Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward-Looking Statements
Any statements made or implied in this report that are not statements of historical fact, including statements about our beliefs and expectations, are forward-looking statements within the meaning of Section 27 A of the Securities Act of 1933, as amended, (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), 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. These forward-looking statements are contained throughout this report. 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 e-commerce and Internet usage in Latin America;
•competition;
•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, central bank and other regulations on our business;
•credit risk and other risks of lending, such as increases in defaults by customers and other delinquencies;
•litigation and legal liability;
•security breaches and illegal uses of our services;
•systems interruptions or failures;
•our ability to attract and retain qualified personnel;
•consumer trends;
•reliance on third-party service providers;
•enforcement of intellectual property rights;
•our expectations regarding benefits and synergies from recent or future strategic investments, acquisitions of businesses, technologies, services or products;
•seasonal fluctuations;
•our indebtedness;
•volatility of market prices, impairment and unique risks related to loss of the digital assets that we acquire;
•political, social and economic conditions in Latin America; and
•our long-term sustainability goals.
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 the Company’s 2022 10-K filed with the SEC on February 24, 2023 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 the Company’s 2022 10-K. 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. Certain monetary amounts included elsewhere in this document have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be the arithmetic aggregation of the figures that precede them.
Forward-looking statements speak only as of the date they are made, and we do not undertake to update these forward-looking statements except as may be required by law. You are advised, however, to review any further disclosures we make on related subjects in our periodic filings with the SEC.
The discussion and analysis of our financial condition and results of operations has been organized to present the following:
•a brief overview of our company;
•a review of our financial presentation and accounting policies, including our critical accounting policies;
•a discussion of our principal trends and results of operations for the three-month periods ended March 31, 2023 and 2022;
•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
We are the largest online commerce ecosystem in Latin America based on unique visitors and orders processed, and we are present in 18 countries: Argentina, Brazil, Mexico, Chile, Colombia, Peru, Uruguay, Venezuela, Bolivia, Costa Rica, Dominican Republic, Ecuador, Guatemala, Honduras, Nicaragua, Panama, Paraguay and El Salvador. Our platform is designed to provide users with a complete portfolio of services to facilitate commercial transactions both digitally and offline.
Through our e-commerce platform, we provide buyers and sellers with a robust and safe environment that fosters the development of a large e-commerce community in Latin America, a region with a population of over 650 million people and with one of the fastest-growing Internet penetration and e-commerce growth rates in the world. We believe that we offer world-class technological and commercial solutions that address the distinctive cultural and geographic challenges of operating a digital commerce platform in Latin America.
We offer our users an ecosystem of six integrated e-commerce services and digital financial services: the Mercado Libre Marketplace, the Mercado Pago Fintech platform, the Mercado Envios logistics service, the Mercado Ads solution, the Mercado Libre Classifieds service and the Mercado Shops online storefronts solution.
The Mercado Libre 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 us (when we act as sellers in our first party sales), merchants and individuals to list merchandise and conduct sales and purchases digitally. The Marketplace has an ample assortment of products, with a wide range of categories such as consumer electronics, apparel and beauty, home goods, automotive accessories, toys, books and entertainment and consumer packaged goods.
To complement the Mercado Libre Marketplace and enhance the user experience for our buyers and sellers, we developed Mercado Pago, an integrated digital payments solution. Mercado Pago was initially designed to facilitate transactions on Mercado Libre’s Marketplaces by providing a mechanism that allowed our users to securely, easily and promptly send and receive payments. Now Mercado Pago is a full ecosystem of financial technology solutions both in the digital and physical world. Our digital payments solution enables any MercadoLibre registered user to securely and easily send and receive digital payments and to pay for purchases made on any of Mercado Libre’s Marketplaces. Currently, Mercado Pago processes and settles all transactions on our Marketplaces in Argentina, Brazil, Mexico, Chile, Colombia, Uruguay and Peru and is available to process and settle transactions on our Marketplace in Ecuador.
Beyond facilitating Marketplace transactions, over the years we have expanded our array of Mercado Pago services to third parties outside Mercado Libre’s Marketplace. We began first by satisfying the growing demand for online-based payment solutions by providing merchants the necessary digital payment infrastructure for e-commerce to flourish in Latin America. Today, Mercado Pago’s digital payments business not only allows merchants to facilitate checkout and payment processes on their websites through a branded or white label solution or software development kits, but it also enables users to transfer money in a simple manner to each other through the Mercado Pago website or on Mercado Pago app. Through Mercado Pago, we brought trust to the merchant customer relationship, allowing online consumers to shop easily and safely, while giving them the confidence to share sensitive personal and financial data with us. Finally, we have also deepened our fintech offerings by growing our online-to-offline (“O2O”) products and services.
The Mercado Envios logistics solution enables sellers on our platform to utilize third-party carriers and other logistics service providers, while also providing them with fulfillment and warehousing services. The logistics services we offer are an integral part of our value proposition, as they reduce friction between buyers and sellers, and allow us to have greater control over the full experience. Sellers that opt into our logistics solutions are not only able to offer a uniform and seamlessly integrated shipping experience to their buyers at competitive prices, but are also eligible to access shipping subsidies to offer free or discounted shipping for many of their sales on our Marketplaces. In 2020, we launched Meli Air with a fleet of dedicated aircraft covering routes across Brazil and Mexico, with the aim of improving our delivery times. We have also developed a network of independent neighborhood stores and commercial points (known as “Meli Places”) to receive and store packages that are in transit using our integrated technology. Meli Places network allows buyers and sellers to pick-up, drop-off, or return packages with a better experience, reducing the travel distance for all parties. As of March 31, 2023, we offer our shipping solution directed towards deliveries in Argentina, Brazil, Mexico, Chile, Colombia, Uruguay, Peru and Ecuador and we also offer free shipping to buyers in Argentina, Brazil, Mexico, Chile, Colombia, Uruguay and Peru.
Mercado Credito, our credit solution available in Argentina, Brazil, Mexico and Chile, leverages our user base, which is loyal and engaged, and in part has also been historically underserved or overlooked by financial institutions and suffers from a lack of access to needed credit. Facilitating credit is a key service overlay that enables us to further strengthen the engagement and lock-in rate of our users, while also generating additional touchpoints and incentives to use Mercado Pago as an end-to-end financial solution.
Our asset management product, which is available in Argentina, Brazil and Mexico, is a critical pillar to build our alternative two-sided network vision. It incentivizes our users to begin to fund their digital wallets with cash as opposed to credit or debit cards given that the return our product offers is greater than traditional checking accounts.
As an extension of our asset management and savings solutions for users, we launched a digital assets feature as part of the Mercado Pago wallet in Brazil in 2021, in Mexico in 2022 and in Chile in 2023. This service allows our millions of users to purchase, hold and sell selected digital assets through our interface without leaving the Mercado Pago application, while a partner acts as the custodian and offers the blockchain infrastructure platform. This feature is available for all users through their Mercado Pago wallet.
Our advertising platform, Mercado Ads, enables businesses to promote their products and services on the Internet. Through our advertising platform, MercadoLibre’s brands and sellers are able to display ads on our webpages through product searches, banner ads, or suggested products. Our advertising platform enables merchants and brands to access the millions of consumers that are on our Marketplaces at any given time with the intent to purchase, which increases the likelihood of conversion.
Through Mercado Libre Classifieds, our online classified listing service, our users can also list and purchase motor vehicles, real estate and services in the countries where we operate. Classifieds listings differ from Marketplace listings as they only charge optional placement fees and not final value fees. Our classifieds pages are also a major source of traffic to our platform, benefiting both the commerce and fintech businesses.
Complementing the services that we offer, our digital storefront solution, Mercado Shops, allows users to set-up, manage and promote their own digital stores. These stores are hosted by Mercado Libre and offer integration with the rest of our ecosystem, namely our Marketplaces, payment services and logistics services. Users can create a store at no cost, and can access additional functionalities and value added services on commission.
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 are Brazil, Argentina, Mexico and Other Countries (including Chile, Colombia, Costa Rica, Ecuador, Peru and Uruguay). 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 three-month periods ended March 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
(% of total consolidated net revenues) | | | | | | 2023 | | 2022 |
Brazil | | | | | | 52.0 | % | | 55.7 | % |
Argentina | | | | | | 23.7 | | | 23.0 | |
Mexico | | | | | | 19.5 | | | 16.2 | |
Other Countries | | | | | | 4.8 | | | 5.1 | |
The following table summarizes the changes in our net revenues by segment for the three-month periods ended March 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Three Months Ended March 31, | | Change from 2022 to 2023 |
| | | | | | | | | 2023 | | 2022 | | in Dollars | | in % |
| | | (in millions, except percentages) |
Net Revenues: | | | | | | | | | | | | | | | |
Brazil | | | | | | | | | $ | 1,579 | | | $ | 1,252 | | | $ | 327 | | | 26.1 | % |
Argentina | | | | | | | | | 721 | | | 518 | | | 203 | | | 39.2 | |
Mexico | | | | | | | | | 591 | | | 364 | | | 227 | | | 62.4 | |
Other Countries | | | | | | | | | 146 | | | 114 | | | 32 | | | 28.1 | |
Total Net Revenues | | | | | | | | | $ | 3,037 | | | $ | 2,248 | | | $ | 789 | | | 35.1 | % |
Description of Line Items
Net revenues
We disaggregate revenues into four geographical reporting segments. Within each of our segments, the services we provide and the products we sell generally fall into two distinct revenue streams: “Commerce” and “Fintech”.
The following table summarizes our consolidated net revenues by revenue stream for the three-month periods ended March 31, 2023 and 2022:
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
Consolidated net revenues by revenue stream | | 2023 | | 2022 |
| | (in millions) |
Commerce | | $ | 1,676 | | | $ | 1,277 | |
Fintech | | 1,361 | | | 971 | |
Total | | $ | 3,037 | | | $ | 2,248 | |
Revenues from commerce transactions are mainly generated from:
•marketplace fees that include final value fees and flat fees for transactions below a certain merchandise value;
•first party sales;
•shipping fees, net of the third-party carrier costs (when we act as an agent);
•ad sales up-front fees;
•classifieds fees; and
•fees from other ancillary businesses.
Final value fees represent a percentage of the sale value that is charged to the seller once an item is successfully sold and flat fees represent a fixed charge for transactions below a certain merchandise value.
Revenues from first-party sales are generated when control of the good is transferred, upon delivery to our customers.
Shipping revenues are generated when a buyer elects to receive an item through our shipping service, net of the third-party carrier costs (when we act as an agent).
Through our classifieds offerings in 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.
Revenues from advertising services provided to sellers, vendors, brands and others, through performance product ads and display advertising, are recognized based on the number of clicks or impressions.
Fintech revenues correspond to our Mercado Pago service, which are attributable to:
•commissions representing a percentage of the payment volume processed that are charged to sellers in connection with off Marketplace-platform transactions;
•commissions from additional fees we charge when a buyer elects to pay in installments through our Mercado Pago platform, for transactions that occur either on or off our Marketplace platform;
•commissions from additional fees we charge when our sellers elect to withdraw cash;
•interest, cash advances and fees from merchant and consumer loans granted under our Mercado Credito solution;
•commissions that we charge from transactions carried out with Mercado Pago credit and debit cards; and
•revenues from the sale of mobile points of sale products and insurtech fees.
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 that we charge.
When more than one service is included in one single arrangement with the same customer, we recognize revenue according to multiple element arrangements accounting, distinguishing between each of the services provided and allocating revenues based on their respective estimated selling prices. When the Company finances the transactions directly, the financing component is separated from the revenue amount and is recognized over the financing period using the interest method.
We have a highly fragmented customer revenue base given the large numbers of sellers and buyers who use our platforms. For the three-month periods ended March 31, 2023 and 2022, no single customer accounted for more than 5.0% of our net revenues.
Our Mercado Libre Marketplace is available in 18 countries (Argentina, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Mexico, Panama, Peru, Uruguay, Venezuela (deconsolidated since December 1, 2017), Bolivia, Honduras, Nicaragua, El Salvador, Guatemala and Paraguay), and Mercado Pago is available in 8 countries (Argentina, Brazil, Chile, Peru, Colombia, Mexico, Uruguay and Ecuador). Additionally, Mercado Envios is available in 8 countries (Argentina, Brazil, Mexico, Colombia, Chile, Peru, Uruguay and Ecuador). The functional currency for each country’s operations is the country’s local currency, except for Argentina, where the functional currency is the U.S. dollar due to Argentina’s status as a highly inflationary economy. Our net revenues are generated in multiple foreign currencies and then translated into U.S. dollars at the average monthly exchange rate. Please refer to “Summary of significant accounting policies and supplemental information” in Note 2 to our unaudited interim condensed consolidated financial statements for further detail on foreign currency translation.
Cost of net revenues
Cost of net revenues primarily includes cost of goods sold, shipping operation costs (including warehousing costs), carrier and other operating costs, collection fees, sales taxes, funding costs related to our credits business, fraud prevention fees, certain taxes on bank transactions, hosting and site operation fees, compensation for customer support personnel, ISP connectivity charges and depreciation and amortization.
Our subsidiaries in Brazil, Argentina and Colombia are subject to certain taxes on revenues, which are classified as a cost of net revenues. These taxes represented 7.8% of net revenues for the three-month period ended March 31, 2023, as compared to 7.3% for the same period in 2022.
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 expenses related to product and technology development, certain tax withholding related to export duties, telecommunications costs and payments to third-party suppliers who provide technology maintenance services to us.
Sales and marketing expenses
Our sales and marketing expenses consist primarily of costs related to marketing our platforms through online and offline advertising and agreements with portals, search engines and other sales expenses related to strategic marketing initiatives, charges related to our buyer protection program, the salaries of employees involved in these activities, chargebacks related to our Mercado Pago operations, branding initiatives, marketing activities for our users and depreciation and amortization expenses.
We carry out the majority of our marketing efforts on the Internet. We enter into agreements with portals, search engines, social networks, ad networks and other sites in order to attract Internet users to the Mercado Libre Marketplace and convert them into registered users and active traders on our platform.
We also work intensively on attracting, developing and growing our seller community through our customer support efforts. We have dedicated professionals in most of our operations that work with sellers through trade show participation, seminars and meetings to provide them with important tools and skills to become effective sellers on our platform.
Provision for doubtful accounts
Provision for doubtful accounts consists of the current expected credit losses on our financial assets, mainly loans receivable.
General and administrative expenses
Our general and administrative expenses consist primarily of salaries for management and administrative staff, compensation of non-employee directors, long term retention program compensation, expenses for legal, audit and other professional services, insurance expenses, office space rental expenses, impairment losses from digital assets, travel and business expenses, as well as depreciation and amortization expenses. Our general and administrative expenses include the costs of the following areas: general management, finance, treasury, internal audit, administration, accounting, tax, legal and human resources.
Other income (expenses), net
Other income (expenses) consists primarily of interest income derived from our investments and cash equivalents, interest expense and other financial charges related to financial liabilities and foreign currency gains or losses.
Income tax
We are subject to federal and state income tax in the United States, as well as foreign taxes in the multiple jurisdictions where we operate. Our tax obligations consist of current and deferred income taxes incurred in these jurisdictions. We account for income taxes following the liability method of accounting. A valuation allowance is recorded when, based on the available evidence, it is more likely than not that all or a portion of our deferred tax assets will not be realized. Therefore, our income tax expense consists of taxes currently payable, if any (given that in certain jurisdictions we still have net operating loss carry-forwards), plus the change in our deferred tax assets and liabilities during each period.
Equity in earnings of unconsolidated entity
Equity in earnings of unconsolidated entity consists primarily of earnings and losses related to our share in our equity investment.
Critical Accounting Policies and Estimates
There have been no significant changes in our critical accounting policies, Management estimates or accounting policies since the year ended December 31, 2022 and disclosed in the Company’s 2022 10-K, see “Critical Accounting Policies and Estimates”. See section Recently Adopted Accounting Standards of Note 2 to our unaudited interim condensed consolidated financial statements included in Item 1 of Part I of this report.
Results of operations for the three-month period ended March 31, 2023 compared to the three-month period ended March 31, 2022
The selected financial data for the three-month periods ended March 31, 2023 and 2022 discussed herein is derived from our unaudited interim condensed consolidated financial statements included in Item 1 of Part I of this report. These statements include all normal recurring adjustments that Management believes are necessary to fairly state our financial position, results of operations and cash flows. The results of operations for the three-month period ended March 31, 2023, are not necessarily indicative of the results that may be expected for the full year ending December 31, 2023 or for any other period.
Statement of income data
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
(In millions) | | 2023 | | 2022 |
| | (Unaudited) |
Net service revenues | | $ | 2,763 | | | $ | 1,997 | |
Net product revenues | | 274 | | | 251 | |
Net revenues | | 3,037 | | | 2,248 | |
| | | | |
Cost of net revenues | | (1,501) | | | (1,175) | |
Gross profit | | 1,536 | | | 1,073 | |
| | | | |
Operating expenses: | | | | |
Product and technology development | | (381) | | | (234) | |
Sales and marketing | | (383) | | | (286) | |
Provision for doubtful accounts | | (252) | | | (255) | |
General and administrative | | (180) | | | (159) | |
Total operating expenses | | (1,196) | | | (934) | |
Income from operations | | 340 | | | 139 | |
| | | | |
Other income (expenses): | | | | |
Interest income and other financial gains | | 161 | | | 31 | |
Interest expense and other financial losses | | (94) | | | (56) | |
Foreign currency losses, net | | (87) | | | (3) | |
Net income before income tax expense and equity in earnings of unconsolidated entity | | 320 | | | 111 | |
| | | | |
Income tax expense | | (122) | | | (46) | |
Equity in earnings of unconsolidated entity | | 3 | | | — | |
Net income | | $ | 201 | | | $ | 65 | |
Principal trends in results of operations
Net revenues
Our net revenues maintained its growth trajectory during the three-month period ended March 31, 2023 as compared to the same period in 2022, specifically related to the growth of our fintech solution services (mainly credits business and off-platform transactions through Mercado Pago) and the increase in our gross merchandise volume regarding our commerce services. The quarter’s financial results reflect our ongoing commitment to deliver sustainable and profitable growth. In this sense, we maintained a cautious posture regarding originations of loans receivables and, as a consequence, our credit business portfolio’s size was similar to the prior quarter and focused on lower risk customers. Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Principal trends in results of operations— Net revenues” section below for further detail on net revenues trends for the three-month periods ended March 31, 2023 and 2022.
The continued execution of our long-term strategies in Commerce and Fintech businesses has enabled us to deliver rapid growth in gross merchandise volume, total payment volume and net revenues, alongside record quarterly operating results and strong cash generation.
Gross profit margins
Our gross profit margin is defined as total net revenues minus total cost of net revenues, as a percentage of net revenues.
Our gross profit trends are directly affected by our net revenues, as stated above, and our cost of net revenues. In this sense, our main cost of net revenues is composed of cost of goods sold, shipping operation costs (including warehousing costs), carrier and other operating costs, collection fees, sales taxes, funding costs related to our credits business, fraud prevention fees, certain taxes on bank transactions, hosting and site operation fees, compensation for customer support personnel, ISP connectivity charges and depreciation and amortization. This cost structure is directly affected by the level of operations of our services, and our strategic plan on gross profit is built on factors such as an ample liquidity to fund expenses and investments and a cost-effective capital structure.
In the future, our gross profit margin could decline if we continue growing our sales of goods business, which has a lower pure product margin, building up our logistics network and if we fail to maintain an appropriate relationship between our cost of revenue structure and our net revenues trend.
For the three-month periods ended March 31, 2023 and 2022, our gross profit margins were 50.6% and 47.7%, respectively. The increase in our gross profit margin resulted primarily from the decrease in our shipping operating cost, cost of goods sold and collection fees, as a percentage of net revenues, partially offset by an increase of our fintech costs, as a percentage of net revenues, mainly related to higher funding costs in connection with our credits business.
Operating income margins
Our operating income margin is defined as income from operations as a percentage of net revenues.
Our operating income margin is affected by our operating expenses structure, which mainly consists of our employees’ salaries, our sales and marketing expenses related to those activities we incurred to promote our services, provision for doubtful accounts mainly related to our loans receivable portfolio and product and technology development expenses, among other operating expenses. As we continue to grow and focus on expanding our leadership in the region, we will continue to invest in product and technology development, sales and marketing and human resources in order to promote our services and capture long-term business opportunities. As a result, we may experience decreases in our operating income margins.
For the three-month period ended March 31, 2023, as compared to the same period in 2022, our operating income margin increased from 6.2% to 11.2%. This increase was mainly explained by our improvement in cost of net revenues margins and a decrease in provision for doubtful accounts, as a percentage of net revenues. This increase was partially offset by an increase in our product and technology development expenses, as a percentage of net revenues, mainly as a consequence of higher salaries and wages.
Other Data
The following table includes seven key performance indicators, which are calculated as defined in the footnotes to the table. Each of these indicators provide a different measure of the level of activity on our platform, and we use them to monitor the performance of the business.
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
(in millions)(*) | | 2023 | | 2022 |
| | | | |
Unique active users (1) | | 101 | | | 81 | |
Gross merchandise volume(2) | | $ | 9,434 | | | $ | 7,665 | |
Number of successful items sold (3) | | 309 | | | 267 | |
Number of successful items shipped(4) | | 302 | | | 254 | |
Total payment volume(5) | | $ | 36,986 | | | $ | 25,319 | |
Total volume of payments on marketplace(6) | | $ | 9,950 | | | $ | 8,071 | |
Total payment transactions(7) | | 1,875 | | | 1,091 | |
Capital expenditures | | $ | 89 | | | $ | 137 | |
Depreciation and amortization | | $ | 126 | | | $ | 84 | |
(*)Figures have been calculated using rounded amounts. Growth calculations based on this table may not total due to rounding.
(1)New or existing user who performed at least one of the following actions during the reported period: (1) made one purchase, or reservation, or asked one question on Mercado Libre Marketplace or Classified Marketplace (2) maintained an active listing on Mercado Libre Marketplace or Classified Marketplace (3) maintained an active account in Mercado Shops (4) made a payment, money transfer, collection and/or advance using Mercado Pago (5) maintained an outstanding credit line through Mercado Credito or (6) maintained a balance of more than $5 invested in a Mercado Fondo asset management account. Management uses this metric to evaluate the size of our community of users who interact with the ecosystem and of which we have the opportunity to generate further engagement. With the changes in our businesses we believe it provides a better indication of our active user base rather than our discontinued registration metric that did not reflect any sort of interaction.
(2)Total U.S. dollar sum of all transactions completed through the Mercado Libre Marketplace, excluding Classifieds transactions.
(3)Number of items that were sold/purchased through the Mercado Libre Marketplace, excluding Classifieds items.
(4)Number of items that were shipped through our shipping service.
(5)Total U.S. dollar sum of all transactions paid for using Mercado Pago, including marketplace and non-marketplace transactions.
(6)Total U.S. dollar sum of all marketplace transactions paid for using Mercado Pago. Management uses this metric to evaluate the performance of our payments services and development of our integrated ecosystem. As from January 1, 2022, we no longer disclose our total volume of payments on marketplace net of shipping and financing fees. Given the growth of our shipping and fintech businesses, management believes that including shipping and financing fees in the calculation of total volume of payments on marketplace results in a more accurate indicator of that performance on a go-forward basis. Consequently, total volume of payment on marketplace for the three-month period ended March 31, 2022 has been recast to include shipping and financing fees.
(7)Number of all transactions paid for using Mercado Pago.
Net revenues
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Change from 2022 to 2023 |
| 2023 | | 2022 | | in Dollars | | in % |
| (in millions, except percentages) |
Total Net Revenues | $ | 3,037 | | | $ | 2,248 | | | $ | 789 | | | 35.1 | % |
The increase in net revenues was primarily attributable to:
a)an increase of $399 million, or 31.2%, in Commerce revenues, for the three-month period ended March 31, 2023, as compared to the same period in 2022. This increase was mainly generated by an increase of $378 million in our commerce services revenues and an increase of $21 million in our revenues from commerce products sales, for the three-month period ended March 31, 2023, as compared to the same period in 2022. Shipping carrier costs which are netted from revenues increased $134 million, from $401 million for the three-month period ended March 31, 2022 to $535 million for the three-month period ended March 31, 2023; and
b)an increase of 40.2%, in fintech revenues, from $971 million for the three-month period ended March 31, 2022, to $1,361 million for the three-month period ended March 31, 2023. This increase was mainly generated by an increase of $134 million in our credits revenues and an increase of $254 million in our revenues from Fintech services, for the three-month period ended March 31, 2023, as compared to the same period in 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Change from 2022 to 2023 |
Consolidated Net Revenues by revenue stream | | 2023 | | 2022 | | in Dollars | | in % |
| | (in millions, except percentages) |
Brazil | | | | | | | | |
Commerce | | $ | 907 | | | $ | 689 | | | $ | 218 | | | 31.6 | % |
Fintech | | 672 | | | 563 | | | 109 | | | 19.4 | % |
| | $ | 1,579 | | | $ | 1,252 | | | $ | 327 | | | 26.1 | % |
Argentina | | | | | | | | |
Commerce | | $ | 273 | | | $ | 240 | | | $ | 33 | | | 13.8 | % |
Fintech | | 448 | | | 278 | | | 170 | | | 61.2 | % |
| | $ | 721 | | | $ | 518 | | | $ | 203 | | | 39.2 | % |
Mexico | | | | | | | | |
Commerce | | $ | 398 | | | $ | 262 | | | $ | 136 | | | 51.9 | % |
Fintech | | 193 | | | 102 | | | 91 | | | 89.2 | % |
| | $ | 591 | | | $ | 364 | | | $ | 227 | | | 62.4 | % |
Other countries | | | | | | | | |
Commerce | | $ | 98 | | | $ | 86 | | | $ | 12 | | | 14.0 | % |
Fintech | | 48 | | | 28 | | | 20 | | | 71.4 | % |
| | $ | 146 | | | $ | 114 | | | $ | 32 | | | 28.1 | % |
Consolidated | | | | | | | | |
Commerce | | $ | 1,676 | | | $ | 1,277 | | | $ | 399 | | | 31.2 | % |
Fintech | | 1,361 | | | 971 | | | 390 | | | 40.2 | % |
Total | | $ | 3,037 | | | $ | 2,248 | | | $ | 789 | | | 35.1 | % |
See Note 8 “Segment reporting” of our unaudited interim condensed consolidated financial statements for further information regarding our net revenues disaggregated by similar products and services for three-month periods ended March 31, 2023 and 2022.
Brazil
Commerce revenues in Brazil increased 31.6% in the three-month period ended March 31, 2023 as compared to the same period in 2022. This increase was generated by an increase of $195 million in our commerce services revenues and an increase of $23 million in our revenues from commerce products sales. Fintech revenues grew by 19.4%, a $109 million increase, during the three-month period ended March 31, 2023 as compared to the same period in 2022, mainly driven by an increase of $108 million in our revenues from Fintech services and an increase of $2 million in our credits revenues.
Argentina
Commerce revenues in Argentina increased 13.8% in the three-month period ended March 31, 2023 as compared to the same period in 2022. This increase was generated by an increase of $43 million in our commerce services revenues, partially offset by a decrease of $10 million in our revenues from commerce products sales. Fintech revenues grew 61.2%, a $170 million increase, during the three-month period ended March 31, 2023 as compared to the same period in 2022, mainly driven by an increase of $98 million in our revenues from Fintech services and an increase of $71 million in our credits revenues.
Mexico
Commerce revenues in Mexico increased 51.9% in the three-month period ended March 31, 2023 as compared to the same period in 2022. This increase was generated by an increase of $125 million in our commerce services revenues and an increase of $11 million in our revenues from commerce products sales. Fintech revenues grew 89.2%, a $91 million increase, during the three-month period ended March 31, 2023 as compared to the same period in 2022, mainly driven by an increase of $60 million in our credits revenues and an increase of $31 million in our revenues from Fintech services.
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) |
2023 | | | | | | | |
Net revenues | $ | 3,037 | | | n/a | | n/a | | n/a |
Percent change from prior quarter | 1 | % | | | | | | |
2022 | | | | | | | |
Net revenues | $ | 2,248 | | | $ | 2,597 | | | $ | 2,690 | | | $ | 3,002 | |
Percent change from prior quarter | 5 | % | | 16 | % | | 4 | % | | 12 | % |
The following table sets forth the growth in net revenues in local currencies, for the three-month period ended March 31, 2023 as compared to the same period in 2022:
| | | | | | | | |
(% of revenue growth in Local Currency) (*) | | Three-month period |
Brazil | | 25.9 | % |
Argentina (**) | | 150.9 | % |
Mexico | | 47.7 | % |
Other Countries | | 29.8 | % |
Total Consolidated | | 58.4 | % |
(*)The local currency revenue growth was calculated by using the average monthly exchange rates for each month during 2022 and applying them to the corresponding months in 2023, so as to calculate what our financial results would have been if exchange rates had remained stable from one year to the next. See also “Non-GAAP Financial Measures” section below for details on FX neutral measures.
(**)Average inter-annual inflation rate in our Argentine segment for the three-month period ended March 31, 2023 was 101.9%. This effect was partially offset by an average inter-annual depreciation of the Argentine peso of 83.3% for the three-month period ended March 31, 2023.
Cost of net revenues
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Change from 2022 to 2023 |
| | 2023 | | 2022 | | in Dollars | | in % |
| | (in millions, except percentages) |
Total cost of net revenues | | $ | 1,501 | | $ | 1,175 | | $ | 326 | | 27.7% |
As a percentage of net revenues | | 49.4% | | 52.3% | | | | |
For the three-month period ended March 31, 2023 as compared to the same period in 2022, the increase in cost of net revenues was primarily attributable to: i) a $102 million increase in shipping operating and carrier costs; ii) a $74 million increase in sales taxes; iii) a $60 million increase in collection fees, which was mainly attributable to our Brazilian and Mexican operations as a result of the higher transactions volume of Mercado Pago in those countries; iv) a $52 million increase in other fintech costs mainly related to higher funding costs related to our credits business; v) a $19 million increase in cost of sales of goods mainly in Brazil and Mexico; and vi) a $17 million increase mainly related to hosting.
Product and technology development expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Change from 2022 to 2023 |
| | 2023 | | 2022 | | in Dollars | | in % |
| | (in millions, except percentages) |
Product and technology development | | $ | 381 | | $ | 234 | | $ | 147 | | 62.8% |
As a percentage of net revenues | | 12.5% | | 10.4% | | | | |
For the three-month period ended March 31, 2023, the increase in product and technology development expenses as compared to the same period in 2022 was primarily attributable to: i) a $109 million increase in salaries and wages mainly related to the increase of 42% in our product and technology development headcount; ii) a $23 million increase in other product and technology development expenses mainly related to certain tax withholding in connection with intercompany export services billing duties; and iii) a $15 million increase in depreciation and amortization expenses mainly related to capitalized information and technology assets.
We believe that product and technology development is one of our key competitive advantages and we intend to continue to invest in hiring engineers to meet the increasingly sophisticated product expectations of our customer base.
Sales and marketing expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Change from 2022 to 2023 |
| | 2023 | | 2022 | | in Dollars | | in % |
| | (in millions, except percentages) |
Sales and marketing | | $ | 383 | | $ | 286 | | $ | 97 | | 33.9% |
As a percentage of net revenues | | 12.6 | % | | 12.7 | % | | | | |
For the three-month period ended March 31, 2023, the increase in sales and marketing expenses as compared to the same period in 2022 was primarily attributable to: i) a $38 million increase in online and offline marketing expenses mainly in Brazil and Mexico; ii) a $21 million increase in our buyer protection program expenses; iii) an $18 million increase in salaries and wages; and iv) a $6 million increase in chargebacks.
Provision for doubtful accounts
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Change from 2022 to 2023 |
| | 2023 | | 2022 | | in Dollars | | in % |
| | (in millions, except percentages) |
Provision for doubtful accounts | | $ | 252 | | $ | 255 | | $ | (3) | | (1.2)% |
As a percentage of net revenues | | 8.3% | | 11.3% | | | | |
For the three-month period ended March 31, 2023, as compared to the same period in 2022, the provision for doubtful accounts remained stable despite the credit portfolio increasing 26%, from $2,415 million as of March 31, 2022 to $3,049 million as of March 31, 2023. Initiatives to rebalance portfolio exposure towards lower risk customers allowed us to improve our 1-90 days non-performing loans ratio from 13.4% as of March 31, 2022 to 9.5% as of March 31, 2023.
General and administrative expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Change from 2022 to 2023 |
| | 2023 | | 2022 | | in Dollars | | in % |
| | (in millions, except percentages) |
General and administrative | | $ | 180 | | $ | 159 | | $ | 21 | | 13.2% |
As a percentage of net revenues | | 5.9% | | 7.1% | | | | |
For the three-month period ended March 31, 2023, the increase in general and administrative expenses as compared to the same period in 2022 was primarily attributable to a $26 million increase in salaries and wages, mainly related to the increase of 27% in general and administrative headcount, and as it relates to our Argentine segment, related to an average inter-annual inflation rate for the three-month period ended March 31, 2023 that has been higher than the local currency depreciation. This increase was partially offset by a $3 million decrease in temporary services primarily related to administrative workers.
Other expense, net
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Change from 2022 to 2023 |
| | 2023 | | 2022 | | in Dollars | | in % |
| | (in millions, except percentages) |
Other expense, net | | $ | (20) | | | $ | (28) | | | $ | 8 | | | (28.6)% |
As a percentage of net revenues | | -0.7 | % | | -1.2 | % | | | | |
For the three-month period ended March 31, 2023, the decrease in other expense, net as compared to the same period in 2022 was primarily attributable to the $130 million increase in interest income and other financial gains from our financial investments as a result of higher interest income due to higher float and rates in Argentina, Brazil, Mexico and U.S. This decrease was partially offset by: i) foreign exchange losses that were $84 million higher than foreign exchange losses for the same period in 2022, mainly due to higher acquisition of our own common stock in the Argentine market at a price that reflects the additional cost of accessing U.S. dollars through an indirect mechanism due to restrictions imposed by the Argentine government for buying U.S. dollars at the official exchange rate (refer to Note 16 of our unaudited interim condensed consolidated financial statements for further detail), higher foreign exchange losses from our Argentine subsidiaries and lower foreign exchange gains from our Brazilian subsidiaries; and ii) a $38 million increase in interest expense and other financial losses mainly attributable to higher levels of indebtedness in 2023 and higher rates (mainly in Brazil).
Income tax
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Change from 2022 to 2023 |
| | 2023 | | 2022 | | in Dollars | | in % |
| | (in millions, except percentages) |
Income tax expense | | $ | 122 | | | $ | 46 | | | $ | 76 | | 165.2 | % |
As a percentage of net revenues | | 4.0 | % | | 2.0 | % | | | | |
During the three-month period ended March 31, 2023 as compared to the same period in 2022, income tax expense increased mainly as a result of higher income tax expense in Argentina and Mexico as a consequence of higher pre-tax gains in those segments in 2023.
The following table summarizes our effective tax rates for the three-month periods ended March 31, 2023 and 2022:
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2023 | | 2022 |
| | | | |
Effective tax rate (*) | | 38.1% | | 40.7% |
(*)Percentages have been calculated using whole-dollar amounts rather than the rounded amounts that appear in the table.
Our effective tax rate for the three-month period ended March 31, 2023 decreased as compared to the same period in 2022, as a result of lower proportion of pre-tax losses in our Mexican segment which were included in the valuation allowance. This effect was offset by higher foreign exchange losses related to the acquisition of our own common stock in the Argentine market at a price that reflects the additional cost of accessing U.S. dollars through an indirect mechanism due to restrictions imposed by the Argentine government for buying U.S. dollars at the official exchange rate, which was considered as non-deductible expense.
The following table summarizes our effective tax rates for the three-month periods ended March 31, 2023 and 2022:
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2023 | | 2022 |
Effective tax rate by country | | | | |
Argentina | | 31.2% | | 26.2% |
Brazil | | 6.8% | | -0.7% |
Mexico | | 40.6% | | -27.8% |
The increase in our Argentine effective income tax rate during the three-month period ended March 31, 2023, as compared to the same period in 2022, was mainly related to taxable foreign exchange gains accounted for local tax purposes which are not recorded for accounting purposes since, under U.S. GAAP, Argentine operations’ functional currency is the U.S. dollar due to the highly inflationary status of the country and higher non-deductible expenses.
The increase in our Brazilian effective income tax rate for the three-month period ended March 31, 2023, was mainly related to a higher proportion of taxable pre-tax gains over the segment income as compared to the same period in 2022.
The increase in our Mexican effective income tax rate for the three-month period ended March 31, 2023, was mainly driven by lower proportion of pre-tax losses over the segment income which were included in the valuation allowance and higher true up charges recognized in the period compared to the same period in 2022.
Segment information
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2023 |
| Brazil | | Argentina | | Mexico | | Other Countries | | Total |
| (In millions, except percentages) |
Net revenues | $ | 1,579 | | $ | 721 | | $ | 591 | | $ | 146 | | $ | 3,037 |
Direct costs | (1,261) | | | (411) | | | (464) | | | (131) | | | (2,267) | |
Direct contribution | $ | 318 | | $ | 310 | | $ | 127 | | $ | 15 | | $ | 770 |
Margin | 20.1% | | 43.0% | | 21.5% | | 10.3% | | 25.4% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2022 |
| Brazil | | Argentina | | Mexico | | Other Countries | | Total |
| (In millions, except percentages) |
Net revenues | $ | 1,252 | | $ | 518 | | $ | 364 | | $ | 114 | | $ | 2,248 |
Direct costs | (1,065) | | | (320) | | | (328) | | | (110) | | | (1,823) | |
Direct contribution | $ | 187 | | $ | 198 | | $ | 36 | | | $ | 4 | | $ | 425 |
Margin | 14.9% | | 38.2% | | 9.9% | | 3.5% | | 18.9% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Change from the Three Months Ended March 31, 2022 to March 31, 2023 |
| Brazil | | Argentina | | Mexico | | Other Countries | | Total |
| (In millions, except percentages) |
Net revenues | | | | | | | | | |
in Dollars | $ | 327 | | $ | 203 | | $ | 227 | | $ | 32 | | | $ | 789 |
in % | 26.1% | | 39.2% | | 62.4% | | 28.1 | % | | 35.1% |
Direct costs | | | | | | | | | |
in Dollars | $ | (196) | | | $ | (91) | | | $ | (136) | | | $ | (21) | | | $ | (444) | |
in % | 18.4% | | 28.4% | | 41.5% | | 19.1% | | 24.4% |
Direct contribution | | | | | | | | | |
in Dollars | $ | 131 | | $ | 112 | | $ | 91 | | $ | 11 | | | $ | 345 |
in % | 70.1% | | 56.6% | | 252.8 | % | | 275.0 | % | | 81.2% |
Net revenues
Net revenues for the three-month period ended March 31, 2023 as compared to the same period in 2022 are described above in “Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations—Principal trends in results of operations— Net revenues.”
Direct costs
Brazil
For the three-month period ended March 31, 2023, as compared to the same period in 2022, direct costs increased mainly driven by: i) a $180 million increase in cost of net revenues, mainly attributable to an increase in sales taxes, shipping operating and carrier costs, collection fees as a consequence of the higher transactions volume of our Mercado Pago business, cost of goods sold, hosting expenses, and other payments costs mainly consisting of higher funding cost related to our credits; ii) a $42 million increase in sales and marketing expenses, mainly due to an increase in online and offline marketing expenses, buyer protection program expenses, salaries and wages and sales expenses; and iii) a $9 million increase in product and technology development expenses, mostly attributable to an increase in depreciation and amortization expenses. This was partially offset by a decrease of $35 million in provision for doubtful accounts mainly related to our initiatives to rebalance portfolio exposure towards lower risk customers, which allowed us to improve our 1-90 days non-performing loans ratio.
Argentina
For the three-month period ended March 31, 2023, as compared to the same period in 2022, direct costs increased mainly driven by: i) a $63 million increase in cost of net revenues, mainly attributable to an increase in other payments costs in connection with higher funding cost related to our credits business, sales taxes, shipping operating and carrier costs and hosting expense; ii) a $10 million increase in sales and marketing expenses, mainly due to buyer protection program expenses, salaries and wages and chargebacks; iii) a $9 million increase in provision for doubtful accounts mainly related to our consumer credits business growth; iv) a $6 million increase in product and technology development expenses mostly attributable to an increase in depreciation and amortization expenses; and v) a $3 million increase in general and administrative expenses, mostly attributable to an increase in other general and administrative expenses principally related to certain tax withholdings.
Mexico
For the three-month period ended March 31, 2023, as compared to the same period in 2022, direct costs increased mainly driven by: i) a $82 million increase in cost of net revenues, mainly attributable to increases in shipping operating and carrier costs, collection fees due to higher Mercado Pago penetration, other payments costs mainly related to higher funding cost related to our credits business, cost of goods sold as a consequence of an increase in first-party sales and hosting expenses; ii) a $27 million increase in sales and marketing expenses, mainly due to buyer protection program expenses, online and offline marketing expenses, salaries and wages, chargebacks and sales expenses; iii) a $21 million increase in provision for doubtful accounts mainly related to our consumer credits business growth, partially offset by initiatives to rebalance portfolio exposure towards lower risk customers, allowed us to improve our 1-90 days non-performing loans ratio; and; iv) a $4 million increase in product and technology development expenses, mainly attributable to depreciation and amortization expenses.
Liquidity and Capital Resources
Our main cash requirement has been working capital to fund Mercado Pago financing operations. We also require cash to fund our credits business, for capital expenditures relating to technology infrastructure, software applications, office space, business acquisitions, to build out our logistics capacity and to make interest payments on our loans payable and other financial liabilities.
We have funded Mercado Pago mainly by selling credit card receivables and through credit lines. Additionally, we have financed our Mercado Pago and Mercado Credito businesses through the securitization of credit card receivables and certain loans through SPEs created in Brazil, Mexico and Argentina. Finally, we obtained funding through our financial institution in Brazil through deposit certificates and financial bills. Refer to Notes 12 and 13 of our unaudited interim condensed consolidated financial statements for further detail.
We committed to purchase cloud services for: i) a total amount of $824 million to be paid within a 5-year period starting on October 1, 2021 and ii) a total amount of $200 million to be paid within a 3-year period starting on September 23, 2022. Please refer to Note 10 of our unaudited interim condensed consolidated financial statements for further detail on purchase commitments.
Further, in connection with the closing of MELI Kaszek Pioneer Corp (“MEKA”)’s initial public offering on October 1, 2021, MEKA (a special purpose acquisition company sponsored by MELI Kaszek Pioneer Sponsor LLC (the “Sponsor”), which is a joint venture between our subsidiary, MELI Capital Ventures LLC, and Kaszek Ventures Opportunity II, L.P.) entered into a forward purchase agreement with the Sponsor, pursuant to which the Sponsor committed to purchase from MEKA 5 million Class A ordinary shares at a price of $10 per share in a private placement to close substantially concurrently with the consummation of MEKA’s initial business combination.
On April 8, 2022, we signed a 10-year agreement with Gol Linhas Aereas S.A. under which we committed to contract a minimum amount of air logistics services for a total annual cost of $43 million (total amount once all the dedicated aircraft are in operation). Pursuant to the agreement, Gol Linhas Aereas S.A. will provide logistics services in Brazil to Mercado Envios through six dedicated aircraft, three of which have already started operations as of March 31, 2023.
Additionally, we have several committed leases, mainly, related to our fulfillment and service centers, which are one of the most important investments for our Mercado Envios business. As of March 31, 2023, we have committed rental expenditures with our lessors for $973 million and $64 million for operating leases and finance leases, respectively. See Note 14 of our unaudited interim condensed consolidated financial statements for further detail on leases.
We and certain financial institutions participate in a supplier finance program (“SFP”) that enables certain of our suppliers, at their own election, to request the payment of their invoices to the financial institutions earlier than the terms stated in our payment policy. Suppliers’ voluntary inclusion of invoices in the SFP does not change our payment terms, the amounts paid or liquidity. We have no economic interest in a supplier’s decision to participate in the SFP and have no financial impact in connection with the SFP. As of March 31, 2023, the obligations outstanding that the Company has confirmed as valid to the financial institutions amounted to $254 million, and are included in the balance sheet within accounts payable and accrued expenses line.
During August 2022, we issued commercial paper in Brazil for $198 million, the main purpose of which is to continue investing in capital expenditures for our shipping business, in order to continue developing our shipping strategy. See Note 12 of our unaudited interim condensed consolidated financial statements for further detail.
Finally, on March 31, 2022, we entered into a $400 million revolving credit arrangement (“the Credit Arrangement”). The interest rates under the Credit Arrangement are based on Adjusted Term SOFR plus an interest margin of 1.25% per annum. Any loans drawn under the Credit Arrangement must be repaid on or prior to March 31, 2025. We are also obligated to pay a commitment fee on the unused amounts of the facility at an annual rate of 0.3125%. As of March 31, 2023, no amounts had been borrowed under the facility. See Note 12 of our unaudited interim condensed consolidated financial statements for further detail.
As of March 31, 2023, our main source of liquidity was $3,213 million of cash and cash equivalents and short-term investments, which excludes a $1,409 million investment mainly related to the Central Bank of Brazil Mandatory Guarantee, and consists mainly of cash generated from operations and proceeds from loans.
The significant components of our working capital are cash and cash equivalents, restricted cash and cash equivalents, short-term investments, credit card receivables and other means of payments, accounts receivable, loans receivable, inventory, accounts payable and accrued expenses, funds payable to customers, amounts payable due to credit and debit card transactions and short-term debt.
As of March 31, 2023, cash and cash equivalents, restricted cash and cash equivalents and investments of our non-U.S. subsidiaries amounted to $5,173 million or 82.4% of our consolidated cash and cash equivalents, restricted cash and cash equivalents and investments, and our non-US denominated cash and cash equivalent, restricted cash and cash equivalent and investments held outside U.S. amounted to 79.8% of our consolidated cash and cash equivalents, restricted cash and cash equivalents and investments. Our non-U.S. dollar-denominated cash and investments are located primarily in Brazil, Mexico and Argentina.
The following table presents our cash flows from operating activities, investing activities and financing activities for the three-month periods ended March 31, 2023 and 2022:
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
(In millions) | | 2023 | | 2022 |
Net cash provided by (used in): | | | | |
Operating activities | | $ | 859 | | | $ | (233) | |
Investing activities | | (538) | | | (1,224) | |
Financing activities | | (112) | | | 152 | |
Effect of exchange rates on cash and cash equivalents, restricted cash and cash equivalents | | (48) | | | 71 | |
Net increase (decrease) in cash and cash equivalents, restricted cash and cash equivalents | | $ | 161 | | | $ | (1,234) | |
Net cash provided by (used in) operating activities
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Change from 2022 to 2023 |
| 2023 | | 2022 | | in Dollars | | in % |
| (in millions, except percentages) |
Net Cash provided by (used in): | | | | | | | |
Operating activities | $ | 859 | | | $ | (233) | | | $ | 1,092 | | | (468.7) | % |
Net cash provided by operating activities in the three-month period ended March 31, 2023 resulted mainly from our net income of $201 million, adjustments to net income related to non-cash items of $538 million, a decrease in credit card receivables and other means of payments by $165 million, and an increase in payables and accrued expenses of $107 million, which were partially offset by a $242 million decrease in funds payable to customers.
Net cash used in investing activities
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Change from 2022 to 2023 |
| 2023 | | 2022 | | in Dollars | | in % |
| (in millions, except percentages) |
Net Cash used in: | | | | | | | |
Investing activities | $ | (538) | | | $ | (1,224) | | | $ | 686 | | | (56.0) | % |
Net cash used in investing activities in the three-month period ended March 31, 2023 resulted mainly from purchases of investments of $5,124 million, which was offset by proceeds from the sale and maturity of investments of $5,104 million, consistent with our treasury strategy of investing part of our available liquidity. We also used $421 million in principal of loans receivable granted to merchants and consumers under our Mercado Credito solution and $89 million in the investment of property and equipment (mainly related to our shipping network and information technology assets in Argentina, Brazil and Mexico).
Net cash (used in) provided by financing activities
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Change from 2022 to 2023 |
| 2023 | | 2022 | | in Dollars | | in % |
| (in millions, except percentages) |
Net Cash (used in) provided by: | | | | | | | |
Financing activities | $ | (112) | | | $ | 152 | | | $ | (264) | | | (173.7) | % |
For the three-month period ended March 31, 2023, our net cash used in financing activities resulted primarily from $6,022 million used in payments on loans payable and other financial liabilities, $61 million related to repurchases of our common stock, and $6 million for the payments of finance lease obligations, partially offset by $5,977 million in net proceeds from 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
Convertible Senior Notes
On August 24, 2018, we issued $800 million of 2.00% Convertible Senior Notes due 2028 and on August 31, 2018 we issued an additional $80 million of notes pursuant to the partial exercise of the initial purchasers’ option to purchase such additional notes, resulting in an aggregate principal amount of $880 million of 2.00% Convertible Senior Notes due 2028. The 2028 Notes are unsecured, unsubordinated obligations, which pay interest in cash semi-annually, on February 15 and August 15, at a rate of 2.00% per annum. The 2028 Notes will mature on August 15, 2028 unless earlier redeemed, repurchased or converted in accordance with their terms prior to such date. The 2028 Notes may be converted, under specific conditions, based on an initial conversion rate of 2.2553 shares of common stock per $1,000 principal amount of the 2028 Notes (equivalent to an initial conversion price of $443.40 per share of common stock), subject to adjustment as described in the indenture governing the 2028 Notes.
In January 2021, we signed agreements with 2028 Notes holders to repurchase $440 million principal amount of our outstanding 2028 Notes. The total amount paid amounted to $1,865 million, which includes principal, interest accrued and premium. As of the date of the issuance of this report, $439 million of our principal amount of the 2028 Notes remains outstanding.
Please refer to Note 12 to our unaudited interim condensed consolidated financial statements for additional information regarding the 2028 Notes and the related capped call transactions.
Debt Securities Guaranteed by Subsidiaries
On January 14, 2021, we issued $400 million aggregate principal amount of the 2026 Sustainability Notes and $700 million aggregate principal amount of the 2031 Notes. The payment of principal, premium, if any, interest, and all other amounts in respect of each of the Notes, is fully and unconditionally guaranteed (the “Subsidiary Guarantees”), jointly and severally, on an unsecured basis, by certain of our subsidiaries (the “Subsidiary Guarantors”). The initial Subsidiary Guarantors were MercadoLibre S.R.L., Ibazar.com Atividades de Internet Ltda., eBazar.com.br Ltda., Mercado Envios Servicos de Logistica Ltda., Mercado Pago Instituição de Pagamento Ltda. (formerly known as “MercadoPago.com Representações Ltda.”), MercadoLibre Chile Ltda., MercadoLibre, S.A. de C.V., Institución de Fondos de Pago Electrónico (formerly known as “MercadoLibre, S. de R.L. de C.V.”), DeRemate.com de México, S. de R.L. de C.V. and MercadoLibre Colombia Ltda. On October 27, 2021, MercadoLibre, S.A. de C.V., Institución de Fondos de Pago Electrónico became an excluded subsidiary pursuant to the terms of the Notes and it was released from its Subsidiary Guaranty. On October 27, 2021, MP Agregador, S. de R.L. de C.V. became a Subsidiary Guarantor under the Notes. On July 1 and October 1, 2022, Ibazar.com Atividades de Internet Ltda. and Mercado Envios Servicos de Logistica Ltda. were merged into eBazar.com.br Ltda., respectively.
We pay interest on the Notes on January 14 and July 14 of each year, beginning on July 14, 2021. The 2026 Sustainability Notes will mature on January 14, 2026, and the 2031 Notes will mature on January 14, 2031.
The Notes rank equally in right of payment with all of the Company’s other existing and future senior unsecured debt obligations. Each Subsidiary Guarantee will rank equally in right of payment with all of the Subsidiary Guarantor’s other existing and future senior unsecured debt obligations, except for statutory priorities under applicable local law.
Each Subsidiary Guarantee will be limited to the maximum amount that would not render the Subsidiary Guarantor’s obligations subject to avoidance under applicable fraudulent conveyance provisions of applicable law. By virtue of this limitation, a Subsidiary Guarantor’s obligation under its Subsidiary Guarantee could be significantly less than amounts payable with respect to the Notes, or a Subsidiary Guarantor may have effectively no obligation under its Subsidiary Guarantee.
Under the indenture governing the Notes, the Subsidiary Guarantee of a Subsidiary Guarantor will terminate upon: (i) the sale, exchange, disposition or other transfer (including by way of consolidation or merger) of the Subsidiary Guarantor or the sale or disposition of all or substantially all the assets of the Subsidiary Guarantor (other than to the Company or a Subsidiary) otherwise permitted by the indenture, (ii) satisfaction of the requirements for legal or covenant defeasance or discharge of the Notes, (iii) the release or discharge of the guarantee by such Subsidiary Guarantor of the Triggering Indebtedness (as defined in the applicable indenture) or the repayment of the Triggering Indebtedness, in each case, that resulted in the obligation of such Subsidiary to become a Subsidiary Guarantor, provided that in no event shall the Subsidiary Guarantee of an Initial Subsidiary Guarantor terminate pursuant to this provision, or (iv) such Subsidiary Guarantor becoming an Excluded Subsidiary (as defined in the applicable indenture) or ceasing to be a Subsidiary.
We may, at our option, redeem the 2026 Sustainability Notes, in whole or in part, at any time prior to December 14, 2025 (the date that is one month prior to the maturity of the 2026 Sustainability Notes) and the 2031 Notes, in whole or in part, at any time prior to October 14, 2030 (the date that is three months prior to the maturity of the 2031 Notes), in each case by paying 100% of the principal amount of such Notes so redeemed plus the applicable “make-whole” amount and accrued and unpaid interest and additional amounts, if any. We may, at our option, redeem the 2026 Sustainability Notes, in whole or in part, on December 14, 2025 or at any time thereafter and the 2031 Notes on October 14, 2030 or at any time thereafter, in each case at the redemption price of 100% of the principal amount of such Notes so redeemed plus accrued and unpaid interest and additional amounts, if any. If we experience certain change of control triggering events, we may be required to offer to purchase the notes at 101% of their principal amount plus any accrued and unpaid interest thereon through the purchase date.
See Note 12 of our unaudited condensed consolidated financial statements for additional detail.
We are presenting the following summarized financial information for the issuer and the Subsidiary Guarantors (together, the “Obligor Group”) pursuant to Rule 13-01 of Regulation S-X, Guarantors and Issuers of Guaranteed Securities Registered or Being Registered. For purposes of the following summarized financial information, transactions between the Company and the Subsidiary Guarantors, presented on a combined basis, have been eliminated. Financial information for the non-guarantor subsidiaries, and any investment in a non-guarantor subsidiary by the Company or by any Subsidiary Guarantor, have been excluded. Amounts due from, due to and transactions with the non-guarantor subsidiaries and other related parties, as applicable, have been separately presented in footnotes.
Summarized balance sheet information for the Obligor Group as of March 31, 2023 and as of December 31, 2022 is provided in the table below:
| | | | | | | | | | | | | | |
(In millions) | | March 31, 2023 | | December 31, 2022 |
| | | | |
Current assets (1) (2) | | $ | 8,688 | | | $ | 7,966 | |
Non-current assets (3) | | 2,811 | | | 2,693 | |
Current Liabilities (4) | | 7,706 | | | 7,214 | |
Non-current Liabilities | | 2,655 | | | 2,547 | |
(1)Includes restricted cash and cash equivalents of $435 million and $687 million and guarantees in short-term investments of $1,408 million and $1,219 million as of March 31, 2023, and December 31, 2022, respectively.
(2)Includes Current assets from non-guarantor subsidiaries of $1,507 million and $863 million as of March 31, 2023, and December 31, 2022, respectively.
(3)Includes Non-current assets from non-guarantor subsidiaries of $451 million and $410 million as of March 31, 2023, and December 31, 2022, respectively.
(4)Includes Current liabilities to non-guarantor subsidiaries of $1,758 million and $1,334 million as of March 31, 2023, and December 31, 2022, respectively.
Summarized statement of income information for the Obligor Group for the three-month period ended March 31, 2023, is provided in the table below:
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(In millions) | | March 31, 2023 |
| | |
Net revenues (1) | | $ | 2,544 |
Gross Profit (2) | | 1,181 |
Income from operations (3) | | 252 |
Net Income (4) | | 155 |
(1)Includes Net revenues from transactions with non-guarantor subsidiaries of $28 million for the three-month period ended March 31, 2023.
(2)Includes charges from transactions with non-guarantor subsidiaries of $162 million for the three-month period ended March 31, 2023.
(3)In addition to the charges included in Gross profit, Income from operations includes charges from transactions with non-guarantor subsidiaries of $168 million for the three-month period ended March 31, 2023.
(4)Includes other income/ (expense) from transactions with non-guarantor subsidiaries of $(21) million for the three-month period ended March 31, 2023.
Capital expenditures
Our capital expenditures (comprised of our investments for property and equipment (such as fulfillment centers), intangible assets (excluding digital assets)) for the three-month periods ended March 31, 2023 and 2022 amounted to $89 million and $137 million, respectively.
During the three-month period ended March 31, 2023, we invested $49 million in information and technology assets in Brazil, Argentina and Mexico, and $36 million in our Argentine, Brazilian and Mexican shipping premises and offices.
We are continually increasing our level of investment in hardware and software licenses necessary to improve and update our platform’s technology and computer software developed internally. We anticipate continued investments in capital expenditures related to information technology and logistics network capacity in the future as we strive to maintain our position in the Latin American e-commerce and fintech market.
We believe that our existing cash and cash equivalents, including the sale of credit card receivables, short-term investments and cash generated from operations, will be sufficient to fund our operating activities, property and equipment expenditures and to pay or repay obligations in the foreseeable future.
Recently issued accounting pronouncements
See Item 1 of Part I, “Unaudited Interim Condensed Consolidated Financial Statements - Note 2 - Summary of significant accounting policies and supplemental information— Recently Adopted Accounting Standards and Recently issued accounting pronouncements not yet adopted.”
Non-GAAP Measures of Financial Performance
To supplement our unaudited interim condensed consolidated financial statements presented in accordance with U.S. GAAP, we present earnings before interest income and other financial gains, interest expense and other financial losses, foreign currency losses, income tax expense, depreciation and amortization and equity in earnings of unconsolidated entity (“Adjusted EBITDA”), net debt, interest margins after losses (“IMAL”) and foreign exchange (“FX”) neutral measures as non-GAAP measures. Reconciliation of these non-GAAP financial measures to the most comparable U.S. GAAP financial measures can be found in the tables below.
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.
We believe that reconciliation of these non-GAAP measures to the most directly comparable GAAP measure provides investors an overall understanding of our current financial performance and its prospects for the future.
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure that represents our net income, adjusted to eliminate the effect of depreciation and amortization charges, interest income and other financial gains, interest expense and other financial losses, foreign currency losses, income tax expense and equity in earnings of an unconsolidated entity. We have included this non-GAAP financial measure because it is used by our Management to evaluate our operating performance and trends, make strategic decisions and the calculation of leverage ratios. Accordingly, we believe this measure provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our Management. In addition, it provides a useful measure for period-to-period comparisons of our business, as it removes the effect of certain items.
The following table presents a reconciliation of net income to Adjusted EBITDA for each of the periods indicated (in millions):
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2023 | | 2022 |
Net income | $ | 201 | | | $ | 65 | |
Adjustments: | | | |
Depreciation and amortization | 126 | | 84 | |
Interest income and other financial gains | (161) | | | (31) | |
Interest expense and other financial losses | 94 | | | 56 | |
Foreign currency losses, net | 87 | | | 3 | |
Income tax expense | 122 | | | 46 | |
Equity in earnings of unconsolidated entity | (3) | | | — | |
Adjusted EBITDA | $ | 466 | | | $ | 223 | |
Net debt
We define net debt as total debt which includes current and non-current loans payable and other financial liabilities and current and non-current operating lease liabilities, less cash and cash equivalents, short-term investments and long-term investments, excluding foreign government debt securities held in guarantee, securitization transactions and equity securities held at cost. We have included this non-GAAP financial measure because it is used by our Management to analyze our current leverage ratios and set targets to be met, which will also impact other components of the Company’s balance sheet, cash flows and income statement. Accordingly, we believe this measure provides useful information to investors and other market participants in showing the evolution of the Company’s indebtedness and its capability of repayment as a means to, alongside other measures, monitor our leverage based on widely-used measures.
The following table presents a reconciliation of net debt for each of the periods indicated (in millions):
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| March 31, 2023 | | December 31, 2022 |
Current Loans payable and other financial liabilities | $ | 2,332 | | | $ | 2,131 | |
Non-current Loans payable and other financial liabilities | 2,500 | | | 2,627 | |
Current Operating lease liabilities | 159 | | | 142 | |
Non-current Operating lease liabilities | 529 | | | 514 | |
Total debt | $ | 5,520 | | | $ | 5,414 | |
Less: | | | |
Cash and cash equivalents | $ | 2,143 | | | $ | 1,910 | |
Short-term investments (1) | 1,070 | | | 1,120 | |
Long-term investments (2) | 200 | | | 245 | |
Net debt | $ | 2,107 | | | $ | 2,139 | |
(1) Excludes foreign government debt securities held in guarantee and investments held in VIEs as a consequence of securitization transactions.
(2) Excludes investments held in VIEs as a consequence of securitization transactions and equity securities held at cost.
IMAL
IMAL is a non-GAAP financial measure that represents the annualized ratio between total credits revenues of the last quarter less provision for doubtful accounts for the last quarter and total loans receivable as of the end of the quarter. We have included this non-GAAP financial measure because it is used by our Management to monitor how effectively we are pricing the credit product relative to its risk. As such, it is used internally as a measure to monitor performance, manage risk and set targets. Accordingly, we believe this measure provides useful information to investors and others portraying how revenues and provision for doubtful accounts interact with the portfolio size through the different quarters and showing how effectively we are pricing risk, and as a simple measure of profitability.
The following table presents a reconciliation of IMAL for each of the periods indicated (in millions, except percentages):
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2023 | | 2022 |
Total credits revenues | $ | 536 | | | $ | 402 | |
Less: Provision for doubtful accounts | 240 | | | 253 | |
Subtotal (a) | $ | 296 | | | $ | 149 | |
Loans receivable (b) | $ | 3,049 | | | $ | 2,415 | |
Annualized ratio (a/b)*4 | 38.8 | % | | 24.7 | % |
FX neutral
We believe that FX neutral 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 2022 and applying them to the corresponding months in 2023, so as to calculate what our results would have been had exchange rates remained stable from one year to the next. The comparative FX neutral measures were calculated by using the average monthly exchange rates for each month during 2021 and applying them to the corresponding months in 2022. 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 sets forth the FX neutral measures related to our reported results of the operations for the three-month period ended March 31, 2023:
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| | Three Months Ended March 31, |
| | As reported | | FX Neutral Measures | | As reported | | |
(In millions, except percentages) | | 2023 | | 2022 | | Percentage Change | | 2023 | | 2022 | | Percentage Change |
| | (Unaudited) | | | | (Unaudited) | | |
Net revenues | | $ | 3,037 | | | $ | 2,248 | | | 35.1 | % | | $ | 3,562 | | | $ | 2,248 | | | 58.4 | % |
Cost of net revenues | | (1,501) | | | (1,175) | | | 27.7 | % | | (1,709) | | | (1,175) | | | 45.4 | % |
Gross profit | | 1,536 | | | 1,073 | | | 43.2 | % | | 1,853 | | | 1,073 | | | 72.6 | % |
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Operating expenses | | (1,196) | | | (934) | | | 28.1 | % | | (1,450) | | | (934) | | | 55.4 | % |
Income from operations | | $ | 340 | | | $ | 139 | | | 144.6 | % | | $ | 403 | | | $ | 139 | | | 188.3 | % |
Item 3 — Qualitative and Quantitative Disclosure About Market Risk
We are exposed to market risks arising from our business operations. These market risks arise mainly from macroeconomic instability and the possibility that changes in interest rates and the U.S. dollar exchange rate with local currencies, particularly the Brazilian Real, Argentine Peso and Mexican Peso due to Brazil’s, Argentina’s and Mexico’s respective share of our revenues, may affect the value of our financial assets and liabilities.
We are also exposed to market risks arising from our long-term retention programs (“LTRPs”). These market risks arise from our obligations to pay employees cash payments in amounts that vary based on the market price of our stock.
Foreign currencies
We have significant operations internationally that are denominated in foreign currencies, primarily the Brazilian Real, Argentine Peso, Mexican Peso, Colombian Peso and Chilean Peso, subjecting us to foreign currency risk, which may adversely impact our financial results. We transact business in various foreign currencies and have significant international revenues and costs. In addition, we charge our international subsidiaries for their use of intellectual property and technology and for certain corporate services. Our cash flows, results of operations and certain of our intercompany balances that are exposed to foreign exchange rate fluctuations may differ materially from expectations and we may record significant gains or losses due to foreign currency fluctuations and related hedging activities.
We use foreign currency exchange forward contracts and currency swaps to protect our foreign currency exposure and our investment in a foreign subsidiary from adverse changes in foreign currency exchange rates. These hedging contracts reduce, but do not entirely eliminate, the impact of adverse foreign currency exchange rate movements. We designate these contracts as cash flow and net investment hedges for accounting purposes. The derivative’s gain or loss is initially reported as a component of accumulated other comprehensive income (“AOCI”). Cash flow hedges and net investment hedges are subsequently reclassified into the financial statement line item in which the hedged item is recorded in the same period the forecasted transaction affects earnings.
As of March 31, 2023, we hold cash and cash equivalents in local currencies in our subsidiaries, and have receivables denominated in local currencies in all of our operations. Our subsidiaries generate revenues and incur most of their expenses in the respective local currencies of the countries in which they operate. As a result, our subsidiaries use their local currency as their functional currency except for our Argentine subsidiaries, whose functional currency is the U.S. dollar due to the inflationary environment. As of March 31, 2023, the total cash and cash equivalents, restricted cash and cash equivalent denominated in foreign currencies totaled $2,988 million, short-term investments denominated in foreign currencies totaled $1,916 million and accounts receivable, credit card receivables and other means of payment and loans receivable in foreign currencies totaled $4,839 million. As of March 31, 2023, we had $83 million long-term investments denominated in foreign currencies. To manage exchange rate risk, our treasury policy is to transfer most cash and cash equivalents in excess of working capital requirements into U.S. dollar-denominated accounts in the United States and to enter into certain foreign exchange derivatives, such as currency forwards contracts, in order to mitigate our exposure to foreign exchange risk. As of March 31, 2023, our U.S. dollar-denominated cash and cash equivalents, restricted cash and cash equivalents and short-term investments totaled $1,099 million and our U.S. dollar-denominated long-term investments totaled $195 million.
For the three-month period ended March 31, 2023, we had a consolidated loss on foreign currency of $87 million mainly related to higher foreign exchange losses attributable to our own common stock acquisition in the Argentine market at a price that reflects the additional cost of accessing U.S. dollars through an indirect mechanism due to restrictions imposed by the Argentine government for buying U.S. dollars at the official exchange rate, higher foreign exchange losses from our Argentinian subsidiaries and lower foreign exchange gains from our Brazilian subsidiaries. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of operations—Other income (expenses), net” for more information.
Foreign Currency Sensitivity Analysis
The table below shows the impact on our net revenues, cost of net revenues, operating expenses, other income (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 at the moment of translating our financial statements to U.S. dollars as of March 31, 2023:
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Foreign Currency Sensitivity Analysis |
(In millions) | | -10% | | Actual | | +10% |
| | (1) | | | | (2) |
Net revenues | | $ | 3,374 | | | $ | 3,037 | | | $ | 2,761 | |
Expenses (*) | | (2,983) | | | (2,697) | | | (2,463) | |
Income from operations | | 391 | | | 340 | | | 298 | |
| | | | | | |
Other income/(expenses), equity in earning of unconsolidated entity and income tax related to P&L items | | 57 | | | (52) | | | 62 | |
Foreign Currency impact related to the remeasurement of our Net Asset position | | (204) | | | (87) | | | (193) | |
Net Income | | $ | 244 | | | $ | 201 | | | $ | 167 | |
| | | | | | |
Total Shareholders’ Equity | | $ | 2,348 | | | $ | 2,040 | | | $ | 1,788 | |
(1)Appreciation of the subsidiaries’ local currency against U.S. Dollar.
(2)Depreciation of the subsidiaries’ local currency against U.S. Dollar.
(*)Includes cost of net revenues and operating expenses.
The table above shows an increase in our net income when the U.S. dollar weakens against foreign currencies because of the positive impact of the increase in income from operations. On the other hand, the table above shows a decrease in our net income when the U.S. dollar strengthens against foreign currencies because of the negative impact of the decrease in income from operations.
Brazilian Segment
Considering a hypothetical devaluation of 10% of the Brazilian Reais against the U.S. dollar on March 31, 2023, the reported net assets in our Brazilian subsidiaries would have decreased by approximately $187 million with the related impact in Other Comprehensive Income. Additionally, we would have recorded a foreign currency loss amounting to approximately $32 million in our Brazilian subsidiaries.
Argentine Segment
In accordance with U.S. GAAP, we have classified our Argentine operations as highly inflationary since July 1, 2018, using the U.S. dollar as the functional currency for purposes of reporting our financial statements. Therefore, no translation effect has been accounted for in other comprehensive income related to our Argentine operations since July 1, 2018. Argentina’s quarterly inflation rate for the three-month periods ended March 31, 2023 and 2022 was 21.7% and 16.1%, respectively.
We use the Argentina’s official exchange rate to account for transactions in our Argentine segment, which as of March 31, 2023 and December 31, 2022 was 209.01 and 177.16 Argentine Pesos, respectively, against the U.S. dollar. For the three-month periods ended March 31, 2023 and 2022 the Argentina’s quarterly depreciation of its local currency against the U.S. dollar was 18.0% and 8.1%, respectively.
Considering a hypothetical devaluation of 10% of the Argentine Peso against the U.S. dollar on March 31, 2023, the effect on non-functional currency net asset position in our Argentine subsidiaries would have been a foreign exchange loss amounting to approximately $19 million in our Argentine subsidiaries.
See “Summary of significant accounting policies and supplemental information - Foreign currency translation - Argentine currency status and Argentine Exchange regulations” in Note 2 of our unaudited interim condensed consolidated financial statements for further detail on the currency status and the exchange regulations of our Argentine segment.
Mexican Segment
Considering a hypothetical devaluation of 10% of the Mexican peso against the U.S. dollar on March 31, 2023, the reported net assets in our Mexican subsidiaries would have decreased by approximately $68 million with the related impact in Other Comprehensive Income. Additionally, we would have recorded a foreign currency loss amounting to approximately $21 million in our Mexican subsidiaries.
Interest
Our earnings and cash flows are also affected by changes in interest rates. These changes could have an impact on the interest rates that financial institutions charge us prior to the time we sell our Mercado Pago receivables and on the financial debt that we use to fund Mercado Pago and Mercado Credito’s operations. As of March 31, 2023, Mercado Pago’s receivables totaled $2,799 million. Interest rate fluctuations could also impact interest earned through our Mercado Credito solution. As of March 31, 2023, loans receivable from our Mercado Credito solution totaled $1,908 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 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.
As of March 31, 2023, our short-term investments amounted to $2,479 million and our long-term investments amounted to $278 million. Our short-term investments, except for the $1,409 million investment, which is mainly related to the Central Bank of Brazil Mandatory Guarantee, 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. See Notes 3 and 5 of our unaudited interim condensed consolidated financial statements for further detail on our restricted investments.
Fluctuations of the interest rate could also have a negative impact on interest expense related to our Loans payable and other financial liabilities, as a portion of these instruments is subject to variable interest rates. As of March 31, 2023, our loans payable and other financial liabilities which accrue interest based on variable rates amounted to $2,692 million. See Notes 12 and 13 of our unaudited interim condensed consolidated financial statements for further detail. Considering a hypothetical increase of 10% of the interest rates on March 31, 2023, the reported Loans payable and other financial liabilities would have increased by approximately $95 million with the related impact in Interest expense and other financial losses. We have entered into swap contracts to hedge the interest rate fluctuation of $752 million notional amount, $365 million of which have been designated as hedging instruments. See Note 15 of our unaudited interim condensed consolidated financial statements for further detail on derivative instruments.
Equity Price Risk
Our Board, upon the recommendation of the compensation committee, approved the 2018 Long Term Retention Program (the “2018 LTRP”).
In order to receive an award under the 2018 LTRP, each eligible employee must satisfy the performance conditions established by the Board 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 2018 LTRP award, payable as follows:
•the eligible employee will receive a fixed payment, equal to 8.333% of his or her 2018 LTRP bonus once a year for a period of six years starting no later than April 30, 2019 (the “2018 Annual Fixed Payment”); and
•on each date we pay the respective Annual Fixed Payment to an eligible employee, he or she will also receive a payment (the “2018 Variable Payment”) equal to the product of (i) 8.333% of the applicable 2018 LTRP award and (ii) the quotient of (a) divided by (b), where (a), the numerator, equals the Applicable Year Stock Price (as defined below) and (b) the denominator, equals the 2017 Stock Price, defined as $270.84, which was the average closing price of our common stock on the NASDAQ Global Select Market during the final 60 trading days of 2017. The “Applicable Year Stock Price” shall equal the average closing price of our common stock on the NASDAQ Global Select Market during the final 60 trading days of the year preceding the applicable payment date.
Our Board, upon the recommendation of the compensation committee, approved the 2019, 2020, 2021, 2022 and 2023 Long Term Retention Program (the “2019, 2020, 2021, 2022 and 2023 LTRPs”), respectively, under which certain eligible employees have the opportunity to receive cash payments annually for a period of six years (with the first payment occurring no later than April 30, 2020, 2021, 2022, 2023 and 2024 for the 2019, 2020, 2021, 2022 and 2023 LTRPs, respectively). In order to receive the full target award under the 2019, 2020, 2021, 2022 and/or 2023 LTRPs, each eligible employee must remain employed as of each applicable payment date. The 2019, 2020, 2021, 2022 and 2023 LTRP awards are payable as follows:
•the eligible employee will receive 16.66% of half of his or her target 2019, 2020, 2021, 2022 and/or 2023 LTRP bonus once a year for a period of six years, with the first payment occurring no later than April 30, 2020, 2021, 2022, 2023 and 2024, respectively (the “2019, 2020, 2021, 2022 or 2023 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 “2019, 2020, 2021, 2022 or 2023 Variable Payment”) equal to the product of (i) 16.66% of half of the target 2019, 2020, 2021, 2022 or 2023 LTRP award and (ii) the quotient of (a) divided by (b), where (a), the numerator, equals the Applicable Year Stock Price (as defined below) and (b), the denominator, equals the average closing price of our common stock on the NASDAQ Global Select Market during the final 60 trading days of 2018, 2019, 2020, 2021 and 2022 defined as $322.91, $553.45, $1,431.26, $1,391.81 and $888.69 for the 2019, 2020, 2021, 2022 and 2023 LTRPs, respectively. The “Applicable Year Stock Price” shall equal the average closing price of our common stock on the NASDAQ Global Select Market during the final 60 trading days of the year preceding the applicable payment date.
As of March 31, 2023, the total contractual obligation fair value of our outstanding LTRP Variable Award Payment obligation subject to equity price risk amounted to $460 million. As of March 31, 2023, the accrued liability related to the outstanding Variable Award Payment of the LTRP included in Salaries and social security payable and Non-current other liabilities in our consolidated balance sheet amounted to $31 million. The following table shows a sensitivity analysis of the risk associated with our total contractual obligation fair value related to the outstanding LTRP Variable Award Payment subject to equity price risk if our common stock price per share were to increase or decrease by up to 40%:
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| | As of March 31, 2023 |
| | MercadoLibre, Inc Equity Price | | 2018, 2019, 2020, 2021, 2022 and 2023 LTRP Variable contractual obligation |
(In Millions, except equity price) | | |
Change in equity price in percentage | | | | |
| | | | |
40 | % | | 1,853.60 | | | 644 | |
30 | % | | 1,721.20 | | | 598 | |
20 | % | | 1,588.80 | | | 552 | |
10 | % | | 1,456.40 | | | 506 | |
Static | (*) | 1,324.00 | | | 460 | |
-10 | % | | 1,191.60 | | | 414 | |
-20 | % | | 1,059.20 | | | 368 | |
-30 | % | | 926.80 | | | 322 | |
-40 | % | | 794.40 | | | 276 | |
(*)Present value of average closing stock price for the last 60 trading days of the year preceding the applicable payment date.
In November 2021, we acquired Kangú Participações S.A. Former Kangú’s shareholders who after the acquisition became the Company’s employees will receive cash payments annually over a three-year period subject to certain performance and stay conditions. The payments will be indexed based on changes in equity price of our common stock. As of March 31, 2023, the total contractual obligation fair value of the mentioned payments amounted to $8 million.