and-mortar stores through QR codes and mobile points of sale ("MPOS") devices. It also enables users to easily transfer money to each other. ThroughMercado Fondo , our asset management product, our users are able to invest the outstanding balance on theirMercado Pago account at competitive rates and in a simple way.Mercado Credito , our lending solution, allows us to finance merchants' working capital needs and consumers' purchases. 37
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To further enhance our suite of e-commerce services, we launched the Mercado Envios shipping program inBrazil ,Argentina ,Mexico ,Colombia ,Chile andUruguay . ThroughMercado Envios , we offer a cost-efficient way to utilize our existing distribution chain to fulfill sales on our platform. Sellers that opt into the program are able to offer a uniform and seamlessly integrated shipping experience to their buyers at competitive prices. As ofJune 30, 2020 , we also offer free shipping to buyers inBrazil ,Argentina ,Mexico ,Chile andColombia . Through MercadoLibre Classifieds, our online classified listing service, our users can also list and purchase vehicles, real estate and services in the countries where we operate. Classifieds listings differ from Marketplace listings as they only charge optional placement fees and not final value fees. Our classifieds pages are also a major source of traffic to our platform. Furthermore, we developed ourMercadoLibre advertising platform to enable businesses to promote their products and services on the Internet. Through this platform,MercadoLibre's sellers and large advertisers are able to display ads on our webpages. Additionally, throughMercado Shops , our online store solution, users can set-up, manage and promote their own online store. These stores are hosted byMercadoLibre and offer integration with the marketplace, and payment and advertising services we offer. Users can pay monthly subscriptions for enhanced functionality and value added services on their store.
Reporting Segments and Geographic Information
Our segment reporting is based on geography, which is the criterion our Management currently uses to evaluate our segment performance. Our geographic segments areBrazil ,Argentina ,Mexico and Other Countries (includingChile ,Colombia ,Costa Rica ,Dominican Republic ,Ecuador ,Panama ,Peru ,Bolivia ,Honduras ,Nicaragua ,El Salvador ,Guatemala ,Paraguay ,Uruguay andthe United States of America ). Although we discuss long-term trends in our business, it is our policy not to provide earnings guidance in the traditional sense. We believe that uncertain conditions make the forecasting of near-term results difficult. Further, we seek to make decisions focused primarily on the long-term welfare of our company and believe focusing on short-term earnings does not best serve the interests of our stockholders. We believe that execution of key strategic initiatives as well as our expectations for long-term growth in our markets will best create stockholder value. A long-term focus may make it more difficult for industry analysts and the market to evaluate the value of our Company, which could reduce the value of our common stock or permit competitors with short-term tactics to grow more rapidly than us. We, therefore, encourage potential investors to consider this strategy before making an investment in our common stock. The following table sets forth the percentage of our consolidated net revenues by segment for the six and three-month periods endedJune 30, 2020 and 2019: Six-month Periods Ended Three-month Periods Ended June 30, June 30, (% of total consolidated net revenues) (*) 2020 2019 2020 2019 Brazil 56.4 % 63.1 % 53.0 % 62.5 % Argentina 24.3 20.4 27.2 20.9 Mexico 14.4 11.7 14.3 11.8 Other Countries 4.9 4.8 5.5 4.8 (*) Percentages have been calculated using whole-dollar amounts rather than the rounded amounts that appear in the table. The table above may not total due to rounding. ? 38
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The following table summarizes the changes in our net revenues by segment for
the six and three-month periods ended
Three-month Periods
Six-month Periods Ended Change from 2019 Ended Change from 2019 June 30, to 2020 (*) June 30, to 2020 (*) 2020 2019 in Dollars in % 2020 2019 in Dollars in % (in millions, except percentages) (in millions, except percentages) Net Revenues: Brazil$ 862.7 $ 643.2 $ 219.5 34.1 %$ 465.3 $ 340.9 $ 124.4 36.5 % Argentina 372.1 207.7 164.4 79.2 239.2 113.9 125.3 110.0 Mexico 220.7 118.9 101.8 85.6 125.9 64.4 61.6 95.6 Other Countries 74.9 49.1 25.8 52.5 47.9 26.1 21.8 83.7 Total Net Revenues$ 1,530.5 $ 1,019.0 $ 511.4 50.2 %$ 878.4 $ 545.2 $ 333.1 61.1 % (*) Percentages have been calculated using whole-dollar amounts rather than the rounded amounts that appear in the table. The table above may not total due to rounding. Recent Developments
Loss from transaction with an agent
We have arrangements with some unaffiliated entities under which our users are able to fund theirMercado Pago accounts by depositing an equivalent amount with the unaffiliated entity. In some of these arrangements, we credit the Mercado Pago account before the unaffiliated entity transfers the funds to us to settle the transaction. The amounts pending settlement are recognized in our balance sheet as credit cards receivable and other means of payment. InJune 2020 , we became aware that$26.7 million dollars of receivables had accumulated from one such unaffiliated entity inArgentina . The aging of these receivables exceeded the expected aging for transactions of this kind. Consequently, we conducted, with the assistance of an outside independent accounting advisor, an internal review. Our internal review on this matter did not identify any material errors in the consolidated financial statements for the year endedDecember 31, 2019 or the quarter endedMarch 31, 2020 . However, based on the review, management has determined that there were deficiencies in the timely operation of certain internal controls. See Item 4 of Part I, "Controls and Procedures-Changes in Internal Controls Over Financial Reporting." As ofJune 30, 2020 , we recorded a$26.7 million allowance for doubtful accounts on receivables due to us by this entity, and are attempting to collect the full outstanding balance from said unaffiliated entity.
Capped call transactions related to the 2.00% Convertible Senior Notes 2028
In connection with the issuance of the 2028 Notes, we paid$104.1 million (including transaction expenses) inJune 2020 to enter into the 2028 Notes Capped Call Transactions with certain financial institutions. The 2028 Notes Capped Call Transactions are expected generally to reduce the potential dilution upon conversion of the 2028 Notes in the event that the market price of our common stock is greater than the strike price of the 2028 Notes Capped Call Transactions. Please see note 11 to our unaudited condensed consolidated financial statements for further detail on the 2028 Notes Capped Call Transactions. 39
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Criminal complaint against our chief executive officer and others
OnFebruary 4, 2020 , an Argentine federal prosecutor submitted to an Argentine judge a complaint alleging that certain sales of Argentine government securities, made by a common investment fund that holds balances forMercado Pago customers, were based on non-public information about the government's plans to extend the maturities of the securities. The complaint named our chief executive officer, as well as others who are not specifically identified, as having committed criminal fraud against the Argentine federal government. The judge appointed another prosecutor to investigate the allegations described in the complaint. At the conclusion of the investigation, the prosecutor recommended dismissing the complaint, finding that there was no criminal conduct, which recommendation was accepted by the judge.
Description of Line Items
Net revenues
We recognize revenues in each of our four geographical reporting segments. Within each of our segments, the services we provide generally fall into two distinct revenue streams: "Commerce" and "Fintech."
We have re-named and grouped by nature our Revenue streams breakdown, given the increasing importance of our financial business in current and expected future revenue composition, which our management considers shows more meaningful information about the business. As such, the breakdown by revenue stream previously labeled as "Enhanced Marketplace " and "Non-marketplace", is now presented under the titles of "Commerce" and "Fintech", respectively. Also, as a result, a group of other services, including classifieds fees, ad sales and other ancillary services, which had historically been included in the "Non-marketplace" line, have as ofJanuary 1, 2020 , been included as a part of the "Commerce" Revenue stream. Prior-period corresponding figures have been changed accordingly for comparative purposes.
The following table summarizes our consolidated net revenues by revenue stream
for the six and three-month periods ended
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