Form 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2010
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
to
Commission file number 001-33647
MercadoLibre, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
(State of incorporation)
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98-0212790
(I.R.S. Employer Identification Number) |
Arias 3751, 7th Floor
Buenos Aires, C1430CRG, Argentina,
(Address of principal executive offices)
011-54-11-4640-8000
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Class
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Name of Exchange upon Which Registered |
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Common Stock, $0.001 par value per share
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Nasdaq Global Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to
submit and post such files). Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulations S-K is not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment of this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definitions of large accelerated filer, accelerated filer, and smaller reporting
company in Rule 12b-2 of the Exchange Act. (Check one):
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Large Accelerated Filer þ
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Accelerated Filer o
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Non-Accelerated Filer o
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Smaller reporting company o |
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(Do not check if smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes o No þ
The aggregate market value of the registrants Common Stock, $0.001 par value per share,
at June 30, 2010, held by those persons deemed by the registrant to be non-affiliates
(based upon the closing sale price of the Common Stock on the Nasdaq Global Market on
June 30, 2010) was approximately $1,500,927,000. Shares of the registrants Common Stock
held by each executive officer and director and by each entity or person that, to the
registrants knowledge, owned 10% or more of the registrants outstanding common stock
as of June 30, 2010 have been excluded from this number in that these persons may be
deemed affiliates of the registrant. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As of the latest practicable date, there were 44,131,376 shares of the registrants
Common Stock, $0.001 par value per share, outstanding.
Documents Incorporated By Reference
Portions of the Companys Definitive Proxy Statement relating to its 2010 Annual Meeting
of Stockholders, to be filed with the Securities and Exchange Commission by no later
than April 30, 2011, are incorporated by reference in Part III, Items 10-14 of this
Annual Report on Form 10-K as indicated herein.
MERCADOLIBRE, INC.
FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 2010
2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Any statements contained 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 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 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, for example in Risk Factors, Managements Discussion and Analysis of
Financial Condition and Results of Operations and Business. Forward-looking
statements generally relate to information concerning our possible or assumed future
results of operations, business strategies, financing plans, competitive position,
industry environment, potential growth opportunities, the effects of future regulation
and the effects of competition. Such forward-looking statements reflect, among other
things, our current expectations, plans, projections and strategies, anticipated
financial results, future events and financial trends affecting our business, all of
which are subject to known and unknown risks, uncertainties and important factors (in
addition to those discussed elsewhere in this report) that may cause our actual results
to differ materially from those expressed or implied by these forward-looking
statements. These risks and uncertainties include, among other things:
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our expectations regarding the continued growth of online commerce and Internet usage in Latin America; |
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our ability to expand our operations and adapt to rapidly changing technologies; |
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litigation and legal liability; |
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systems interruptions or failures; |
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our ability to attract and retain qualified personnel; |
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security breaches and illegal uses of our services; |
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reliance on third-party service providers; |
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enforcement of intellectual property rights; |
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our ability to attract new customers, retain existing customers and increase revenues; |
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seasonal fluctuations; and |
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political, social and economic conditions in Latin America in general, and Venezuela and Argentina in
particular, including Venezuelas status as a highly inflationary economy and new exchange rate
system. |
Many of these risks are beyond our ability to control or predict. New risk factors
emerge from time to time and it is not possible for management to predict all such risk
factors, nor can it assess the impact of all such risk factors on our companys business
or the extent to which any factor, or combination of factors, may cause actual results
to differ materially from those contained in any forward-looking statements.
3
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 this report. You
should read that information in conjunction with Managements Discussion and Analysis
of Financial Condition and Results of Operations in Item 7 of Part II of this report
and our audited consolidated financial statements and related notes in Item 8 of Part II
of this report. 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 we do not
perceive them to be material that could cause results to differ materially from our
expectations.
Forward-looking statements speak only as of the date they are made, and we do not
undertake to update these forward-looking statements except as may be required by law.
You are advised, however, to review any further disclosures we make on related subjects
in our periodic filings with the Securities and Exchange Commission.
PART I
MercadoLibre, Inc. (together with its subsidiaries us, we, our or
the company) hosts the largest online commerce platform in Latin America located at
www.mercadolibre.com which is focused on enabling e-commerce and its related services.
Our services are designed to provide our users with mechanisms for buying, selling,
paying, collecting, generating leads and comparing via e-commerce transactions in an
effective and efficient manner. We are market leaders in e-commerce in each of Argentina,
Brazil, Chile, Colombia, Costa Rica, Ecuador, Mexico, Peru, Uruguay and Venezuela, based
on unique visitors and page views during 2010. Additionally, we also operate online
commerce platforms in the Dominican Republic, Panama and Portugal.
Through our online commerce platform, we provide buyers and sellers with a robust online
commerce environment that fosters the development of a large and growing e-commerce
community in Latin America, a region with a population of over 550 million people and one
of the fastest-growing Internet penetration rates in the world. We believe that we offer
a technological and commercial solution that addresses the distinctive cultural and
geographic challenges of operating an online commerce platform in Latin America.
We offer our users an eco-system of four related e-commerce services: the MercadoLibre
Marketplace, the MercadoPago payments solution, the MercadoClics advertising program and
the MercadoShops on-line stores solution.
The MercadoLibre Marketplace, which we sometimes refer to as our marketplace, is a
fully-automated, topically-arranged and user-friendly online commerce service. This
service permits both businesses and individuals to list items and conduct their sales and
purchases online in either a fixed-price or auction-based format. Additionally, through
online classified listings, our registered users can list and purchase motor vehicles,
vessels, aircraft, real estate and services. Any Internet user can browse through the
various products and services that are listed on our web site and register with
MercadoLibre to list, bid for and purchase items and services.
To complement the MercadoLibre Marketplace, we developed MercadoPago, an integrated
online payments solution. MercadoPago is designed to facilitate transactions both on and
off the MercadoLibre Marketplace by providing a mechanism that allows our users to
securely, easily and promptly send, receive and finance payments online.
As a further enhancement to the MercadoLibre Marketplace, in 2009, we launched our
MercadoClics program to allow businesses to promote their products and services on the
Internet. Through MercadoClics users and advertisers are able to place display and/or
text advertisements on our web pages in order to promote their brands and offerings.
MercadoClics offers advertisers a cost efficient and automated platform through which it
will acquire traffic. Advertisers purchase, on a cost per clicks basis, advertising space
that appear alongside product search results for specific categories and other pages.
These advertising placements are clearly differentiated from product search results and
direct traffic both to and off our platform to the advertisers destination of choice.
To close out our suite of e-commerce services we launched, during 2010, the MercadoShops
on-line stores solution. Through MercadoShops users can set-up, manage and promote their
own on-line webstores. These webstores are hosted by MercadoLibre and offer integration
with the other marketplace, payments and advertising services we offer. Users can choose
from a basic, free webstore or pay monthly subscriptions for enhanced functionality and
added services on their stores.
4
History of MercadoLibre
In March of 1999, Marcos Galperín, our co-founder and Chief Executive Officer,
while working towards his masters degree in business administration from Stanford
Business School, wrote our business plan and began to assemble a team of professionals
to implement it. We were incorporated in Delaware in October of 1999.
We commenced operations in Argentina in August of 1999, and began operations in
other countries subsequently. The following table shows the timeline of different
launches and events in each country:
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MercadoLibre |
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MercadoPago |
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Launch date |
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Office opening |
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Launch date |
Argentina |
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August 1999 |
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July 1999 |
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November 2003 |
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Brazil |
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October 1999 |
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September 1999 |
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January 2004 |
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Mexico |
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November 1999 |
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October 1999 |
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January 2004 |
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Uruguay |
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December 1999 |
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September 2004 |
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N/A |
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Colombia |
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February 2000 |
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January 2000 |
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December 2007 |
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Venezuela |
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March 2000 |
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March 2000 |
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April 2005 |
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Chile |
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March 2000 |
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April 2000 (*) |
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September 2007 |
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Ecuador |
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December 2000 |
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N/A |
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N/A |
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Peru |
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December 2004 |
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N/A |
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N/A |
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Costa Rica |
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November 2006 |
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N/A |
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N/A |
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Dominican Republic |
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December 2006 |
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N/A |
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N/A |
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Panama |
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December 2006 |
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N/A |
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N/A |
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Portugal |
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January 2010 |
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N/A |
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N/A |
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During 2009 the office was closed |
Our business is organized using the same technological platform in each country
where we operate. However, each country has its own specific local website which has no
interaction with other country sites. For example, searches carried out on our Brazilian
site show only results of listings uploaded on that particular site and do not show
listings from other countries.
We received two rounds of financing in addition to our initial seed funding. The
first round, carried out in November of 1999, raised $7.6 million from investors that
included J.P. Morgan Partners BHCA L.P., Flatiron Fund entities and Hicks, Muse, Tate &
Furst. The second round of financing occurred in May of 2000 and raised $46.7 million
from, among others, Goldman Sachs entities (GS Capital Partners III, L.P., GS Capital
Partners III Offshore, L.P. and Goldman Sachs & Co. Verwaltungs GmbH), Capital Riesgo
Internet SCR S.A. (CRI Banco Santander Central Hispano), GE Capital Equity Investments,
Inc., J.P. Morgan Partners BHCA L.P. and Hicks, Muse, Tate & Furst.
In September of 2001, we entered into a strategic alliance with eBay, which became
one of our stockholders and started working with us to better serve the Latin American
online commerce community. As part of this strategic alliance, we acquired eBays
Brazilian subsidiary at the time, iBazar, and eBay agreed not to compete with us in the
region during the term of the agreement. This agreement also provided us with access to
certain know-how and experience, which accelerated aspects of our development. The
agreement governing our strategic alliance with eBay expired on September 24, 2006. Even
though eBay is one of our stockholders, with the termination of this agreement, there
are no contractual restrictions upon eBay becoming one of our competitors. See Risk
FactorsRisks related to our businessWe operate in a highly competitive and evolving market, and therefore
face potential reductions in the use of our service.
In November of 2002, we acquired certain key strategic assets of Lokau.com, a
competing Brazilian online commerce platform and we incorporated all registered users of
Lokau.com into our platform.
5
In November of 2005, we acquired certain operations of a regional competitor in
online commerce, DeRemate.com Inc., including all of its operations and the majority of
the shares of capital stock of its subsidiaries in Brazil, Colombia, Ecuador, Mexico,
Peru, Uruguay and Venezuela for an aggregate purchase price of $12.1 million, net of
cash and cash equivalents acquired. We did not acquire DeRemates Argentine and Chilean
subsidiaries, which continued to operate under the control of certain previous
stockholders of DeRemate. This acquisition increased our user base by approximately 1.3
million confirmed registered users and solidified our market leadership position in
Brazil, Mexico, Venezuela, Colombia, Peru, and Uruguay.
In August 2007, we completed our initial public offering pursuant to which
3,000,000 shares of common stock were sold by us and 15,488,762 shares were sold by
certain selling stockholders, resulting in net proceeds to us of approximately $49.6
million.
In January 2008, we acquired 100% of the issued and outstanding shares of capital
stock of Classified Media Group, Inc., or CMG, and its subsidiaries. CMG and its
subsidiaries operate an online classified advertisements platform primarily dedicated to
the sale of automobiles at www.tucarro.com in Venezuela, Colombia and Puerto Rico and
real estate at www.tuinmueble.com in Venezuela, Colombia, Panama, the United States,
Costa Rica and the Canary Islands. On the acquisition date, we paid $19 million subject
to certain escrows and working capital adjustment clauses.
In September 2008, we acquired the remaining operations of DeRemate.com in Chile,
Argentina, Mexico and Colombia for an aggregate purchase price of $37.6 million and we
also purchased certain URLs, domains, trademarks, databases and intellectual property
rights for $2.4 million, subject to certain set off rights and working capital
adjustment clauses.
Our strategy
We seek to serve people in Latin America by offering a collection of e-commerce
services that can improve the quality of life of those who use it, while creating
significant value for our stockholders. We serve our buyers by giving them access to a
broader and more affordable variety of products and services than those available on
other online and offline venues. We serve our sellers by allowing them to reach a larger
and more geographically diverse user base at a lower overall cost and investment than
offline venues. At the same time, we provide payment settlement services to facilitate
such transactions, and advertising solutions to promote them. More
broadly, we strive to turn inefficient markets into more efficient ones and in that
process generate value for our stockholders. To achieve these objectives, we pursue the
following strategies:
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Continue to grow our business and maintain market leadership. We have focused and intend to continue to focus
on growing our business by strengthening our position as
the preferred online marketplace in each of the countries
in which we operate. We also intend to grow our business
and maintain our leadership by taking advantage of the
expanding potential client base that has resulted from the
growth of Internet penetration rates in Latin America. We
intend to achieve these goals through organic growth, by
entering into new countries and category segments, by
launching new transactional business endeavours, when possible and advantageous, through
potential strategic acquisitions of key businesses and
assets. |
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Increase monetization of our transactions. We have focused
and will continue to focus on improving the revenue
generation capacity of our business by implementing
initiatives designed to maximize the revenues we receive
from transactions on our platform. Some of these
initiatives include increasing our fee structure, selling advertising on our
platform, offering other e-commerce services and expanding our
paid-for features. |
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Take advantage of the natural synergies
that exist between our services. We strive
to leverage our different businesses to
promote greater cross-usage among the
businesses, thereby creating a virtuous
ecosystem of e-commerce offerings. We
intend to promote the adoption of our
MercadoPago payments solution on our
marketplace as well as on our MercadoShops
solution, to offer our MercadoClics
advertising solutions to users of our
marketplace, payments and shop solutions,
and to encourage users of any of our
services to experiment with the other
solutions we offer. |
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Expand into additional transactional service offerings. Our
strategic focus is to enable on-line transactions of
multiple types of goods and services throughout Latin
America. Consequently, we strive, and will continue to
strive, to launch on-line transactional offerings in new
product and service categories where we consider business
opportunities exist. These new transactional offerings
include, but are not limited to, efforts involving: (a) the
offer of additional product categories in our marketplace
business, (b) the expansion of our presence in vehicle,
real estate and services classifieds, (c) the penetration
of our on platform payments services the expansion of our
off platform payments services, (d) the increase of our
Mercadoclics and on-line advertisement services and (e) the
offer of on-line software as service e-commerce solutions.
We believe that a significant portion of our future growth
will be derived from these new or expanded product and
service launches. |
6
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Enhance brand awareness. We believe that enhancing
awareness of the MercadoLibre brand is important to achieve
our business objectives. We intend to continue to promote
and increase recognition of our brand through a variety of
marketing and promotional campaigns. These may include
marketing agreements with companies with significant online
presence and advertising through traditional media, such as
cable television. We may also use leading web sites and
other media such as affiliate programs, banner
advertisements and keyword searches. In addition, we
believe that by enhancing our e-commerce community
experience, we promote greater brand awareness through word
of mouth. |
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Focus on user loyalty and web site enhancement. We will
continue to focus on increasing purchase frequency and
transaction volumes from our existing users. We intend to
do so by maintaining an appealing and convenient platform
for e-commerce, improving the functionality of our web site
to deliver a more efficient user experience and providing
our users with the help of a dedicated customer support
department. We employ a number of programs aimed to foster
customer loyalty and repeated purchases, such as our
MercadoLider loyalty program for high-volume sellers, our
targeted and segmented direct marketing program, and our
MercadoPago special promotions. |
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Increase operational efficiency. We believe our business
model provides us with an opportunity to generate healthy
profit margins. We plan to maximize this potential by
achieving economics of scale, maintaining controls on
overhead costs and reducing variable costs whenever
possible. |
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Continue to develop innovative and creative solutions. We
intend to continually enhance our commerce platform in
order to better serve both individuals and businesses that
want to buy or sell goods and services online. We intend to
continue investing to develop new tools and technologies
that facilitate e-commerce on our platform and improve our
users online experience on MercadoLibre, while addressing
the distinctive cultural, geographical and other challenges
of online commerce in Latin America. |
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Serve our dynamic and active user community. We seek to
operate MercadoLibre as an open and trusted Web-based
marketplace where users can access a broad market of
products. We believe in treating our users with respect by
applying a consistent set of policies that reinforce good
online and offline behavior within our user community. We
also seek to offer superior customer care in order to
maintain the loyalty and satisfaction of our active user
base. |
The MercadoLibre marketplace
The MercadoLibre marketplace is an Internet-based commerce platform where buyers
and sellers can meet, exchange information and complete e-commerce transactions for a
wide range of goods and services. Our platform is a fully-automated, topically-arranged
and user-friendly online commerce service which permits both businesses and individuals
to list items and conduct their sales and purchases online in either a fixed-price or
auction-based format. The MercadoLibre marketplace also allows sellers to list motor
vehicles, vessels, aircraft, real estate and services on our online classified section.
Any Internet user can browse through the various products and services that are listed
on our web site and register with MercadoLibre to list, bid for and purchase items and
services. Additionally, sellers and advertisers can purchase, display and link
advertising on our web pages to promote their brands, businesses and products. The
MercadoLibre marketplace offers buyers a large selection of new and used items that are
often more expensive or otherwise hard to find through traditional offline sellers, such
as brick-and-mortar retail establishments, offline classified advertisements, community
bulletin boards, auction houses and flea markets. We believe that the MercadoLibre
marketplace allows sellers to reach a large number of potential buyers more
cost-effectively than through traditional offline commerce channels or other online
venues.
During 2010, visitors to our web site were able to browse an average of over 7.9
million listings on any given day, organized by country, in over 2,000 different product
categories. We believe that we have achieved a critical mass of active buyers, sellers
and product listings in most of the countries where we operate and that our business can
be readily scaled to handle increases in our user base and transaction volume. At
December 31, 2010, we had over 52.9 million confirmed registered MercadoLibre users up
from 42.6 million at December 31, 2009. During 2010 we had 3.9 million unique sellers,
11.3 million unique buyers and 39.2 million successful items sold.
7
The MercadoPago online payments solution
To complement the MercadoLibre Marketplace, we developed MercadoPago, an integrated
online payments solution. MercadoPago is designed to facilitate transactions both on and
off the MercadoLibre Marketplace by providing a mechanism that allows our users to
securely, easily and promptly send and receive Payments online. MercadoPago
enables any individual or business registered with MercadoPago to securely and easily
send and receive payments online for MercadoLibre marketplace items. MercadoPago is
currently available to MercadoLibre users in each of Brazil, Mexico, Venezuela,
Argentina, Chile and Colombia.
MercadoPago
is also available for purchases of goods and services outside the
MercadoLibre marketplace, as an open on-line payment service in Argentina, Brasil, Chile
and Colombia. The off platform service, also referred to as MercadoPago 3.0, which is
available only in Argentina, Brazil, Chile and Colombia, is designed to meet the growing
demand for Internet-based payments systems in Latin America. In addition to improving
the ease of use and efficiency of payments for purchases made in our marketplace,
MercadoPago 3.0 also allows payments for transactions that occur outside of our
platforms. Users are able to transfer money to other users with MercadoPago accounts and
to incorporate MercadoPago as a means for payments on their independent commerce
websites. This version of MercadoPago simplifies the payment of transactions in the
MercadoLibre marketplace achieving higher transaction velocity for most users. Direct
payments allow online sellers to use MercadoPago to facilitate checkout and payment
processes on their web site and also enables users to simply transfer money to each
other. The direct payments product allows users who are not registered with the
MercadoLibre marketplace to send and receive payments to each other as long as they
register on MercadoPago. Furthermore, direct payment offers online sellers who accept
MercadoPago as a means of payment to integrate MercadoPago to their shopping cart
streamlining the shopping and payment processes. We believe that the ease of use, safety
and efficiency of MercadoPago will allow us to generate additional transactions from Web
merchants that sell items outside the MercadoLibre marketplace. We believe that there is
a significant business opportunity to increase use of MercadoPago as a payment mechanism
within and outside of the MercadoLibre marketplace.
During the year ended December 31, 2010, our on and off-platform users paid
approximately $697.5 million using MercadoPago, which represented 20.5% of our gross
merchandise volume for that year. During the year ended December 31, 2009, our users
paid approximately $382.5 million for items by using MercadoPago, which represented
13.9% of our gross merchandise volume for that year. During 2008, our users paid
approximately $255.9 million for items by using MercadoPago, which represented 12.3% of
our gross merchandise volume for that year.
We seek to increase adoption and penetration of MercadoPago among MercadoLibre
marketplace users. In the countries where MercadoPago was available, as of December 31,
2010 approximately 87.4% of the MercadoLibre marketplaces listings accepted MercadoPago
for payments and 20.9% of our total gross merchandise volume (excluding motor vehicles,
vessels, aircraft and real estate) was completed through MercadoPago. Starting in
January 2010 in Brazil and in March 2010 in Argentina, all paid listings in the
MercadoLibre Marketplace (excluding free listings and classifieds) accepted MercadoPago.
MercadoClics advertising services
The MercadoClics program allows businesses and users to promote their products and
services on the web. Through MercadoClics users and advertisers are able to place text
and/or display advertisements on our web pages in order to promote their brands and
offerings. MercadoClics offers advertisers a cost efficient and automated platform with
which to acquire traffic from us. Advertisers purchase, on a cost per clicks basis,
advertising space that appears alongside product search results for specific categories
and other pages. These advertising placements are clearly differentiated from product
search results and direct traffic both to on and off platform to the advertisers
destination of choice.
MercadoShops online stores service
MercadoShops is a software-as-a-service, fully hosted online webstore solution.
Through MercadoShops users can set-up, manage and promote their own on-line webstores.
These webstores are hosted by MercadoLibre and offer integration with the other
marketplace, payments and advertising services we offer. Users can choose from a basic,
free webstore or pay monthly subscriptions for enhanced functionality and added services
on their stores.
8
Marketing
Our marketing strategy is to grow our platform by promoting the MercadoLibre brand,
attracting new users, and generating more frequent trading by our existing users. To
this end, we employ various means of advertising, including placement in leading portals
and networks across the region, our affiliates program, cable and over the air
television, paid and natural positioning in leading search engines, email marketing,
onsite marketing and presence in off-line events. Our investment in online and offline
marketing activities was $22.5 million during 2008, $22.0 million during 2009 and $20.2
million during 2010.
Specifically, we rely mostly on online advertising to promote our brand and attract
potential buyers and sellers to our web site. Our online activities focus on:
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Entering into agreements
with search platforms, portals, social networks and web sites that we believe can reach our target
audience. These agreements allow us to purchase online advertising positions where we can market
ourselves and show relevant promotions to potential and already registered users. |
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Actively managing our MercadoSocios program, an affiliates program that financially rewards site
owners for directing to our platform buyers, sellers and new users who ultimately register with, and
conduct transactions on MercadoLibre. The MercadoSocios program is available in Argentina, Brazil,
Chile, Colombia, Mexico and Venezuela. With our MercadoSocios program any site or online tool owner
can place a link to our web site with a pre-approved creative design that we provide or XML data
feeds. If an Internet user clicks on the link, arrives at our web site, registers as a user and
completes transactions on our platform, we compensate the site or tool owner. For each new registered
user that completes a transaction on our platform, we pay the site or tool owner that directed the
user to us a fee per active registered user and a percentage of the commissions that that selling user
pays us for transactions carried out in the first 30 days after that user registered. |
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Investing in preferential placing on the most popular search engines in each country where we operate,
such as Google and Yahoo Search. We purchase advertising space next to the results of certain keyword
searches related to our activities. |
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Structuring our web site so that it appears among the top natural results for certain keyword searches. |
Since 2005, we have been running an annual cable television commercial campaign on
a regional basis to increase brand awareness and recognition. We believe that cable
television subscribers in Latin America offer an attractive demographic group based on
both socio-economic profiling and the high penetration of Internet usage among cable
television subscribers. During 2010, our cable media campaign ran from August to
December, and we also ran some spots in Brazil over the air television to expand
coverage.
In addition to online and television advertising, we seek to reinforce our brand
and increase transaction levels within the existing MercadoLibre user base through
activities such as permission-based e-mail marketing and special promotions on our web
site. We utilize information regarding our users past bids, sales and purchases in
order to better target the messages that we communicate through these activities.
Additionally, we use street billboards, radio and magazine ads to promote our automobile
classifieds business.
We also conduct a variety of initiatives that focus on attracting and training
sellers. We organize events such as MercadoLibre Universities and seller meetings in
all countries where we have an office. MercadoLibre Universities are full-day sessions
of approximately 100 to 250 new users where we teach how to buy and sell on the
MercadoLibre marketplace. During seller meetings we teach sellers with high-potential or
with MercadoLider status more advanced selling techniques and allow them to discuss
issues of interest with our employees. Additionally, certain seller activities are
streamed over the Internet to reach a larger audience than is possible in live meetings.
The positioning of the MercadoLibre brand among Internet users is one of our key
marketing concerns, and our goal is to position MercadoLibres name and concept as a
trustworthy platform in the publics mind. We conduct surveys every year in our key
markets to gauge the position of our brand in the minds of consumers. We consistently
appear at the top of these surveys in areas such as consumer recall and preference for
e-commerce and online commerce sites. We believe these ratings are the result of the
quality of our product and our marketing efforts.
Product development
At December 31, 2010, we had 282 employees on our information technology and
product development staff, an increase from 245 employees at December 31, 2009. We
incurred product development expenses (including salaries) in the amount of $7.3 million
for 2008, $12.1 million for 2009 and $15.9 million for 2010. We also incurred
information technology capital expenditures, including software licenses, of $2.6
million for 2008, $4.4 million for 2009 and $5.0 million for 2010.
We continually work to improve both our MercadoLibre marketplace and MercadoPago
platforms so that they better serve our users needs and work more efficiently. A
significant portion of our information technology resources are allocated to these
purposes. We strive to maintain the right balance between offering new features and
enhancing the existing functionality and architecture of our software and hardware.
9
The development of new and improved features usually begins by listening to
suggestions from our community of buyers and sellers. We hold meetings periodically with
both regular and highly active users to obtain feedback regarding our services and
suggestions and ideas relating to possible additional features on the MercadoLibre
marketplace and MercadoPago. We also receive suggestions from our chat rooms and
bulletin boards. Additionally, we monitor the market for new features, formats and
elements that could be adapted to our platform to improve our users experience.
We place significant importance on the testing and implementation phase of newly
developed features. After an internal team of testers ensures that new features and
upgrades are working properly, we typically involve a select group of users in testing
these features before we release them to the general public. Through this process we
receive feedback and suggestions on how to enhace the final details of a feature.
Additionally, we typically introduce new features country by country, in order to
isolate and resolve any potential problems and release improved versions to subsequent
countries.
The adequate management of the MercadoLibre and MercadoPago software architecture
and hardware requirements is as important as introducing additional and better features
for our users. Because our business grows relatively fast, we must ensure that our
systems are capable of absorbing this incremental volume. Therefore, our engineers work
to optimize our processes and equipment by designing more effective and efficient ways
to run our platforms.
We develop most of our software technology in-house. Since our inception in 1999,
we have had a development center in Buenos Aires where we concentrate the majority of
our development efforts. In June of 2007, we also launched a second development center
in the province of San Luis in Argentina. The center is a collaborative effort with the
Technological University of La Punta. In this effort, the university offers us access to
dedicated development facilities and a recruiting base for potential employees.
While we have developed most of our software technology in-house, we also outsource
certain projects to outside developers. We believe that outsourcing the development of
these projects allows us to have a greater operating capacity and strengthens our
internal know-how by incorporating new expertise to our business. In addition, our team
of developers frequently interacts with technology suppliers and attends
technology-related events to familiarize itself with the latest inventions and
developments in the field.
We anticipate that we will continue to devote significant resources to product
development in the future as we add new features and functionality to our services. The
market in which we compete is characterized by rapidly changing technology, evolving
industry standards, frequent new service and product announcements, introductions and
enhancements and changing customer demands. Accordingly, our future success will depend
on our ability to adapt to rapidly changing technologies, to adapt our services to
evolving industry standards and to continually improve the performance, features and
reliability of our service in response to competitive service and product offerings and
evolving demands of the marketplace. In addition, the widespread adoption of new
Internet, networking or telecommunications technologies or other technological changes
could require us to make substantial expenditures to modify or adapt our services or
infrastructure. See Risk FactorsRisks related to our businessOur future success
depends on our ability to expand and adapt our operations to meet rapidly changing
industry and technology standards in a cost-effective and timely manner, and on the
continued market acceptance of our products and services.
Seasonality
Like most retail businesses, we experience the effects of seasonality in all our
operating territories throughout the calendar year. Although much of our seasonality is
due to the Christmas holiday season, the geographic diversity of our operations helps
mitigate the seasonality attributed to summer vacation time ( i.e. southern and northern
hemispheres) and national holidays.
Typically, the fourth quarter of the year is the strongest in every country where
we operate due to the significant increase in transactions before the Christmas season
(see Management Discussion and Analysis of Financial Conditions and Results of
Operations Seasonality for more detail). The first quarter of the year is generally
our slowest period. The months of January, February and March normally correspond to
summer vacation time in Argentina, Brazil, Chile, Peru and Uruguay. Additionally, the
Easter holiday falls in March or April, and Brazil celebrates Carnival for one week in
February or March. This first quarter seasonality is partially mitigated by the
countries located in the northern hemisphere, such as Colombia, Mexico and Venezuela,
the slowest months for which are the summer months of July, August and September.
10
Competition
The market for trading over the Internet is rapidly evolving and highly
competitive, and we expect competition to intensify even further in the future.
Barriers-to-entry for large, established Internet companies are relatively low, and
current and new competitors can launch new sites at relatively low cost using
commercially available software. While we are currently the market leaders in a number
of the markets in which we operate, we currently or potentially compete with a limited
number of small marketplace operators, such as Mas Oportunidades. We also compete with
businesses that offer business-to-consumer online e-commerce services such as pure play
Internet retailer Submarino (a website of B2W Inc), and a growing number of bricks and
mortar retailers who have launched on line offerings such as Americanas (a website of
B2W Inc), Casas Bahia and Falabella, and with shopping comparison sites located
throughout Latin America such as Buscape and Bondfaro. In the classified advertising
market, although no regional competitor exists, local players such as Webmotors,
VivaStreet, Zap have important positions in certain markets.
In addition, we could face competition from a number of large online communities
and services that have expertise in developing online commerce and facilitating online
interaction. Some of these competitors, such as Google, Yahoo and Microsoft, currently
offer a variety of online services, and certain of these companies may introduce online
commerce to their large user populations. Other large companies with strong brand
recognition and experience in on line commerce, such as large newspaper or media
companies also compete in the online listing market in Latin America.
In September of 2001, we entered into a strategic alliance with eBay, which became
one of our stockholders and started working with us to better serve the Latin American
online commerce community. As part of this strategic alliance, we acquired eBays
Brazilian subsidiary at the time, iBazar, and eBay agreed not to compete with us in the
region during the term of the agreement. This agreement also provided us with access to
certain know-how and experience, which accelerated aspects of our development. The
agreement governing our strategic alliance with eBay expired on September 24, 2006. Even
though eBay is one of our stockholders, with the termination of this agreement, there
are no contractual restrictions upon eBay competing with us.
MercadoPago competes with existing online and offline payment methods, including,
among others, banks and other providers of traditional payment methods, particularly
credit cards, checks, money orders, and electronic bank deposits, international online
payments services such as Paypal and Google Checkout, local online payment services such
as DineroMail in Argentina, Chile, Colombia and Mexico, and Pagamento Digital and
PagSeguro in Brazil, money remitters such as Western Union, the use of cash, which is
often preferred in Latin America, and offline funding alternatives such as cash deposit
and money transmission services. Some of these services may operate at lower commission
rates than MercadoPagos current rates.
Intellectual property
We regard the protection of our copyrights, service marks, trademarks, domain
names, trade dress and trade secrets as critical to our future success and rely on a
combination of copyright, trademark, service mark and trade secret laws and contractual
restrictions to establish and protect our proprietary rights in our products and
services. We have entered into confidentiality and invention assignment agreements with
our employees and certain contractors. We have also established non-disclosure
agreements with our employees, strategic partners and some suppliers in order to limit
access to and disclosure of our proprietary information.
We pursue the registration of our trademarks and service marks in each country
where we operate, in the United States and in certain other Latin American countries.
Generally, we register the name MercadoLibre, MercadoLivre, MercadoPago and
MercadoSocios as well as our handshake logo, and other names and logos in each country
where we operate. As part of our acquisition of DeRemate, we acquired the trademarks of
DeRemate throughout the countries where it operates, as well as certain other
jurisdictions. As part of our acquisition of CMG, we acquired the trademarks of CMG
throughout the countries where it operates.
We have licensed in the past, and expect that we may license in the future, certain
of our proprietary rights, such as trademarks or copyrighted material, to third parties.
While we attempt to ensure that our licenses maintain the quality of the MercadoLibre
brand, our licensees may take actions that could materially adversely affect the value
of our proprietary rights or reputation. We also rely on certain technologies that we
license from third parties, such as Oracle Corp., SAP AG, Salesforce.com Inc.,
Microstrategy, Radware, Juniper Networks, Cisco Systems Inc, F5 Networks, and Netapp,
the suppliers of key database technology, the operating system and specific hardware
components for our services.
Third parties have from time to time claimed, and others may claim in the future,
that we have infringed their intellectual property rights by allowing sellers to list
certain items on MercadoLibre. See Legal proceedings below and Risk factorsRisks
related to our businessWe could potentially face legal and financial liability for the
sale of items that infringe on the intellectual property rights of others and for
information disseminated on the MercadoLibre marketplace.
11
Employees
The following table shows the number of our employees at December 31, 2010.
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Number of |
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Country |
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employees |
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Argentina |
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873 |
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Brazil |
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470 |
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Colombia |
|
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47 |
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Chile |
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2 |
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Mexico |
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35 |
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Uruguay |
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|
4 |
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Venezuela |
|
|
136 |
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Total |
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1,567 |
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We manage operations in the remaining countries remotely from our headquarters in
Argentina.
Our employees in Brazil are represented by an Information Technology Companies
Labor Union in the State of São Paulo (Sindicato dos Trabalhadores nas Empresas e
Cursos de Informática do Estado de São Paulo) and some of our employees in Argentina
are represented by the Argentine Federation of Commercial and Service Employees
(Federación Argentina de Empleados de Comercio y Servicios(FAECYS) ). Unions or
local regulations in other countries could also require that employees be represented.
We consider our relations with our employees to be good and we implement a variety of
human resources practices, programs and policies that are designed to hire, retain,
develop and compensate our employees.
We are very proud of our employees and believe that our team is one of the most
important assets of our business. We believe that our employees are among the most
knowledgeable in the Latin American Internet industry, and they have developed a deep
understanding of our business and e-commerce in general. We believe we have been
successful at attracting and retaining outstanding individuals over the years. A
significant portion of our personnel has been with the company for several years, and we
strive to bring more talent by hiring individuals with an Internet-related background
and experience. Similarly, our future success will depend on our ability to continue to
attract and retain capable professionals. See Risk factorsRisks related to our
businessWe depend on key personnel, the loss of which could have a material adverse
effect on us.
In order to support our Human Resources department, in 2006 we implemented SAPs
human resources module across our business. We believe this will allow us to centralize
our employee database and important human resources functions, such as payroll
processing, to improve our controls and reduce certain administrative costs.
In 2007, we were distinguished as one of the three best companies to work for in
Argentina and in 2008 as one of the best companies to work for in Latin America, both by
the Great Place to Work Institute.
Government regulation
We are subject to a variety of laws, decrees and regulations that affect companies
conducting business on the Internet in some of the countries where we operate related to
e-commerce, data protection, information requirements for Internet providers,
obligations to provide information to certain authorities about transactions occurring
on our platforms or about our users, and other legislation which also applies to other
companies conducting business in general. It is not clear how existing laws governing
issues such as general commercial activities, property ownership, copyrights and other
intellectual property issues, taxation (including the imposition to provide certain
information about transactions that occurred in our platforms, or about our users),
libel and defamation, obscenity, consumer protection, digital signatures and personal
privacy apply to online businesses. The majority of these laws were adopted before the
Internet was available and, as a result, do not contemplate or address the unique issues
of the Internet. Due to these areas of legal uncertainty, and the increasing popularity
and use of the Internet and other online services, it is possible that new laws and
regulations will be adopted with respect to the Internet or other online services. These regulations could cover issues such as online commerce, Internet service providers
responsibility for third party content hosted in their servers, user privacy, freedom of
expression, pricing, content and quality of products and services, taxation (including
imposition of value added or sales taxes collection obligations, obligation to provide
certain information about transactions occurred in our platforms, or about our users),
advertising, intellectual property rights, consumer protection and information security.
12
We believe that the agency-based structure that we currently use for MercadoPago
allows us to operate this service without obtaining any governmental authorizations or
licenses or being regulated as a financial institution in the countries where we offer
MercadoPago. However, as we continue to develop MercadoPago, we may need to secure
governmental authorizations or licenses or comply with regulations applicable to
financial institutions in the countries where we offer this service.
There are laws and regulations that address foreign currency and exchange rates in
every country in which we operate. We need governmental authorization to pay invoices to
a foreign supplier or send money abroad only in Venezuela due to foreign exchange
restrictions. See Risk factorsRisks related to doing business in Latin AmericaLocal
currencies used in the conduct of our business are subject to depreciation, volatility
and exchange controls for more information.
On May 15, 2007, the Argentine Ministry of Economy approved MercadoLibre S.A. (this
subsidiary changed its name in 2010 to MercadoLibre S.R.L.), our wholly owned Argentine
subsidiary as a beneficiary of the Argentine Regime to promote the software industry.
Benefits of receiving this status include a 70% discount on mandatory Argentine labor
taxes, a 60% reduction of Argentine income tax and a fixed federal tax rate in Argentina
at the rate effective in April of 2007 until September of 2018.
Segment and Geographic Information
For an analysis of financial information about our segments, see Note 7, Segments
to our Consolidated Financial Statement included elsewhere in this report.
Offices
We are a Delaware corporation incorporated on October 15, 1999. Our registered
office is located at 15 East North Street, Dover, Delaware. Our principal executive
offices are located at Arias 3751, 7th Floor, Buenos Aires, Argentina, C1430CRG.
Available Information
We maintain a web site, http://www.mercadolibre.com, which contains
additional information concerning our company. We make available free of charge through
our web site our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the SEC. Our Corporate
Governance Guidelines, Code of Business Conduct and Ethics, and the charters of the
Audit, the Compensation and the Nominating and Corporate Governance Committees are also
available on our web site and are available in print to any stockholder upon request in
writing to MercadoLibre, Inc., Attention: Investor Relations, Arias 3751, 7th floor,
Buenos Aires, Argentina, C1430CRG. Information on or connected to our web site is
neither part of nor incorporated into this report on Form 10-K or any other SEC filings
we make from time to time.
For purposes of this section, the term stockholders means the holders of shares
of our common stock. Set forth below are the risks that we believe are material to our
stockholders. You should carefully consider the following factors in evaluating our
company, our properties and our business. The occurrence of any of the following risks
might cause our stockholders to lose all or a part of their investment. The risks and
uncertainties described below are not the only ones facing us. Other risks that we do
not currently anticipate or that we currently deem immaterial also may affect our
results of operations and financial condition. Some statements in this report including
statements in the following risk factors constitute forward-looking statements. Please
refer to the section entitled Special Note Regarding Forward-Looking Statements at the
beginning of this report.
13
Risks related to our business
The market for the sale of goods over the Internet in Latin America is developing, and
our business depends on the continued growth of online commerce and the availability and
suitability of the Internet in Latin America.
The market for the sale of goods over the Internet is a new and emerging market in
Latin America. Our future revenues depend substantially on Latin American consumers
widespread acceptance and use of the Internet as a way to conduct commerce. Rapid growth
in the use of and interest in the Internet (particularly as a way to conduct commerce)
is a recent phenomenon, and we cannot assure you that this acceptance and use will
continue to exist or develop. For us to grow our user base successfully, consumers who
have historically used traditional means of commerce to purchase goods must accept and
use new ways of conducting business and exchanging information. Furthermore, the price
of personal computers and Internet access may limit our potential growth in countries
with low levels of Internet penetration and/or high levels of poverty.
In addition, the Internet may not be commercially viable in Latin America in the
long term for a number of reasons, including potentially inadequate development of the
necessary network infrastructure or delayed development of enabling technologies,
performance improvements and security measures. The infrastructure for the Internet may
not be able to support continued growth in the number of Internet users, their frequency
of use or their bandwidth requirements. In addition, the Internet could lose its
viability due to delays in telecommunications technological developments, or due to
increased government regulation. If telecommunications services change or are not
sufficiently available to support the Internet, response times would be slower, which
would adversely affect use of the Internet and our service in particular.
Our future success depends on our ability to expand and adapt our operations to meet
rapidly changing industry and technology standards in a cost-effective and timely
manner, and on the continued market acceptance of our products and services.
We plan to continue to expand our operations by developing and promoting new and
complementary services. We may not succeed at expanding our operations in a
cost-effective or timely manner, and our expansion efforts may not have the same or
greater overall market acceptance as our current services. Furthermore, any new business
or service that we launch that is not favorably received by consumers could damage our
reputation and diminish the value of our brands. To expand our operations we will also
need to spend significant amounts on development, operations and other resources, and we
may place a strain on our management, financial and operational resources. Similarly, a
lack of market acceptance of these services or our inability to generate satisfactory
revenues from any expanded services to offset their cost could have a material adverse
effect on our business, results of operations and financial condition.
Any delay or problem with upgrading our existing information technology infrastructure
could cause a disruption in our business and adversely impact our financial results.
Our ability to operate our business from day-to-day largely depends on the
efficient operation of our information technology infrastructure. We are frequently
implementing hardware and software technology upgrades, which may include migrations to
new technology systems, in an effort to improve our systems. Our information technology
systems may experience errors, interruptions, delays or cessations of service. We are
particularly susceptible to errors in connection with any systems upgrade or migration
to a different hardware or software system. Errors or interruptions could impede or
delay our ability to process transactions on our site, which could reduce our revenue
from activity on our site and adversely affect our reputation with, or result in the
loss of customers. These issues could cause business disruptions and be more expensive,
time consuming, and resource intensive than anticipated. Defects or disruptions in our
technology infrastructure could adversely impact our ability to process transactions,
our financial results and our reputation.
Internet regulation in the countries where we operate is scarce, and several legal
issues related to the Internet are uncertain. We are subject to a number of other laws
and regulations, and governments may enact laws or regulations that could adversely
affect our business.
Unlike the United States, most of the countries where we operate do not have
specific laws governing the liability of Internet service providers, such as ourselves,
for fraud, intellectual property infringement, other illegal activities committed by
individual users or third-party infringing content hosted on a providers servers. This
legal uncertainty allows for different judges or courts to decide very similar claims in
different ways and establish contradictory jurisprudence. For example, in June 2009, a
judge of a first instance court in the State of São Paulo ruled that our Brazilian
subsidiary should be held liable for fraud committed by sellers and losses incurred by
buyers when purchasing items on the Brazilian version of the MercadoLibre website. We
are appealing this ruling and, in December 2009, the effect of the ruling was suspended
until the appeal is decided by State Court of Appeals. If the ruling is upheld, it could
require us to restructure our business model in ways that would harm our business and or
cause us to incur substantial costs.
In addition, certain judges may decide that Internet service providers are liable
to an intellectual property owner for a users sale of counterfeit items using our
platform, while others may decide that the responsibility lies solely with the offending
user. This legal uncertainty allows for rulings against us and could set adverse
precedents, which individually or in the aggregate could have a material adverse effect
on our business, results of operations and financial condition. In addition, legal
uncertainty may negatively affect our clients perception and use of our services.
14
We are subject to a variety of laws, decrees and regulations that affect companies
conducting business on the Internet in some of the countries where we operate related to
e-commerce, information requirements for Internet providers, obligations to provide
certain information to certain authorities about transactions which occurred in our
platforms or about our users and those regulations applicable to businesses in general
and consumer protection. It is not clear how existing laws governing issues such as
general commercial activities, property ownership, copyrights and other intellectual
property issues, taxation (including imposition to provide certain information about
transactions occurred in our platforms or about our users), libel and defamation,
obscenity, and personal privacy apply to online businesses. The majority of these laws
were adopted before the Internet was available and, as a result, do not contemplate or
address the unique issues of the Internet. Due to these areas of legal uncertainty, and
the increasing popularity and use of the Internet and other online services, it is
possible that new laws and regulations will be adopted with respect to the Internet or
other online services. These laws and regulations could cover issues such as online
commerce, Internet service providers responsibility for third party content hosted in
their servers, user privacy, freedom of expression, pricing, content and quality of
products and services, taxation (including imposition of value added or sales taxes
collection obligations, obligation to provide certain information about transactions
occurred in our platforms or about our users), advertising, intellectual property
rights, consumer protection and information security. If these laws are enacted, they
may have negative effects on our business, results of operation and financial condition.
As our activities and the types of goods listed on our web site expand, regulatory
agencies or courts may argue or rule that we or our users must either obtain licenses or
not be allowed to conduct business in their jurisdiction, either with respect to our
services in general or only relating to certain items, such as auctions, real estate and
motor vehicles. For example, numerous jurisdictions, including Brazil and Argentina,
have regulations regarding auctions and auctioneers and the handling of property by
secondhand dealers or pawnbrokers. Attempted enforcement of these laws against us or
our users and other regulatory and licensing claims could result in expensive litigation
or could require us to change the way we or our users do business. Any changes in our or
our users business methods could increase costs or reduce revenues or force us to
prohibit listings of certain items for some locations. We could also be subject to fines
or other penalties, and any of these outcomes could harm our business.
In addition, because our services are accessible worldwide and we facilitate sales
of goods to users worldwide, other foreign jurisdictions may claim that we are required
to comply with their laws. As we expand and localize our international activities, we
have to comply with the laws of the countries in which we operate. Laws regulating
Internet companies outside of the Latin American jurisdictions where we operate may be
more restrictive to us than those in Latin America. In order to comply with these laws,
we may have to change our business practices or restrict our services. We could be
subject to penalties ranging from criminal prosecution to bans on our services for
failure to comply with foreign laws.
We are subject to laws relating to the use, storage and transfer of personally
identifiable information about our users, especially financial information. Several
jurisdictions have regulations in this area, and other jurisdictions are considering
imposing additional restrictions or regulations. If we violate these laws, which in many
cases apply not only to third-party transactions but also to transfers of information
among ourselves, our subsidiaries, and other parties with which we have commercial
relations, we could be subject to significant penalties and negative publicity, which
would adversely affect us.
We are subject to regulatory activity and antitrust litigation under competition laws.
We receive scrutiny from various government agencies under competition laws in the
countries where we operate. Some jurisdictions also provide private rights of action for
competitors or consumers to assert claims of anti-competitive conduct. Other companies
and government agencies may allege that our actions violate antitrust or competition
laws, or otherwise constitute unfair competition. Contractual agreements with buyers,
sellers, or other companies could give rise to regulatory action or antitrust
litigation. Also, our unilateral business practices could give rise to regulatory action
or antitrust litigation. Some regulators may perceive our business to have so much
market power that otherwise uncontroversial business practices could be deemed
anticompetitive. Such claims and investigations, even if without foundation, typically
are very expensive to defend, involve negative publicity and substantial diversion of
management time and effort, and could result in significant judgments against us.
Our business is an Internet platform for commercial transactions in which all commercial
activity depends on our users and is therefore largely outside of our control.
Our business is dependent on Internet users listing and purchasing their items and
services on our Internet platform. Therefore, we depend on the commercial activity,
including both sales and purchases that our users generate. We do not choose which items
will be listed, nor do we make pricing or other decisions relating to the products and
services bought and sold on our platform. Therefore, the principal drivers of our
business are largely outside of our control, and we depend on the continued preference
for our platform by millions of individual users.
15
We could face liability for the sale of regulated and prohibited items, unpaid items or
undelivered purchases, and the sale of defective items.
Laws specifying the scope of liability of providers of online services for
activities of their users through their service are currently unsettled in most of the
Latin American countries where we operate. We have implemented what we believe to be
clear policies that are incorporated in our terms of use that prohibit the sale of
certain items on our platform and have implemented programs to monitor and exclude
unlawful goods and services. Despite these efforts, we may be unable to prevent our
users from exchanging unlawful goods or services or exchanging goods in an unlawful
manner, and we may be subject to allegations of civil or criminal liability for the
unlawful activities of these users.
More specifically, we are aware that certain goods, such as alcohol, tobacco,
firearms, adult material and other goods that may be subject to regulation by local or
national authorities of various jurisdictions have been traded on the MercadoLibre
marketplace. As a consequence of these transactions, we have at times been subject to
fines in Brazil for certain users sale of products that have not been approved by the
government. We cannot provide any assurances that we will successfully avoid civil or
criminal liability for unlawful activities that our users carry out through our service
in the future. If we suffer potential liability for any unlawful activities of our
users, we may need to implement additional measures to reduce our exposure to this
liability, which may require, among other things, that we spend substantial resources
and/or discontinue certain service offerings. Any costs that we incur as a result of
this liability or asserted liability could have a material adverse effect on our
business, results of operations and financial condition.
We believe that government and consumer protection agencies have received a
substantial number of complaints about both the MercadoLibre marketplace and
MercadoPago. We believe that these complaints are small as a percentage of our total
transactions, but they could become large in aggregate numbers over time. From time to
time, we are involved in disputes or regulatory inquiries that arise in the ordinary
course of business. The number and significance of these disputes and inquiries have
increased as our business has expanded and our company has grown larger. We are likely
to receive new inquiries from regulatory agencies in the future, which may lead to
action against us. We have responded to all inquiries from regulatory agencies and
described our services, operating procedures and requested information. If one or more
of these agencies is not satisfied with our response to current or future inquiries, we
could be subject to enforcement actions, fines or other penalties, or forced to change
our operating practices in ways that could harm our business, or if during these
inquiries any of our processes are found to violate laws on consumer protection, or to
constitute unfair business practices, we could be subject to civil damages, enforcement
actions, fines or penalties. Such actions or fines could require us to restructure our
business processes in ways that would harm our business and cause us to incur
substantial costs.
In addition, our success depends largely upon sellers accurately representing and
reliably delivering the listed goods and buyers paying the agreed purchase price. We
have received in the past, and anticipate that we will receive in the future, complaints
from users who did not receive the purchase price or the goods agreed to be exchanged.
While we can suspend the accounts of users who fail to fulfill their delivery
obligations to other users, we do not have the ability to require users to make payments
or deliver goods sold. We also receive complaints from buyers regarding the quality of
the goods purchased or the partial or non-delivery of purchased items. We have tried to
reduce our liability to buyers for unfulfilled transactions or other claims related to
the quality of the purchased goods by offering a free Buyer Protection program to buyers
who meet certain conditions. Although the number of claims that we have paid through
this program is not currently significant, we may in the future receive additional
requests from users requesting reimbursement or threatening legal action against us if
we do not reimburse them, the result of which could materially adversely affect our
business and financial condition. As discussed above, we are currently appealing a
determination by a Brazilian court that our Brazilian subsidiary should be held liable
for fraud committed by sellers and losses incurred by buyers when purchasing items on
the Brazilian version of the MercadoLibre website. We keep expanding the coverage of our
Buyers Protection Program. This coverage expansion may impact the number and amount of
reimbursements we are required to make. This new version may impact the number and
amount of reimbursements we are required to make.
Any litigation related to unpaid or undelivered purchases or defective items could
be expensive for us, divert managements attention and could result in increased costs
of doing business. In addition, any negative publicity generated as a result of the
fraudulent or deceptive conduct of our users could damage our reputation and diminish
the value of our brands.
16
We could face legal and financial liability for the sale of items that infringe on the
intellectual property and distribution rights of others and for information disseminated
on the MercadoLibre marketplace.
Even though we monitor listings on our web sites, we are not able to detect every
item that may infringe on the intellectual property rights of third parties. As a
result, we have received in the past, and anticipate that we will receive in the future,
complaints alleging that certain items listed and/or sold through the MercadoLibre
marketplace and/or using MercadoPago infringe third-party copyrights, trademarks or
other intellectual property rights. Content owners and other intellectual property
rights owners have been active in defending their rights against online companies,
including us. We have taken steps to work in coordination and cooperation with the
intellectual property rights owners to seek to eliminate allegedly infringing items
listed in the MercadoLibre marketplace. Our user policy prohibits the sale of goods
which may infringe third-party intellectual property rights, and we may suspend the
account of any user who infringes third-party intellectual property rights. Despite all
these measures some rights owners have expressed that our efforts are insufficient.
Content owners and other intellectual property rights owners have been active in
asserting their purported rights against online companies, including eBay. Allegations
of infringement of intellectual property rights could result in threats of litigation
and actual litigation against us by rights owners.
Specifically, allegations of infringement of intellectual property rights have
already resulted in claims against us from time to time, including litigation in Brazil
brought by Cartier International B.V., Montblanc Simplo Gmbh, Richemont International
S.A., Puma Sports Ltda., Lacoste do Brasil Indústria e Comercio Ltda., Sporloisirs S.A.,
Qix Skateboards Indústria e Comercio Ltda, Vintage Denim Ltda., Editora COC
Empreendimentos Culturais Ltda., Barros Fischer e Associados Ltda., Fallms Distribuição
de Fitas Ltda., 100% Nacional Distribuidora de Fitas Ltda., Xuxa Promoções e Produções
Artísticas Limitada, Praetorium Instituto de Ensino, Pesquisas e Atividades de Extensão
e Direito Ltda., Sette Informações Educacionãis Ltda., Serasa S.A., Botelho Industria e
Distribuiçāo Cinematográfica Ltda., and Citizen Watch do Brasil S/A and in Argentina
brought by Nike International Ltd. and Iglesia Mesianica Mundial Sekai Kyusei Kio.
While we have been largely successful to date in settling existing claims by
agreeing to monitor the brands and have not paid any damages, the current lack of laws
related to the Internet results in great uncertainty as to the outcome of any future
claims. Other companies providing similar services to us have also been subject to these
types of claims in the United States and other countries. In June 2008, the Paris Court
of Commerce ruled that eBay, Inc. and eBay International AG were liable to Louis Vuitton
Malletier and Christian Dior Couture for failing to prevent the sale of counterfeit
items on its web sites that traded on plaintiffs brand names and for interfering with
the plaintiffs selective distribution network. The court awarded plaintiffs
approximately EUR 38.6 million in damages and issued an injunction prohibiting all sales
of perfumes and cosmetics bearing the Dior, Guerlain, Givenchy and Kenzo brands over all
worldwide eBay sites to the extent they are accessible from France. We cannot assure you
that MercadoLibre and MercadoPago will not be subject to similar suits, which could
result in substantial awards and costly injunctions against us.
We continue to have outstanding litigation and, although we intend to defend each
of these claims, we cannot assure you that we will be successful. This type of
litigation is expensive for us, could result in damage awards or increased costs of
doing business through adverse judgments or settlements, could require us to change our
business practices in expensive ways, or could otherwise harm our business. Litigation
against other online companies could result in interpretations of the law that could
also require us to change our business practices or otherwise increase our costs.
We are subject to risks with respect to information and material disseminated through
our platforms.
It is possible that third parties could bring claims against us for defamation,
libel, invasion of privacy, negligence, or other theories based on the nature and
content of the materials disseminated through our services. Other online services
companies are facing several lawsuits for this type of liability. As mentioned
previously, the liability of online services companies for content hosted and the
information carried on or disseminated through their services is currently unclear in
the Latin American countries where we operate. This could allow for claims being made
against us by purportedly aggrieved third parties. For example, the MercadoLibre service
contains a User Feedback feature, which includes reviews and ratings from users
regarding the reliability of other users in paying or delivering goods sold in a
transaction promptly. Although users generate all the feedback, it is possible that a
party could bring a claim for defamation or other injury against us for content posted
through the User Feedback feature. If we or other online services providers are held
liable or potentially liable for information carried on or disseminated through our
services, we may have to implement measures to reduce our exposure to this liability.
Any measures we may need to implement may involve spending substantial resources and/or
discontinuing certain services. Any costs that we incur as a result of liability or
asserted liability could have a material adverse effect on our business, results of
operations and financial condition. In addition, public attention to liability issues,
lawsuits and legislative proposals could impact the growth of Internet use, and
subsequently have a negative impact on our business results.
17
The market in which we operate is rapidly evolving and we may not be able to maintain
our profitability.
As a result of the emerging nature of the markets in which we compete, the
increased variety of services offered on our web site and the rapidly evolving nature of
our business, it is particularly difficult for us to forecast our revenues or earnings
accurately. In addition, we have no backlog and substantially all of our net revenues
for each quarter are derived from listing fees, optional feature fees, up-front fees,
final value fees, commissions on MercadoPago payments and advertising that are earned
during that quarter. Our current and future expense levels are based largely on our
investment plans and estimates of future revenues and are, to a large extent, fixed. We
may not be able to adjust spending in a timely manner to compensate for any unexpected
revenue shortfall. Accordingly, any significant shortfall in revenues relative to our
planned expenditures would have an immediate adverse effect on our business, results of
operations and financial condition.
If we continue to grow, we may not be able to appropriately manage the increased size of
our business.
We are currently experiencing a period of significant expansion and anticipate that
further expansion will be required to address potential growth in our customer base and
market opportunities. This expansion has placed, and is expected to continue to place, a
significant strain on management and our operational and financial resources.
We must constantly add new hardware, update software, enhance and improve our
billing and transaction systems, and add and train new engineering and other personnel
to accommodate the increased use of our web site and the new products and features we
regularly introduce. This upgrade process is expensive, and the increasing complexity
and enhancement of our web site results in higher costs. Failure to upgrade our
technology, features, transaction processing systems, security infrastructure, or
network infrastructure to accommodate increased traffic or transaction volume could harm
our business. Adverse consequences could include unanticipated system disruptions,
slower response times, degradation in levels of customer support, impaired quality of
users experiences of our services and delays in reporting accurate financial
information.
Our revenues depend on prompt and accurate billing processes. Our failure to grow
our transaction-processing capabilities to accommodate the increasing number of
transactions that must be billed on our web site would harm our business and our ability
to collect revenue.
Furthermore, we may need to enter into relationships with various strategic
partners, web sites and other online service providers and other third parties necessary
to our business. The increased complexity of managing multiple commercial relationships
could lead to execution problems that can affect current and future revenues and
operating margins.
Our current and planned systems, procedures and controls, personnel and third party
relationships may not be adequate to support our future operations. Our failure to
manage growth effectively could have a material adverse effect on our business, results
of operations and financial condition.
Our systems may fail or suffer interruptions due to human acts, technical problems, or
natural disasters.
Our success, and in particular our ability to facilitate trades or payments
successfully and provide high quality customer service, depends on the efficient and
uninterrupted operation of our computer and communications hardware systems.
Substantially all of our computer hardware for operating the MercadoLibre marketplace
and MercadoPago services is currently located at the facilities of the Savvis Datacenter
in Sterling, Virginia, with a redundant database backup in Atlanta, Georgia. These
systems and operations are vulnerable to damage or interruption from earthquakes,
floods, fires, power loss, computer viruses, telecommunication failures, physical or
electronic break-ins, sabotage, intentional acts of vandalism, terrorism, and similar
events. If our system suffers a major failure, it would take as much as several days to
get the service running again because our Atlanta database is only a backup with very
limited hardware. We also have no formal disaster recovery plan or alternative providers
of hosting services and do not carry business interruption insurance to compensate us
for losses that may occur. Despite any precautions we have taken and plan to take, if
there is a natural disaster or major failure, a decision by our providers to close one
of the facilities we use without adequate notice, or other unanticipated problem at the
Virginia or Atlanta facilities, the services we provide could suffer interruptions. We
currently have no plans to upgrade the Atlanta facility capabilities. Additionally, in
the occurrence of such pronounced, frequent or persistent system failures, our
reputation and name brand could be materially adversely affected.
We are subject to security breaches or other confidential data theft from our systems,
which can adversely affect our reputation and business.
A significant risk associated with online commerce and communications is the secure
transmission of confidential information over public networks. Currently, a number of
MercadoLibre users authorize us to bill their credit card accounts or debit their bank
accounts directly, or use MercadoPago for all the transaction fees that we charge. We
rely on encryption and authentication necessary to provide the security and
authentication technology to transmit confidential information securely, including
customer credit card numbers and other account information. Advances in computer capabilities, new discoveries in the field of cryptography, or other
events or developments may result in a compromise or breach of the technology that we
use to protect customer transaction data. If our security were compromised, it could
have a material adverse effect on our reputation. We cannot assure you that our security
measures will prevent security breaches or that failure to prevent them will not have a
material adverse effect on our business, results of operations and financial condition.
18
We depend on key personnel, the loss of which could have a material adverse effect on
us.
Our performance depends substantially on the continued services and on the
performance of our senior management and other key personnel. Our ability to retain and
motivate these and other officers and employees is fundamental to our performance.
Our most senior executive officers have been with us since 2000 or before,
providing us with a stable and experienced management team. The loss of the services of
any of these executive officers or other key employees could have a material adverse
effect on our business, results of operations and financial condition. We do not have
employment agreements with any of our key technical personnel other than our senior
executives (whose agreements are for an undetermined period and establish general
employment terms and conditions) and maintain no key person life insurance policies.
The option grants to most of our senior management and key employees are fully vested.
Therefore, these employees may not have sufficient financial incentive to stay with us.
Consequently we may have to incur costs to replace key employees who leave and our
ability to execute our business model could be impaired if we cannot replace them in a
timely manner.
Our future success also depends on our ability to identify, attract, hire, train,
retain and motivate other highly skilled technical, managerial, marketing and customer
service personnel. Competition for this personnel is intense, and we cannot assure you
that we will be able to successfully attract, integrate, train, retain, motivate and
manage sufficiently qualified personnel.
Currently our revenues depend substantially on up-front, final value fees and fees
related to our payment solution we charge to sellers and may decrease if market
conditions force us to lower such fees or if we fail to diversify our sources of
revenue.
Our revenues currently depend primarily on up-front fees, final value fees and fees
related to our payment solution that we charge to our sellers for listing and upon
selling their items and services. Our platform depends upon providing access to a large
market at a lower cost than other comparable alternatives. If market conditions force us
to substantially lower our listing or final value fees or fees related to our payment
solution or if we fail to continue to attract new buyers and sellers, and if we are
unable to effectively diversify and expand our sources of revenue, our profitability,
results of operations and financial condition could be adversely affected.
We are subject to consumer trends and could lose revenue if certain items become less
popular.
We derive substantially all of our revenues from fees charged to sellers for
listing products for sale on our service, fees from successfully completed transactions
and fees for making payments through MercadoPago. Our future revenues depend on
continued demand for the types of goods that users list on the MercadoLibre marketplace
or pay with MercadoPago on or off the MercadoLibre marketplace. The popularity of
certain categories of items, such as computer and electronic products, cellular
telephones, toys, clothing and sporting goods, among consumers may vary over time due to
perceived availability, subjective value, and trends of consumers and society in
general. A decline in the demand for or popularity of certain items sold through the
MercadoLibre marketplace without an increase in demand for different items could reduce
the overall volume of transactions on the MercadoLibre service, resulting in reduced
revenues. In addition, certain consumer fads may temporarily inflate the volume of
certain types of items listed on the MercadoLibre marketplace, placing a significant
strain on our infrastructure and transaction capacity. These trends may also cause
significant fluctuations in our operating results from one quarter to the next.
Retailers may encourage manufacturers to limit distribution of their products to dealers
who sell through us, or may encourage the government to limit online commerce.
Manufacturers may attempt to enforce minimum resale price maintenance arrangements
to prevent distributors from selling on our websites or on the Internet generally, or at
prices that would make our site attractive relative to other alternatives. The adoption
by manufacturers of policies, or the adoption of new laws or regulations or
interpretations of existing laws or regulations by government authorities, in each case
discouraging the sales of goods or services over the Internet, could force our users to
stop selling certain products on our websites. Increased competition or anti-Internet
distribution policies or regulations may result in reduced operating margins, loss of
market share and diminished value of our brand. In order to respond to changes in the
competitive environment, we may, from time to time, make pricing, service or marketing decisions or acquisitions that may be controversial with and
lead to dissatisfaction among some of our sellers, which could reduce activity on our
websites and harm our profitability.
19
The success of other e-commerce companies such as eBay and Amazon is not an indication
of our future financial performance.
Several companies that operate e-commerce web sites, such as eBay and Amazon, have
been successful and profitable in the past. However, we operate in a business
environment that is different from eBays and other e-commerce companies operating
outside of Latin America. These differences include the smaller size of the national
markets, lower Internet adoption rates, lower confidence in remote payment mechanisms
and less reliable postal and parcel services. Therefore, you should not interpret the
success of any of these companies as indicative of our financial prospects.
We could be subject to liability and forced to change our MercadoPago business practices
if we were found to be subject to or in violation of any laws or regulations governing
banking, money transmission, tax regulation, anti-money laudering regulations or
electronic funds transfers in any country where we operate.
A number of jurisdictions where we operate have enacted legislation regulating
money transmitters. We believe we do not require a license under the existing statutes
of Argentina, Brazil, Mexico, Chile, Colombia and Venezuela to operate MercadoPago with
its current agency-based structure. If our operation of MercadoPago were found to be in
violation of money services laws or regulations or any tax or anti-money laudering
regulations, or engaged in an unauthorized banking or financial business, we could be
subject to liability, forced to cease doing business with residents of certain
countries, or forced to change our business practices or to become a financial entity.
Any change to our MercadoPago business practices that makes the service less attractive
to customers or prohibits its use by residents of a particular jurisdiction could
decrease the speed of trade on the MercadoLibre marketplace, which would further harm
our business. Even if we are not forced to change our MercadoPago business practices, we
could be required to obtain licenses or regulatory approvals that could be very
expensive and time consuming, and we cannot assure you that we would be able to obtain
these licenses in a timely manner or at all.
MercadoPago is susceptible to illegal uses, and we could potentially face liability for
any illegal use of MercadoPago.
MercadoPago, like the MercadoLibre platform, is also susceptible to potentially
illegal or improper uses, including, fraudulent and illicit sales, money laundering,
bank fraud, different fraud schemes and online securities fraud. In addition,
MercadoPagos service could be subject to unauthorized credit card use, identity theft,
break-ins to withdraw account balances, employee fraud or other internal security
breaches, and we may be required to reimburse customers for any funds stolen as a result
of such breaches. Merchants could also request reimbursement, or stop using MercadoPago,
if they are affected by buyer fraud.
In addition, MercadoPago may be subject to anti-money laundering laws and
regulations that prohibit, among other things, its involvement in transferring the
proceeds of criminal activities or impose taxes collection obligations or obligation to
provide certain information about transactions occurred in our platforms, or about our
users. Because of different laws and regulations in each jurisdiction where we operate,
as we roll-out and adapt MercadoPago in other countries, additional verification and
reporting requirements could apply. These regulations could impose significant costs on
us and make it more difficult for new customers to join the MercadoPago network. Future
regulation (under the USA Patriot Act or otherwise), may require us to learn more about
the identity of our MercadoPago customers before opening an account, to obtain
additional verification of customers and to monitor our customers activities more
closely. These requirements, as well as any additional restrictions imposed by credit
card associations, could raise our MercadoPago costs significantly and reduce the
attractiveness of MercadoPago. Failure to comply with money laundering laws could result
in significant criminal and civil lawsuits, penalties, and forfeiture of significant
assets.
We incur losses from claims that customers did not authorize a purchase, from buyer
fraud and from erroneous transmissions. In addition to the direct costs of such losses,
if they are related to credit card transactions and become excessive, they could result
in MercadoPago losing the right to accept credit cards for payment. If MercadoPago is
unable to accept credit cards, our business will be adversely affected given that credit
cards are the most widely used method for funding the MercadoPago accounts. We have
taken measures to detect and reduce the risk of fraud on MercadoPago, such as running
address verification system (AVS) and card security code (CSC) checks in some countries,
calling users to have them answer personal questions to confirm their identity or asking
users to fax extra documentation for higher risk transactions, implementing caps on
overall spending per users and data mining to detect potentially fraudulent
transactions. However, these measures may not be effective against current and new forms
of fraud. If these measures do not succeed, excessive charge-backs may arise in the
future and our business will be adversely affected.
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Our failure to manage MercadoPago customer funds properly would harm our business.
Our ability to manage and account accurately for MercadoPago customer funds
requires a high level of internal controls. We have neither an established operating
history nor proven management experience in maintaining, over a long term, these
internal controls. As MercadoPago continues to grow, we must strengthen our internal
controls accordingly. MercadoPagos success requires significant public confidence in
our ability to handle large and growing transaction volumes and amounts of customer
funds. Any failure to maintain necessary controls or to properly manage customer funds
could severely reduce customer use of MercadoPago.
MercadoPago is a relatively new service that faces competition from other payment
methods, and competitors may adversely affect the success of MercadoPago.
MercadoPago competes with existing online and offline payment methods, including,
among others, banks and other providers of traditional payment methods, particularly
credit cards, checks, money orders, and electronic bank deposits; international online
payments services such as Paypal and Google Checkout, and local online payment services
such as DineroMail in Argentina, Chile, Colombia and Mexico, and Pagamento Digital and
PagSeguro in Brazil; money remitters such as Western Union; the use of cash, which is
often preferred in Latin America; and offline funding alternatives such as cash deposit
and money transmission services. Some of these services may operate at lower commission
rates than MercadoPagos current rates and, accordingly, we are subject to market
pressures with respect to the commissions we charge for MercadoPago services.
MercadoPagos competitors may respond to new or emerging technologies and changes
in customer requirements faster and more effectively than us. They may devote greater
resources to the development, promotion, and sale of products and services than we do
for MercadoPago. Competing services tied to established banks and other financial
institutions may offer greater liquidity and create greater consumer confidence in the
safety and efficacy of their services than MercadoPago. Established banks and other
financial institutions currently offer online payments and those which do not yet
provide such a service could quickly and easily develop it.
We are currently in the process of rolling out our direct payments product in some
countries in order to provide a better experience to our users. For the same reason we
are also charging a single Final Value Fee for the right to use MercadoLibre and
MercadoPago in those transactions. This change may result in a lower combined take rate.
We consider MercadoPagos direct payments product to be in early release and have
identified several opportunities to improve upon the product. In addition, the
transition to the new system may not be a smooth one. The occurrence of any of these
events could adversely affect our business.
We continue to expand MercadoPagos services internationally. We have no experience
with the online payment solution in Costa Rica, the Dominican Republic, Ecuador, Panama,
Peru, Portugal or Uruguay. In order to introduce MercadoPago in some countries we may
require a close commercial relationship with one or more local banks. These or other
factors may prevent, delay or limit our introduction of MercadoPago in other countries,
or reduce its profitability.
We rely on banks or payment processors to fund transactions, and changes to credit card
association fees, rules or practices may adversely affect our business.
Because MercadoPago is not a bank, we cannot belong to or directly access credit
card associations, such as Visa and MasterCard. As a result, we must rely on banks or
payment processors to process the funding of MercadoPago transactions and MercadoLibre
marketplace collections, and must pay a fee for this service. From time to time, credit
card associations may increase the interchange fees that they charge for each
transaction using one of their cards. The credit card processors of MercadoPago and the
MercadoLibre marketplace have the right to pass any increases in interchange fees on to
us as well as increase their own fees for processing. These increased fees increase the
operating costs of MercadoPago, reduce our profit margins from MercadoPago operations
and, to a lesser degree, affect the operating margins of the MercadoLibre marketplace.
We are also required by MercadoPago and MercadoLibres processors to comply with
credit card association operating rules. The credit card associations and their member
banks set and interpret the credit card rules. Some of those member banks compete with
MercadoPago. Visa, MasterCard, American Express or other credit card companies could
adopt new operating rules or re-interpret existing rules that we or MercadoPagos
processors might find difficult or even impossible to follow. As a result, we could lose
our ability to provide MercadoPago customers the option of using credit cards to fund
their payments and MercadoLibre users the option to pay their fees using a credit card.
If MercadoPago were unable to accept credit cards, our MercadoPago business would be
adversely affected.
We could lose the right to accept credit cards if MasterCard and/or Visa determine
that users are using MercadoPago to engage in illegal or high risk activities.
Accordingly, we are working to prevent high risk merchants from using MercadoPago. To
date, we have not incurred fines from MercadoPagos credit card processor relating to
our failure to detect the use of MercadoPago by high risk merchants.
21
Additionally, we may be unable to access financing in the credit and capital
markets at reasonable rates to fund our MercadoPago and for that reason our
profitability and total payments volume could decrease.
Our operating results may be impacted by an economic crisis.
General adverse economic conditions, including the possibility of a severe
recession and a worldwide economic slowdown, would adversely impact our operating
results and business. If the current worldwide economic crisis continues for an extended
period of time, many of our users may delay or reduce their purchases of goods on the
MercadoLibre marketplace, which would reduce our revenues and have a material adverse
impact on our business. Furthermore, future changes in trends could result in a material
impact to future consolidated statements of income and cash flows.
The failure of the financial institutions with which we conduct business may have a
material adverse effect on our business, operating results, and financial condition.
The financial services industry experienced a period of unprecedented turmoil in
2008 and 2009, characterized by the bankruptcy, failure or sale of various financial
institutions and an unprecedented level of intervention from the United States and other
governments. If the condition of the financial services industry agains deteriorates or
becomes weakened for an extended period of time, the following factors could have a
material adverse effect on our business, operating results, and financial condition:
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Disruptions to the capital markets or the banking system
may impair the value of investments or bank deposits we
currently consider safe or liquid. We may be unable to find
suitable alternative investments that are safe, liquid, and
provide a reasonable return. This could result in lower
interest income or longer investment horizons. |
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We may be required to increase the installment and
financing fees we charge to customers for purchases made in
installments or cease offering installment purchases
altogether, each of which may result in a lower volume of
transactions completed. |
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We may be unable to access financing in the credit and
capital markets at reasonable rates in the event we find it
desirable to do so. Due to the nature of our MercadoPago
business we generate high account receivable balances that
we typically sell to financial institutions, and
accordingly, lack of access to credit, or banks
liquidations could cause us to experience severe
difficulties in paying our sellers. |
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The failure of financial institution counterparties to
honor their obligations to us under credit instruments
could jeopardize our ability to rely on and benefit from
those instruments. Our ability to replace those instruments
on the same or similar terms may be limited under difficult
market conditions. |
A rise in interest rates may negatively affect our MercadoPago payment volume.
In each of Brazil, Argentina and Mexico, we offer users the ability to pay for
goods purchased using MercadoPago in installments. In 2008, 2009 and 2010, installment
payments represented 59.3%, 58.4% and 54.6% of MercadoPagos total payment volume,
respectively. To facilitate the offer of the installment payment feature, we pay interest
to credit card processors and issuer banks in Mexico and Argentina and we pay interest
to advance credit card coupons in Brazil. In all of these cases, if interest rates
increase, we may have to raise the installment fees we charge to users which would
likely have a negative effect on MercadoPagos total payment volume.
Changes in MercadoPagos funding mix could adversely affect MercadoPagos results.
MercadoPago pays significant transaction fees when senders fund payment
transactions using credit cards, PagoMisCuentas and Pago Fácil, nominal fees when
customers fund payment transactions from their bank accounts in Brazil and Mexico, and
no fees when customers fund payment transactions from an existing MercadoPago account
balance. Senders funded approximately 73.9%, 74.3% and 71.3% of MercadoPagos payment
volume using credit cards during 2008, 2009 and 2010, respectively (either in a single
payment or in installments), and MercadoPagos financial success will remain highly
sensitive to changes in the rate at which its senders fund payments using credit cards.
Senders may prefer credit card funding rather than bank account transfers for a number
of reasons, including the ability to pay in installments in Brazil, Mexico and
Argentina, the ability to dispute and reverse charges if merchandise is not delivered or
is not as described, the ability to earn frequent flyer miles or other incentives
offered by credit cards, the ability to defer payment, or a reluctance to provide bank
account information to us.
22
Changes in MercadoPago ticket mix could adversely affect MercadoPagos results.
The transaction fees MercadoPago pays in connection with certain means of payments
such as OXXO are fixed regardless of the ticket price, and certain costs incurred in
connection with the processing of credit card transactions are also fixed. Currently,
MercadoPago charges a fee calculated as a percentage of each transaction. If MercadoPago
receives a larger percentage of low ticket transactions its margin may erode or we may
need to raise prices by including a fixed fee per transaction which, in turn, may affect
the volume of transactions.
We have no business insurance coverage, which would require us to spend significant
resources in the event of a disruption of our services or other contingency.
Insurance companies in Latin America offer limited business insurance products. We
do not carry any business liability or disruption insurance coverage for our operations.
Any business disruption, litigation, system failure or natural disaster may cause us to
incur substantial costs and divert resources, which could have a material adverse effect
on our business, results of operation and financial condition.
We may not be able to adequately protect and enforce our intellectual property rights.
We could potentially face claims alleging that our technologies infringe the property
rights of others.
We regard the protection of our copyrights, service marks, trademarks, domain
names, trade dress and trade secrets as critical to our future success and rely on a
combination of copyright, trademark, service mark and trade secret laws and contractual
restrictions to establish and protect our proprietary rights in our products and
services. We have entered into confidentiality and invention assignment agreements with
our employees and certain contractors, and non-disclosure agreements with our employees
and certain suppliers and strategic partners in order to limit access to and disclosure
of our proprietary information. We cannot assure you that these contractual arrangements
or the other steps that we have taken or will take in the future to protect our
intellectual property will prove sufficient to prevent misappropriation of our
technology or to deter independent third-parties from developing similar or competing
technologies.
We pursue the registration of our domain names, trademarks, logos and service marks
in each country where we operate, in the United States and in certain other Latin
American countries. Effective trademark, service mark, copyright, domain name and trade
secret protection may not be available or granted to us by the appropriate regulatory
authority in every country in which our services are made available online. For example,
since 1999, we have filed several applications to register the name MercadoLivre and
our logo in Brazil. Although most of the applications are still pending, certain
applications were denied in that country under the argument that the name was
descriptive of its activities. We cannot assure you that we will succeed in obtaining
these trademarks or in our challenges to existing or future applications by other
parties or by the Instituto Nacional da Propriedade Industrial (the National Institute
of Industrial Property). If we are not successful, MercadoLibres ability to protect its
brand in Brazil against third-party infringers would be compromised and we could face
claims by any future trademark owners. Any past or future claims relating to these
issues, whether meritorious or not, could cause us to enter into costly royalty and/or
licensing agreements. If any of these claims against us are successful we may also have
to modify our brand name in certain countries. Any of these circumstances could
adversely affect our business, results of operations and financial condition.
We have licensed in the past, and expect that we may license in the future, certain
of our proprietary rights, such as trademarks or copyrighted material, to third parties.
While we attempt to ensure that our licenses maintain the quality of the MercadoLibre
brand, our licensees may take actions that could materially adversely affect the value
of our proprietary rights or reputation, which could have a material adverse effect on
our business, results of operations and financial condition.
To date, we have not been notified that our technology infringes on the proprietary
rights of third parties, but third parties may claim infringement on our part with
respect to past, current or future technologies or features of our services. We expect
that participants in our markets will be increasingly subject to infringement claims as
the number of services and competitors in the e-commerce segment grows. Any of these
claims could have a material adverse effect upon our business, results of operations and
financial condition.
Since 2001, eBay has been subject to a lawsuit alleging infringement of patents
relating to online consignment auction technology, multiple database searching and
electronic consignment systems. In September 2001, MercExchange LLC filed a complaint
against eBay and their subsidiaries in the U.S. District Court for the Eastern District
of Virginia alleging infringement of three patents (relating to online consignment
auction technology, multiple database searching and electronic consignment systems) and
seeking a permanent injunction and damages (including treble damages for willful
infringement). Following a trial and jury verdict, in August 2003, the court entered
judgment for MercExchange in the amount of approximately $30 million plus pre-judgment
interest and post-judgment interest, but refused to grant an injunction. eBay appealed
the verdict and judgment in favor of MercExchange, and MercExchange filed a cross-appeal. In May, 2006, following appeals to the U.S.
Court of Appeals for the Federal Circuit and the U.S. Supreme Court, the Supreme Court
ruled that an outright denial of an injunction in a patent case is not appropriate, and
remanded the case to the district court for further proceedings. On August 28, 2006,
MercExchange renewed its motion for a permanent injunction in the U.S. District Court
for the Eastern District of Virginia. Final briefs on such motion were filed in March
2007, and in July 2007, the U.S. District Court for the Eastern District of Virginia
denied MercExchanges motion for permanent injunction. MercExchange subsequently entered
a notice of appeal. In December 2007, the court entered judgment for MercExchange for
$25 million plus prejudgment and post judgment interest. eBay subsequently entered a
notice of appeal.
23
In February 2008, eBay and all parties involved agreed to settle and dismiss all
claims and appeals stemming from the lawsuit. As a part of the settlement, eBay will
purchase all three patents involved in the lawsuit, and related technology and
inventions, as well as a license to another search-related patent portfolio that was not
asserted in the lawsuit.
From time to time, we are involved in other disputes or regulatory inquiries that
arise in the ordinary course of business. The number and significance of these disputes
and inquiries are increasing as our business expands and we grow larger. Any claims or
regulatory actions against us, whether meritorious or not, could be time consuming,
result in expensive litigation, require significant amounts of management time, and
result in the diversion of significant operational resources.
We may not be able to secure licenses for third-party technologies upon which we rely.
We rely on certain technologies that we license from third parties, such as Oracle
Corp., SAP AG, Salesforce.com Inc., Microstrategy, Radware, Juniper Networks, Cisco
Systems Inc, F5 Networks, and Netapp, the suppliers of key database technology,
operating system and specific hardware components for our services. We cannot assure you
that these third-party technology licenses will continue to be available to us on
commercially reasonable terms. If we were not able to make use of this technology, we
would need to obtain substitute technology that may be of lower quality or performance
standards or at greater cost, which could materially adversely affect our business,
results of operations and financial condition.
Problems that affect our third-party service providers could potentially adversely
affect us as well.
A number of parties provide beneficial services to us or to our users. These
services include the hosting of our servers, and the postal and payments infrastructures
that allow users to deliver and pay for the goods and services traded amongst
themselves, in addition to paying their MercadoLibre marketplace bills. Financial,
regulatory, or other problems that might prevent these companies from providing services
to us or our users could reduce the number of listings on our web sites or make
completing transactions on our web sites more difficult, which would harm our business.
Any security breach at one of these companies could also affect our customers and harm
our business. Although we generally have been able to renew or extend the terms of
contractual arrangements with these third party service providers on acceptable terms,
we cannot assure you that we will continue to be able to do so in the future.
Complaints from customers or negative publicity about our services can diminish consumer
confidence and adversely affect our business.
Because volume and growth in adoption of new users are key factors for our
profitability, customer complaints or negative publicity about our customer service
could severely diminish consumer confidence in and use of our services. Measures we
sometimes take to combat risks of fraud and breaches of privacy and security can damage
relations with our customers. To maintain good customer relations, we need prompt and
accurate customer service to resolve irregularities and disputes. Effective customer
service requires significant personnel expense and investment in developing programs and
technology infrastructure to help customer service representatives carry out their
functions. These expenses, if not managed properly, could significantly impact our
profitability. Failure to manage or train our customer service representatives properly
could compromise our ability to handle customer complaints effectively. If we do not
handle customer complaints effectively, our reputation may suffer and we may lose our
customers confidence.
As part of our program to reduce fraud losses in relation to MercadoPago, we make
use of MercadoPago anti-fraud models and we may temporarily restrict the ability of
customers to withdraw their funds if we identify those funds or the customers account
activity as suspicious. MercadoPago has not been subject to any significant negative
publicity about this. However, users who were banned from withdrawing funds or received
fake mail appearing to be sent by MercadoPago initiated legal actions against us. As a
result of our efforts to police the use of our services, MercadoPago may receive
negative publicity, our ability to attract new MercadoPago customers may be damaged, and
we could become subject to litigation. If any of these events happen, current and future
revenues could suffer, and our database technology operating margins may decrease. In
addition, negative publicity about or experiences with MercadoPago customer support could cause MercadoLibres reputation to suffer or
affect consumer confidence in the MercadoLibre brand.
24
We may incur unexpected liabilities in connection with our acquisition of CMG.
On January 22, 2008, we acquired 100% of the issued and outstanding shares of
capital stock of CMG and its subsidiaries. We may become responsible for unexpected
liabilities that we failed or were unable to discover in the course of performing due
diligence in connection with our acquisition of CMG. These liabilities could have an
adverse effect on our business, financial condition and results of operations.
We may incur unexpected liabilities in connection with our acquisition of DeRemate
operations.
In September 2008, we acquired all of the issued and outstanding shares of capital
stock of DeRemate.com de Argentina S.A., DeRemate.com Chile S.A., Interactivos y
Digitales México S.A. de C.V. and Compañía de Negocios Interactiva de Colombia E.U. as
well as certain URLs, domains, trademarks, databases and intellectual property rights
related to those businesses. We may become responsible for unexpected liabilities that
we failed or were unable to discover in the course of performing due diligence in
connection with our acquisition of DeRemate operations. Any of these liabilities could
have an adverse effect on our business, financial condition and results of operations.
If our goodwill becomes impaired, we may be required to record a significant charge to
earnings.
As of December 31, 2010, we have recorded goodwill for approximately 22.4% of our
consolidated assets. Under United States Generally Accepted Accounting Principles (US
GAAP), we review our goodwill for impairment annually or more frequently when events or
changes in circumstances indicate that the carrying value may not be recoverable.
Factors that may be considered a change in circumstances indicating that the carrying
value of our goodwill may not be recoverable include a decline in stock price and market
capitalization, future cash flows, and slower growth rates in our industry. We may be
required to record a significant charge to earnings in our financial statements during
the period in which any impairment of our goodwill is determined, resulting in an
adverse impact on our results of operations.
We may not realize benefits from recent or future strategic acquisitions of businesses,
technologies, services or products despite their costs in cash and dilution to our
stockholders.
We intend to continue to acquire businesses, technologies, services or products, as
we have done in the past with our acquisitions of iBazar, Lokau, DeRemate, and CMG,
which we believe are strategic if an appropriate opportunity presents itself. We may
not, however, be able to identify, negotiate or finance such future acquisitions
successfully or at favorable valuations, or to effectively integrate these acquisitions
with our current business. The process of integrating an acquired business, technology,
service or product into our business may result in unforeseen operating difficulties and
expenditures. Moreover, future acquisitions may also generate unforeseen pressures
and/or strains on our organizational culture.
Additionally, acquisitions could result in potentially dilutive issuances of equity
securities, the incurrence of debt, contingent liabilities and/or amortization expenses
related to goodwill and other intangible assets, which could materially adversely affect
our business, results of operations and financial condition. Any future acquisitions of
other businesses, technologies, services or products might require us to obtain
additional equity or debt financing, which might not be available on favorable terms, or
at all. If debt financing for potential future acquisitions is unavailable, we may
determine to issue shares of our common stock in connection with such an acquisition and
any such issuance could result in the dilution of our common stock.
We are subject to seasonal fluctuations in our results of operations.
We believe that our results of operations are somewhat seasonal in nature (as is
the case with traditional retailers), with relatively fewer listings and transactions in
the first quarters of the year, and increased activity as the year-end shopping season
initiates. This seasonality is the result of fewer listings after the Christmas and
other holidays and summer vacation periods in our Southern hemisphere markets. To some
degree, our historical rapid growth may have overshadowed seasonal or cyclical factors
that might have influenced our business to date. Seasonal or cyclical variations in our
operations could become more pronounced over time, which could materially adversely
affect our quarter to quarter results of operations in the future.
25
We operate in a highly competitive and evolving market, and therefore face potential
reductions in the use of our service.
The market for trading over the Internet is relatively new in Latin America,
rapidly evolving and intensely competitive, and we expect competition to become more
intense in the future. Barriers to entry are relatively low, and current offline and new
competitors, including small businesses who want to create and promote their own stores
or platforms, can easily launch new sites at relatively low cost using software that is
commercially available. We currently or potentially compete with a number of other
companies.
Our direct competitors include various online sales and auction services, including
MasOportunidades.com in Argentina, and a number of other small services, including those
that serve specialty markets. We also compete with business-to-consumer online
e-commerce services, such as pure play Internet retailer Submarino (a website of B2W
Inc), and a growing number of bricks and mortar retailers who have launched on line
offerings such as Americanas (a website of B2W Inc), Casas Bahia and Falabella, OLX,
QueBarato and with shopping comparison sites located throughout Latin America such as
Buscape and Bondfaro, located throughout Latin America. In addition, we compete with
online communities that specialize in classified advertisements. Although no regional
competitor exists in the classified market, local players such as Webmotors, VivaStreet
and Zap have important positions in certain markets.
We face competition from a number of large online communities and services that
have expertise in developing online commerce and facilitating online interaction.
Certain of these competitors, including Google, Amazon.com, Microsoft and Yahoo!
currently offer a variety of business-to-consumer commerce services, searching services
and classified advertising services, and certain of these companies may introduce
broader online commerce to their large user populations. Other large companies with
strong brand recognition and experience in online commerce, such as large newspaper or
media companies also compete in the online listing market. Companies with experience in
online commerce, such as Amazon, may also seek to compete in the online listing market
in Latin America. We also compete with traditional brick-and-mortar retailers to the
extent buyers choose to purchase products in a physical establishment as opposed to on
our platform. In connection with our payment solution, our direct competitors include
international online payments services such as Paypal and Google Checkout, and local
online payment services such as DineroMail in Argentina, Chile, Colombia and Mexico, and
Pagamento Digital and PagSeguro in Brazil; money remitters such as Western Union. Any or
all of these companies could create competitive pressures, which could have a material
adverse effect on our business, results of operations and financial condition.
In addition, if certain websites stop linking or containing links in their
properties that send us traffic across the internet in the future, our gross merchandise
volume could substantially decrease and we could suffer a material adverse effect on our
business, financial condition and results of operations.
We no longer have a non-competition arrangement with eBay. If eBay were to compete
directly with us by launching a competing platform in Latin America, it would have a
material adverse effect on our results of operations and prospects. Similarly, eBay or
other larger, well-established and well-financed companies may acquire, invest in or
enter into other commercial relationships with competing online commerce services.
Therefore, some of our competitors and potential competitors may be able to devote
greater resources to marketing and promotional campaigns, adopt more aggressive pricing
policies and devote substantially more resources to web site and systems development
than us, which could adversely affect us.
In many cases, companies that directly or indirectly compete with us provide
Internet access. These competitors include incumbent telephone companies, cable
companies, mobile communications companies and large Internet service providers. Some of
these providers may take measures that could degrade, disrupt, or increase the cost of
customers use of our services. For example, they could restrict or prohibit the use of
their lines for our services, filter, block or delay the packets containing the data
associated with our products, charge increased fees to us or our users for use of their
lines to provide our services, or seek to charge us for our customers use of our
services or receipt of our e-mails. These activities are technically feasible. Although
we have not identified any providers who intend to take these actions, any interference
with our services or higher charges for access to the Internet, could cause us to lose
existing users, impair our ability to attract new users, limit our potential expansion
and harm our revenue and growth.
Risks related to doing business in Latin America
Political and economic conditions in Venezuela may have an adverse impact on our
operations.
We conduct significant operations in Venezuela, offering both our MercadoLibre
marketplace and MercadoPago online payments solution, and have 136 employees who work in
the country. For the year ended December 31, 2010, our Venezuelan net revenues
represented 9.6% of our consolidated net revenues. The political and economic conditions
in Venezuela are very unstable, and we cannot predict the impact of any future political
and economic events on our business. We cannot predict the economic and regulatory
impact of President Chávezs initiatives, or whether the Venezuelan government will
extend nationalization to e-commerce or other businesses that could impact our business
and results of operations. Nationalization of telecommunications, electrical or other
companies could reduce our or our customers access to our web site or our services or
increase the costs of providing or accessing our services. Certain political events have
also resulted in significant civil unrest in the country. Continuation or worsening of the political and economic conditions in Venezuela could materially and
adversely impact our future business, financial condition and results of operations.
26
Venezuela has suffered severe electricity shortages that prompted the Venezuelan
government to declare an energy emergency. This situation could impact the operation of
our automobile classifieds points of sale in Venezuela as well as our Venezuelan users
ability to access the Internet, either of which could have a material adverse impact on
our business.
In addition, the Venezuelan government has imposed foreign exchange and price
controls on the local currency. These foreign exchange controls increase our costs to,
and also limit our ability to, convert local currency into U.S. dollars and transfer
funds out of Venezuela, and may have an adverse effect on our Venezuelan customers. We
cannot predict the long-term effects of exchange controls on our ability to process
payments from Venezuelan customers or on the Venezuelan economy in general.
Venezuela had an official exchange rate which was 2.15 Bolivares Fuertes per U.S.
dollar as of December 31, 2009, and a parallel exchange rate that was 6.05 Bolivares
Fuertes per US dollar at December 31, 2009. On January 8, 2010, the Venezuelan
government announced that the fixed official rate of 2.15 Bolivares Fuertes per US
would be changed to a dual system that included a rate of 2.6 Bolivares Fuertes per US
dollar for food and heavy machine importers and a rate of 4.3 Bolivares Fuertes per US
dollar for all others.
In 2009, we requested U.S. dollars at the official exchange rate for the first time
for dividend distributions, through a process that included obtaining approval from the
Venezuelan Commission of Foreign Exchange Administration (CADIVI). We cannot predict
if we will obtain approval of the CADIVI to distribute dividends using the official
Venezuelan exchange rate, and the future impact in our financial condition. Starting in
the fourth quarter of 2009, as a result of the changes in facts and circumstances that
affected the Companys ability to convert currency for dividends remittances using the
official exchange rate in Venezuela, the Venezuelan subsidiaries assets, liabilities,
income and expense accounts were translated using the parallel exchange rate.
Until May 13, 2010, the only way by which US dollars could be purchased outside the
official currency market was using an indirect mechanism consisting in the purchase and
sale of securities, including national public debt bonds (DPNs) denominated in Bolivares
Fuertes and bonds issued by the government that were denominated in U.S. dollars. This
mechanism for transactions in certain securities created an indirect parallel foreign
currency exchange market in Venezuela that enabled entities to obtain foreign currency
through financial brokers without going through CADIVI. Although the parallel exchange
rate was higher, and accordingly less beneficial, than the official exchange rate, some
entities used the parallel market to exchange currency because, as it was already
mentioned, CADIVI used not to approve in a timely manner the exchange of currency
requested by such entities. Until May 13, 2010, our Venezuelan subsidiaries used this
mechanism to buy US dollars and accordingly we used the parallel average exchange rate to
re-measure those foreign currency transactions.
However, on May 14th, 2010, the Venezuelan government enacted reforms to its
exchange regulations and closed down the parallel market by declaring that
foreign-currency-denominated securities issued by Venezuelan entities were included in
the definition of foreign currency, thus making the Venezuelan Central Bank (BCV) the
only institution that could legally authorize the purchase or sale of foreign currency
bonds, thereby excluding non-authorized brokers from the foreign exchange market.
Trading of foreign currencies was re-opened as a regulated market on June 9, 2010
with the BCV as the only institution through which foreign currency-denominated
transactions can be brokered. Under the new system, known as the Foreign Currency
Securities Transactions System (SITME), entities domiciled in Venezuela can buy U.S.
dollardenominated securities only through banks authorized by the BCV to import goods,
services or capital inputs. Additionally, the SITME imposes volume restrictions on an
entitys trading activity, limiting such activity to a maximum equivalent of $50,000 per
day, not to exceed $350,000 in a calendar month. This limitation is non-cumulative,
meaning that an entity cannot carry over unused volume from one month to the next.
As a consequence of this new system, commencing on June 9, 2010, we transitioned
from the parallel exchange rate to the SITME rate and started re-measuring foreign
currency transactions using the SITME rate published by BCV, which was 5.27 Bolivares
Fuertes per U.S. dollar as of June 9, 2010.
For the period beginning on May 14, 2010 and ending on June 8, 2010 (during which
there was no open foreign currency markets) we applied US GAAP guidelines, which state
that if exchangeability between two currencies is temporarily lacking at the transaction
date or balance sheet date, the first subsequent rate at which exchanges could be made
shall be used.
Accordingly, the June 9, 2010 exchange rate published by the Venezuelan Central Bank
has been used to re-measure transactions during the abovementioned period.
27
In addition, due to unstable political and economic conditions in Venezuela, the
official and parallel exchange rates could continue to devaluate significantly. Strong
devaluations or changes in accounting rules could impact our results materially and we
may have to recognize losses in the future.
For accounting purposes, Venezuela was designated as a highly inflationary economy
beginning January 1, 2010 because the three-year cumulative blended inflation rate
exceeded 100%. For this reason, as from that date, we are required to account for the
operations of our Venezuelan subsidiaries using the functional currency of MercadoLibre,
Inc., which is the U.S. dollar, rather than the Bolivar Fuerte as the functional
currency. As a consequence, we may experience a decrease in terms of U.S. dollars of our
Venezuela revenues and expenses, which would have an adverse impact on our reported
results of operations in U.S. dollars.
The devaluation of the Venezuelan currency, the highly inflationary status and the
government price control could have a material adverse effect on the countrys economy
and adversely affect our business, financial condition and results of operations.
We face the risk of political
and economic crisis, instability, terrorism, civil strife,
expropriation and other risks of doing business in emerging markets.
We conduct our
operations in emerging market countries in Latin America. Economic
and political developments in these countries, including future economic changes or
crisis (such as inflation, currency devaluation or recession), government deadlock,
political instability, terrorism, civil strife, changes in laws and regulations,
expropriation or nationalization of property, and exchange controls could impact our
operations or the market value of our common stock and have a material adverse effect on
our business, financial condition and results of operations.
In the past, the performance of the economies of Latin American countries has been
affected by each countrys political situation. For example, during its crisis in 2001
and 2002, Argentina experienced social and political turmoil, including civil unrest,
riots, looting, protests, strikes and street demonstrations which have resulted in
significant changes in its general economic policies and regulations. More recently, the
Venezuelan and Bolivian administrations have nationalized or announced plans to
nationalize certain industries and expropriate certain companies and property, and, in
Venezuela, as described above, the administration has imposed exchange controls.
Although economic conditions in one country may differ significantly from another
country, we cannot assure that events in one country alone will not adversely affect the
market value of, or market for, our common stock.
Latin American governments have exercised and continue to exercise significant influence
over the economies of the countries where we operate. This involvement, as well as
political and economic conditions, could adversely affect our business.
Governments in Latin America frequently intervene in the economies of their
respective countries and occasionally make significant changes in policy and
regulations. Governmental actions to control inflation and other policies and
regulations have often involved, among other measures, price controls, currency
devaluations, capital controls and limits on imports. Our business, financial condition,
results of operations and prospects may be adversely affected by changes in government
policies or regulations, including such factors as: exchange rates and exchange control
policies; inflation rates; interest rates; tariff and inflation control policies; price
control policies, import duties on information technology equipment; liquidity of
domestic capital and lending markets; electricity rationing; tax policies, including
royalty, tax increases and retroactive tax claims; and other political, diplomatic,
social and economic developments in or affecting the countries where we operate. An
eventual reduction of foreign investment in any of the countries where we operate may
have a negative impact on such countrys economy, affecting interest rates and the
ability of companies such as ourselves to access financial markets. In addition, our
employees in Brazil are currently represented by a labor union and employees in other
Latin American countries may eventually become unionized. We may incur increased payroll
costs and reduced flexibility under labor regulations if unionization in other countries
were to occur, any of which may negatively impact our business.
Latin America, including Argentina, has experienced adverse economic conditions.
Latin American countries have historically experienced uneven periods of economic
growth, as well as recession, periods of high inflation and economic instability.
Currently, as a consequence of adverse economic conditions in global markets and
diminishing commodity prices, many of the economies of Latin American countries have
slowed their rates of growth, and some have entered mild recessions. The duration and
severity of this slowdown is hard to predict and could adversely affect our business,
financial condition, and results of operations. Additionally, certain countries have experienced severe economic crises, which may still have future
effects. For example, in 2001 Argentina defaulted on its sovereign debt due to severe
economic turmoil. In the first half of 2005, Argentina restructured part of this
sovereign debt. Certain creditors did not agree to the restructuring. Argentinas past
default and its failure to restructure completely its remaining sovereign debt and fully
negotiate with the holdout creditors may prevent Argentina from obtaining favorable
terms or interest rates when accessing the international capital markets. Litigation
initiated by holdout creditors or other parties may result in material judgments against
the Argentine government and could result in attachments of or injunctions relating to
assets of Argentina that the government intended for other uses. As a result, the
government may not have the financial resources necessary to implement reforms and
foster growth, which could have a material adverse effect on the countrys economy.
28
In addition, as a result of this economic instability, the Argentine peso has been
subject to significant devaluation in the past and may be subject to significant
fluctuations in the future. In August 2008, Standard & Poors Inc. downgraded
Argentinas foreign debt rating based upon renewed concerns regarding economic
conditions and rising fears of increased inflationary pressures. Such economic turmoil
has given rise to significant uncertainties about Argentinas economic and political
future. It is currently unclear whether the economic and political instability
experienced over the past several years will continue and it is possible, that despite
recent economic growth, Argentina may return to a deeper recession, higher inflation and
unemployment and greater social unrest. We conduct significant operations in Argentina,
offering both our MercadoLibre marketplace and MercadoPago online payments solution in
Argentina and have our corporate headquarters in that country. Argentina is our third
leading revenue producing country. As a result, our business is to a very large extent
dependent upon the economic conditions prevalent in Argentina and adverse economic
conditions in that country, as well as any other Latin American country in which we
operate, could have a material adverse affect on our business, financial condition and
results of operations.
Local currencies used in the conduct of our business are subject to depreciation, volatility and
exchange controls.
The currencies of many countries in Latin America, including Brazil, Argentina,
Mexico and Venezuela, which together accounted for 95.3% of our revenues for 2008, 94.0%
for 2009 and 93.5% for 2010, have experienced volatility in the past, particularly
against the U.S. dollar. Currency movements, as well as higher interest rates, have
materially and adversely affected the economies of many Latin American countries,
including countries which account or are expected to account for a significant portion of
our revenues. The depreciation of local currencies creates inflationary pressures that
may have an adverse effect on us and generally restricts access to the international
capital markets. For example, the devaluation of the Argentine peso has had a negative
impact on the ability of Argentine businesses to honor their foreign currency denominated
debt, led to very high inflation initially, significantly reduced real wages, had a
negative impact on businesses whose success is dependent on domestic market demand, and
adversely affected the governments ability to honor its foreign debt obligations. On the
other hand, the appreciation of local currencies against the U.S. dollar may lead to the
deterioration of the public accounts and balance of payments of the countries where we
operate, as well as to a lower economic growth related to exports.
We may be subject to exchange control regulations which might restrict our ability
to convert local currencies into U.S. dollars. For example, in 2001 and 2002, Argentina
imposed exchange controls and transfer restrictions substantially limiting the ability of
companies to retain foreign currency or make payments abroad. In addition, Brazilian law
provides that whenever there is a serious imbalance in Brazils balance of payments or
reason to foresee a serious imbalance, the Brazilian government may impose temporary
restrictions on the remittance to foreign investors of the proceeds of their investments
in Brazil. Currently, Venezuela has exchange control regulations in place that restrict
our ability to convert local currency into U.S. dollars. In addition, in May 2010, the
Venezuelan government imposed additional foreign exchange controls under a newly
implemented regulatory system controlled by the Central Bank of Venezuela. Among other
things, the new exchange rate system prohibits trading of foreign currencies through
parallel market transactions, sets a standard exchange rate, imposes volume restrictions
on a Venezuelan entitys ability to purchase U.S. dollar-denominated securities and
imposes strict criminal and economic sanctions on the use of methods other than those
officially designated for the exchange of Venezuelan currency with other currencies.
These new regulations will limit our Venezuelan subsidiaries access to U.S. dollars. In
addition, if current volume restrictions on foreign exchange imposed by the government
worsen significantly or new regulations are implemented which impact our ability to
settle transactions at either the official rates or SITME rate, we could be required to
deconsolidate our Venezuelan operations for accounting purposes, which would reduce our
consolidated net revenues, consolidated income from operations and other income statement
lines, except for net income and earning per share.
29
Our reporting currency is the U.S. dollar but our revenues are paid in foreign
currencies. Therefore, if the U.S. dollar strengthens relative to these foreign
currencies (i.e. the foreign currencies devaluate against the U.S. dollar), the economic
value of our revenues in U.S. dollar terms will decline.
We are subject to increased risks relating to foreign currency exchange rate
fluctuations. Because we conduct our business outside the United States and receive
almost all of our revenues in currencies other than the U.S. dollar, but report our
results in U.S. dollars, we face exposure to adverse movements in currency exchange
rates. The currencies of certain countries where we operate, including most notably
Brazil, Argentina, Mexico and Venezuela, have historically experienced significant
devaluations. The results of operations in the countries where we operate are exposed to
foreign exchange rate fluctuations as the financial results of the applicable
subsidiaries are translated from the local currency into U.S. dollars upon
consolidation. If the U.S. dollar weakens against foreign currencies, as occurred in
previous years, the translation of these foreign-currency-denominated transactions will
result in increased net revenues, operating expenses, and net income. Similarly, our net
revenues, operating expenses, and net income will decrease if the U.S. dollar
strengthens against foreign currencies. For the year ended December 31, 2010, 56.7% of
our revenues were denominated in Brazilian Reais, 18.4% in Argentine Pesos, 9.6% in
Venezuelan Bolivares Fuertes, and 8.8% in Mexican Pesos. The foreign currency
exchange rates for the full year 2010 relative to 2009 resulted in lower net revenues of
approximately $10.2 million and a decrease in aggregate cost of net revenues and
operating expenses of approximately $4.8 million. The foreign currency exchange rates
for the full year 2009 relative to 2008 resulted in lower net revenues of approximately
$22.5 million and a decrease in aggregate cost of net revenues and operating expenses of
approximately $15.5 million. The abovementioned foreign currency exchange rate effect
includes the Venezuelan translation effect discussed in Item 7 MANAGEMENTS DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Critical accounting
policies and estimates Foreign Currency Translation. While we have entered in the
past into transactions to hedge portions of our foreign currency translation exposure,
these are expensive, and in addition it is very difficult to perfectly predict or
completely eliminate the effects of this exposure.
Inflation and certain government measures to curb inflation may have adverse effects on
the economies of the countries where we operate, our business and our operations.
Most Latin American countries have historically experienced high rates of
inflation. Inflation and some measures implemented to curb inflation have had
significant negative effects on the economies of Latin American countries. Governmental
actions taken in an effort to curb inflation, coupled with speculation about possible
future actions, have contributed to economic uncertainty over the years in most Latin
American countries. The Latin American countries where we operate may experience high
levels of inflation in the future that could lead to further government intervention in
the economy, including the introduction of government policies that could adversely
affect our results of operations. In addition, if any of these countries experience high
rates of inflation, particularly in Venezuela which has recently became highly
inflationary, we may not be able to adjust the price of our services sufficiently to
offset the effects of inflation on our cost structures. A return to a high inflation
environment would also have negative effects on the level of economic activity and
employment and adversely affect our business and results of operations.
Developments in other markets may affect the Latin American countries where we operate,
our financial condition and results of operations.
The market value of securities of companies such as ourselves, may be, to varying
degrees, affected by economic and market conditions in other global markets. Although
economic conditions vary from country to country, investors perceptions of the events
occurring in one country may substantially affect capital flows into and securities from
issuers in other countries, including Latin American countries. Various Latin American
economies have been adversely impacted by the political and economic events that
occurred in several emerging economies in recent times, including Mexico in 1994, the
collapse of several Asian economies between 1997 and 1998, the economic crisis in Russia
in 1998, the Brazilian devaluations in January of 1999 and in 2002, the Argentine crisis
of 2001 and the market decline after September 11, 2001. Furthermore, Latin American
economies may be affected by events in developed economies which are trading partners or
that impact the global economy.
Developments of a similar magnitude to the international markets in the future can
be expected to adversely affect the economies of Latin American countries and therefore
us.
E-commerce transactions in Latin America may be impeded by the lack of secure payment
methods.
Unlike in the United States, consumers and merchants in Latin America can be held
fully liable for credit card and other losses due to third-party fraud. As secure
methods of payment for e-commerce transactions have not been widely adopted in Latin
America, both consumers and merchants generally have a relatively low confidence level
in the integrity of e-commerce transactions. In addition, many banks and other financial
institutions have generally been reluctant to give merchants the right to process online
transactions due to these concerns about credit card fraud. Unless consumer fraud laws
in Latin American countries are modified to protect e-commerce merchants and consumers,
and until secure, integrated online payment processing methods are fully implemented
across the region, our ability to generate revenues from e-commerce may be limited,
which could have a material adverse effect on our company.
30
Risks related to our shares
The price of our shares of common stock may fluctuate substantially, and our
stockholders investment may decline in value.
The trading price of our common stock may be highly volatile and could be subject
to wide fluctuations in response to factors, many of which are beyond our control,
including those described above under Risks related to our business.
Further, the stock markets in general, and the Nasdaq Global Market and the market
for Internet-related and technology companies in particular have experienced extreme
price and volume fluctuations that have often been unrelated or disproportionate to the
operating performance of these companies. We cannot assure you that trading prices and
valuations will be sustained. These broad market and industry factors may materially and
adversely affect the market price of our common stock, regardless of our operating
performance. Market fluctuations, as well as general political and economic conditions
in the countries where we operate, such as recession or currency exchange rate
fluctuations, may also adversely affect the market price of our common stock. In the
past, following periods of volatility in the market price of a companys securities,
that company is often subject to securities class-action litigation. This kind of
litigation could result in substantial costs and a diversion of managements attention
and resources, which would have a material adverse effect on our business, results of
operations and financial condition. In addition, the market price of our common stock
may fluctuate in connection with the declaration and payment of quarterly or special
dividends on our common stock.
We continue to be significantly influenced by a group of stockholders that control a
significant percentage of our common shares and the value of our common stock could be
negatively affected by any significant disposition of our shares by any of these
stockholders.
Certain
stockholders own a significant percentage of our common stock. As of
December 31, 2010, eBay owned approximately 8.1 million shares of our common stock
(which represents 18.4% of our outstanding common stock as of December 31, 2010).
Certain members and certain entities affiliated with members of our management also hold
a significant percentage of our common stock. Investment entities affiliated with
General Atlantic LLC, collectively, General Atlantic, beneficially own approximately
1.3 million shares of our common stock, as of December 31, 2010 (which represents 2.9%
of our outstanding common stock as of December 31, 2010).These stockholders retain the
power to influence the outcome of important corporate decisions or matters submitted to
a vote of our stockholders. The interests of these stockholders may conflict with, or
differ from, the interests of other holders of our common shares. For example, these
stockholders could cause us to make acquisitions that increase the amount of our
indebtedness or outstanding shares of common stock, sell revenue-generating assets or
inhibit change of control transactions that benefit other stockholders. They may also
pursue acquisition opportunities that may be complementary to our business, and as a
result, those acquisition opportunities may not be available to us. So long as these
stockholders continue to own a substantial number of shares of our common stock, they
will significantly influence all our corporate decisions and together with other
stockholders may be able to effect or inhibit changes in control of our company.
Additionally, the actual sale, communication of an intention to sell or perceptions
that any of the above mentioned stockholders may sell any significant amount of our
common stock could negatively impact the market value of our common stock.
Provisions of our certificate of incorporation and Delaware law could inhibit others
from acquiring us, prevent a change of control, and may prevent efforts by our
stockholders to change our management.
Certain provisions of our certificate of incorporation and by-laws may inhibit a
change of control that our board of directors does not approve or changes in the
composition of our board of directors, which could result in the entrenchment of current
management. These provisions include:
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advance notice requirements for stockholder proposals and director nominations; |
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a staggered board of directors; |
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limitations on the ability of stockholders to remove directors other than for cause; |
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limitations on the ability of stockholders to own and/or exercise voting power over 20% of our common stock; |
31
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limitations on the ability of stockholders to amend, alter or repeal our by-laws; |
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the inability of stockholders to act by written consent; |
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the authority of the board of directors to adopt a stockholder rights plan; |
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the authority of the board of directors to issue, without stockholder approval, preferred stock with any
terms that the board of directors determines and additional shares of our common stock; and |
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limitations on the ability of certain stockholders to enter into certain business combinations with us, as
provided under Section 203 of the Delaware General Corporation Law. |
These provisions of our certificate of incorporation and by-laws may delay, defer
or prevent a transaction or a change in control that might otherwise be in the best
interests of our stockholders. See Description of capital stock for more information.
We may require additional capital in the future, and this additional capital may not be
available on acceptable terms or at all.
We may need to raise additional funds in order to fund more rapid expansion
(organically or through strategic acquisitions), to develop new or enhanced services or
products, to respond to competitive pressures or to acquire complementary products,
businesses or technologies. If we raise additional funds through the issuance of equity
or convertible debt securities, the percentage ownership of our stockholders will be
reduced, stockholders may experience additional dilution and the securities that we
issue may have rights, preferences and privileges senior to those of our common stock.
Additional financing may not be available on terms favorable to us or at all. If
adequate funds are not available or are not available on acceptable terms, we may not be
able to fund our expansion, take advantage of unanticipated acquisition opportunities,
develop or enhance services or products or respond to competitive pressures. These
inabilities could have a material adverse effect on our business, results of operations
and financial condition.
Shares eligible for future sale may cause the market price of our common stock to drop
significantly, even if our business is doing well.
The market price of our common stock could decline as a result of sales of a large
number of shares of our common stock in the market in the future or the perception that
these sales could occur. These sales, or the possibility that these sales may occur,
also might make it more difficult for us to sell equity securities in the future at a
time and at a price that we deem appropriate.
Certain stockholders or entities controlled by them or their permitted transferees
beneficially own shares of our common stock that have not been registered for resale with
the SEC. The holders of these restricted shares may sell their shares in the public
market from time to time without registering them, subject to certain limitations on the
timing, amount and method of those sales imposed by regulations promulgated by the SEC.
Holders of restricted stock will also have the right to cause us to register the resale
of shares of common stock beneficially owned by them.
Each of General Atlantic and Tiger agreed that, in respect of the shares each
purchased in our initial public offering, neither of them would, without our prior
written consent, transfer or dispose of directly or indirectly, any of its shares of our
common stock or securities convertible into or exchangeable into or exercisable for our
shares, for a period of 18 months following the closing of our initial public offering
that closed in August 2007. These agreements expired on January 31, 2009 and,
accordingly, there are no further contractual restrictions precluding General Atlantic
and Tiger from selling the shares purchased in our initial public offering. If any of
these stockholders, the affiliated entities controlled by them or their respective
permitted transferees holding a significant amount of our restricted common stock were to
sell a large number of their restricted or registered shares, the market price of our
common stock could decline significantly. In addition, the perception in the public
markets that sales by them might occur could also adversely affect the market price of
our common stock.
In the future, we may issue securities in connection with investments and
acquisitions. The amount of our common stock issued in connection with an investment or
acquisition could constitute a material portion of our then outstanding common stock.
Our stockholders may not receive dividends or dividends may not grow over time.
Recently, for the first time in the history of our company, our board of directors
declared a dividend on shares of our common stock and announced its intention to pay
regular quarterly dividends on shares of our common stock in the future. However, we have not established a minimum dividend payment level and
our ability to pay dividends in the future may be adversely affected by a number of
factors, including the risk factors described herein. All dividends will be declared at
the discretion of our board of directors and will depend on our earnings, our financial
condition and other factors as our board of directors may deem relevant from time to
time. Our board is under no obligation or requirement to declare a dividend. We cannot
assure you that we will achieve results that will allow us to pay a specified level of
dividends or to grow our dividends over time.
32
Requirements associated with being a public company require significant company
resources and management attention.
In connection with our initial public offering, we became subject to the periodic
reporting requirements of the Securities Exchange Act of 1934, as amended, or the
Exchange Act, and the other rules and regulations of the SEC and the Nasdaq Global
Market. We are also subject to various other regulatory requirements, including the
Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act. Section 404 of the Sarbanes-Oxley
Act requires that we evaluate and determine the effectiveness of our internal control
over financial reporting. If we have a material weakness or significant deficiency in
our internal control over financial reporting, we may not detect errors on a timely
basis and our financial statements may be materially misstated. As a result, our
stockholders could lose confidence in our financial reporting, which could harm the
trading price of our stock. In addition, in connection with our initial public offering
in August 2007, we became subject to the rules of the Nasdaq Global Market. Our
compliance with these rules and regulations have increased our legal and financial
compliance costs and make some activities more time-consuming and costly.
It may be difficult to enforce judgments against us in U.S. courts.
Although we are a Delaware corporation, our subsidiaries and most of our assets are
located outside of the United States. Furthermore, most of our directors and officers
and some experts named in this report reside outside the United States. As a result, you
may not be able to enforce judgments against us or our directors or officers in U.S.
courts judgments based on the civil liability provisions of U.S. federal securities
laws. It is unclear if original actions of civil liabilities based solely upon U.S.
federal securities laws are enforceable in courts outside the United States. It is
equally unclear if judgments entered by U.S. courts based on the civil liability
provisions of U.S. federal securities laws are enforceable in courts outside the United
States. Any enforcement action in a court outside the United States will be subject to
compliance with procedural requirements under applicable local law, including the
condition that the judgment does not violate the public policy of the applicable
jurisdiction.
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ITEM 1B. |
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UNRESOLVED STAFF COMMENTS |
Not applicable.
33
Our principal administrative, marketing and product development facilities are
located in our offices in Bogotá, Colombia; Buenos Aires, Argentina; Santana do
Parnaíba, Brazil; Caracas, Venezuela; Mexico City, Mexico and Zona America, Uruguay.
Currently, all of our offices are occupied under lease agreements, except for our
Argentine offices. The leases for our facilities provide for renewal options. After
expiration of these leases, we can renegotiate the leases with our current landlords, or
move to another location. The following table shows the location of our offices and
centers, and the expiration date of the leases under which they operate.
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Approximate |
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City and |
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Square |
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Lease |
Country |
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Facility |
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Address |
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Meters |
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Expiration Date |
Bogotá, Colombia |
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Colombia operation |
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Calle 93 B # 17-25 Ofc.406, Bogotá, Colombia |
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155 |
1 |
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April 2011 |
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Bogotá, Colombia |
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TuCarro Colombia operation |
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Calle 93 B # 17-25 Ofc.210 and 211, Bogotá, Colombia |
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132 |
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April 2011 |
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Bogotá, Colombia |
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Colombia operation |
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Transversal 23 Nº 97-73 Ofc. 405, piso 4 |
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621.75 |
1 |
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January 2014 |
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Buenos Aires, Argentina |
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Corporate headquarters, Argentina operation & Customer service center |
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Tronador 48908th floor, Buenos Aires, 1430Argentina |
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910.78 |
1 |
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March 2011 |
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Buenos Aires, Argentina |
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Customer service center |
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Av. Costanera Rafael Obligado y Geronimo Salguero, Buenos Aires, Argentina |
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1,842 |
1 |
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January 2012 |
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Caracas, Venezuela |
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Venezuela operation |
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Piso 7° Edificio Torre Country, Francisco de Miranda, Urbanización El Rosal, Municipio de Chacao, Estado de Miranda |
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436 |
2 |
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April 2011 |
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Lithia Springs, Georgia, U.S.A. |
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SAVVIS Data Center |
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375 Riverside Parkway Lithia Springs, Georgia 30122, |
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3.0 |
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August 2011 |
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Mexico City, Mexico |
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Mexico operation |
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Ibsen 43-101, 102, 301 and 304, Colonia Polanco, Miguel Hidalgo, Código Postal 11650, Mexico D.F. Mexico |
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425 |
2 |
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March 2011 |
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Mexico City, Mexico |
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Mexico operation |
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Félix Cuevas No. 6 Int. 501 Col. Tlacoquemecatl del Valle, Delegación Benito Juarez, CP 03200 Mexico DF., Mexico |
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562.02 |
1 |
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May 2016 |
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Sterling, Virginia, U.S.A. |
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SAVVIS Data Center |
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45901 Nokes Blvd. Sterling, Virginia 20166 |
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145.97 |
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August 2011 |
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San Luis, Argentina |
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Technology Development center |
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Av. Universitaria s/n, Ciudad de la Punta, San Luis, Argentina |
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207 |
2 |
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No End Date |
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Santana do Parnaíba, Brazil |
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Brazilian Subsidiary main office Customer service center |
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Avenida Marte, 489 Andar Térreo, 1°, 2° andar Partes A e B Cep 06541-005 Santana de Parnaíba, São Paulo, Brazil |
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4090,18 |
1 |
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July 2014 |
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Zona America, Uruguay |
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Uruguay Staff |
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Ruta 8, km 17.5 Edificio 200, local 208-07 Zona America, Uruguay |
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37 |
2 |
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December 2011 |
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Sterling, Virginia, U.S.A. |
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SAVVIS Data Center |
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21110 Ridgetop Circle Sterling, Virginia |
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26.75 |
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August 2011 |
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1 |
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This surface includes the area of the office leased and
parking spaces. |
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2 |
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This surface corresponds to the area of the office leased. It
does not include any parking spaces. |
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3 |
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This surface corresponds to the area of the office leased.
The lease agreement also grants lessee the right to use 21 parking spaces. |
All of our properties are leased, except for our Argentine offices. We do not own
any properties, except for our Argentine offices. From time to time we consider various
alternatives related to our long-term facility needs. While we believe our existing
facilities are adequate to meet our immediate needs, it may become necessary to lease or
acquire additional or alternative space to accommodate any future growth.
34
On June 19, 2008, our Argentine subsidiary agreed to participate in a real estate
trust for the construction of an office building located in the City of Buenos Aires. On
February 14th, 2011, we moved our headquarters and Argentine offices to that
office building. It is located in Arias 3751, 5th to 9th floors,
City of Buenos Aires, Argentina. Our offices have 5,340 square meters divided into 5
floors and 70 parking spaces.
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ITEM 3. |
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LEGAL PROCEEDINGS |
From time to time, we are involved in disputes that arise in the ordinary course of
our business. The number and significance of these disputes is increasing as our
business expands and our company grows. Any claims against us, whether meritorious or
not, may be time consuming, result in costly litigation, require significant amounts of
management time, result in the diversion of significant operational resources and
require expensive implementations of changes to our business methods to respond to these
claims. See Item 1ARisk Factors for additional discussion of the litigation and
regulatory risks facing our company.
As of December 31, 2010, our total reserves for proceeding-related contingencies
were approximately $1.5 million to cover legal actions against the Company where we have
determined that a loss is probable. We do not reserve for losses we determine to be
possible or remote.
As of December 31, 2010, there were 321 lawsuits pending against our Brazilian
subsidiary in the Brazilian ordinary courts. In addition, as of December 31, 2010, there
were more than 1,408 lawsuits pending against our Brazilian subsidiary in the Brazilian
consumer courts, where a lawyer is not required to file or pursue a claim. In most of
these cases, the plaintiffs asserted that we were responsible for fraud committed
against them, or responsible for damages suffered when purchasing an item on our
website, when using MercadoPago, or when we invoiced them. We believe we have
meritorious defenses to these claims and intend to continue defending them.
Set forth below is a description of the legal proceedings that we have determined
to be material to our business. We have excluded ordinary routine legal proceedings
incidental to our business. In each of these proceedings we also believe we have
meritorious defenses, and intend to continue defending these actions. We have
established a reserve for those proceedings which we have considered that a loss is
probable.
Litigation
On November 5, 2003, Editora COC Empreendimentos Culturais Ltda., or Editora COC,
sued the Companys Brazilian subsidiary in the 3rd Civil Court of the County of Bauru,
State of São Paulo, Brazil. Editora COC alleged that the Brazilian subsidiary and an
identified user were both infringing Editora COCs trademarks as a result of the users
selling allegedly pirated copies of Editoras COC CD-ROMs through the Brazilian page of
the website, based on Brazilian Industrial Property Law (Law 9,279/96) and the Brazilian
Copyright Law (Law 9,610/98). Editora COC sought an order for the search and seizure of
products held by the user and enjoining the sale of Editora COC-branded products on
MercadoLibres platform. An injunction was granted to prohibit the offer of Editora
COCs products on the Companys platform. On September 8, 2005, the court ruled against
the Company and held that it had to pay $3,000 and its co-defendant had to pay $900 in
moral damages, plus an amount of material damages to be defined at judgment execution,
plus attorneys fees in the amount of 10% of the total damages paid by each defendant.
On January 13, 2006 the Company appealed the ruling to the relevant court of appeals. On
November, 18, 2010, the appeal was denied by the court of appeals. On December 3, 2010
the Company appealed to Superior Court of Appeals, which appeal is still pending.
35
On March 17, 2006, Vintage Denim Ltda., or Vintage, sued the Companys Brazilian
subsidiaries MercadoLivre.com Atividades de Internet Ltda. and eBazar.com.br Ltda. in
the 29th Civil Court of the County of São Paulo, State of São Paulo, Brazil. Vintage requested a preliminary injunction
alleging that these subsidiaries were infringing Diesel trademarks and their right of
exclusive distribution as a result of sellers listing allegedly counterfeit and original
imported Diesel branded clothing through the Brazilian page of the Companys website,
based on Brazilian Industrial Property Law (Law 9,279/96). Vintage sought an order
enjoining the sale of Diesel-branded clothing on the Companys platform. A preliminary
injunction was granted on April 11, 2006 to prohibit the offer of Diesel-branded
products, and a fine for non-compliance was imposed in the approximate amount of $5,300
per defendant per day of non-compliance. The Company appealed that fine and obtained its
suspension in 2006. Because the appeal of the preliminary injunction failed, in March of
2007, Vintage presented petitions alleging the Companys non-compliance with the
preliminary injunction granted to Vintage and requested a fine of approximately $3.3
million against the Companys subsidiaries, which represents approximately $5,300 per
defendant per day of alleged non-compliance since April 2006. In July 2007, the judge
ordered the payment of the fine mandated in the preliminary injunction, without
specifying the amount. When the Company is officially notified of the amount of the
fine, it intends to present a new appeal against the application of the fine. In
September 2007, the judge decided that (i) the Brazilian subsidiaries were not
responsible for alleged infringement of intellectual property rights by its users; and
that (ii) the plaintiffs did not prove the alleged infringement of its intellectual
property rights. However, the decision maintained the injunction until such ruling is
non-appealable. The plaintiff appealed the judges ruling regarding the subsidiarys
non-responsibility and the Company appealed the decision that maintained the preliminary
injunction. Both appeals are still pending.
On April 6, 2006, Fallms Distribuicão de Fitas Ltda., or Fallms, and 100% Nacional
Distribuidora de Fitas Ltda., or 100% Nacional, sued the Companys Brazilian subsidiary
in the Second Civil Court of Santo Amaro, County of São Paulo, State of São Paulo,
Brazil. Fallms and 100% Nacional alleged that the Brazilian subsidiary was infringing
their intellectual property rights as a result of users selling unauthorized copies of
their copyrighted movies through the Brazilian page of MercadoLibres website and by
using their trademark Brasileirinhas on such copies. Fallms and 100% Nacional sought
an order enjoining the sale of Fallms, 100% Nacional and Brasileirinhas branded movies
on the platform. An injunction was granted to prohibit the offer of Fallms, 100%
Nacional and Brasileirinhas branded movies in the Companys website. In July, 2007,
the judge revoked the preliminary injunction. On the same date, the judge decided that
(i) the Brazilian subsidiary was not responsible for alleged infringement of
intellectual property rights by its users; and that (ii) the plaintiffs did not prove
that (a) they own the trademark Brasileirinhas and copyrights of Brasileirinhas
branded movies and (b) the alleged infringement of intellectual property rights resulted
in an effective copyright violation. The plaintiffs have appealed the decision
dismissing the case, which appeal is still pending.
On March 7, 2007, Xuxa Promoções e Produções Artísticas Ltda., or Xuxa, sued the
Companys Brazilian subsidiary in the Court of Barra da Tijuca, Rio de Janeiro, State of
Rio de Janeiro, Brazil. Xuxa, a popular television personality in Brazil, alleged that
counterfeit copies of one of her CDs and of a movie with her participation as an actress
(for which she owns the copyright and distribution rights) are being sold on the
Companys platform, and as such the Brazilian subsidiary is infringing her intellectual
and property rights. Xuxa seeks an injunction, the establishment of preventive measures,
fines, and compensatory and statutory damages. An injunction ordering the removal of any
offers of copies of this CD and movie was granted to Xuxa. The Company presented its
defense and appealed the injunction, which appeal is still pending. A decision of the
lower court judge is still pending. The courts ruling is still pending.
On June 11,
2007, Praetorium Instituto de Ensino, Pesquisas e Atividades de
Extensăo e Direito Ltda., or Praetorium, sued the Brazilian subsidiary in the Fourth
Civil Court of the County of Belo Horizonte, State of Minas Gerais, Brazil. Praetorium
alleged that the Brazilian subsidiary was infringing Praetoriums copyrights as a result
of users selling allegedly counterfeit copies of Praetoriums courses through the
Brazilian page of the website. Praetorium seeks an injunction, fines, and compensatory
and statutory damages. An injunction ordering the removal of any offers containing the
name of Praetorium was granted to Praetorium in July 2007. In addition to the
preliminary injunction, a fine of approximately $5,300 per day of noncompliance was
imposed up to a maximum of approximately $131,000 and a fine of approximately $530 was
also imposed for each new product posted after July 13, 2007 containing the name of
Praetorium and listed in the Brazilian page of MercadoLibres website. The Company has
appealed the decision granting the preliminary injunction, which appeal is still
pending.
On August 23, 2007, Serasa S.A., or Serasa, sued the Companys Brazilian subsidiary
in the Sixth Civil Court of Santo Amaro, City of São Paulo, State of São Paulo, Brazil.
Serasa, a company which provides credit-related analysis, information services and data
bank and payment habits related to individuals and corporations, alleged that the
Brazilian subsidiary should be responsible for the sale by its users of allegedly
unlawful content and unfair uses of its services and Serasas trade name and trademarks.
Serasa seeks an injunction, fines, and compensatory damages. On November 5, 2007 a
preliminary injunction was granted to Serasa, ordering the Brazilian subsidiary (a) to
remove any content offering: (i) consultation of Serasas database; and (ii) passwords,
texts or any material that promises to consult, remove or teach how to remove someone
name from Serasas database; (b) to prohibit on the website any content similar to the
aforementioned; and (c) to provide certain personal data of certain users who have
offered such products. In addition to the preliminary injunction, a fine of approximately $5,500
per day of noncompliance was imposed. On December 17, 2007, the Brazilian subsidiary
presented the information requested. The Company appealed the preliminary injunction to
the State Court of São Paulo and presented the defense on January 7, 2008. Serasa
replied to MercadoLibres appeal on January 30, 2008. On March 26, 2008, the Company was
summoned with a petition presented by Serasa alleging non-compliance with the
injunction. The Company presented its response on March 31, 2008, arguing that it is in
full compliance with the injunction. On August 26, 2008 the State Court of São Paulo
lifted the prohibition to allow in the Brazilian website any content related to Serasa
as established in the injunction but it was not appealed by the plaintiff. On June 5,
2009 the judge declared that the Brazilian subsidiary shall not be held liable for the
content posted by its users. Nonetheless, the sentence ordered the Brazilian subsidiary
to remove certain contents related to the plaintiff. Serasa filed a motion for
clarification of that decision, which was rejected by the Judge. In July 2009, Serasa
presented an appeal to the higher court. In August 2009 the Brazilian subsidiary
presented the response to the appeal. The courts ruling is still pending.
36
On November 23, 2007 Botelho Indústria e Distribuição Cinematográfica Ltda., or
Botelho, sued the Companys Brazilian subsidiary in the Third Civil Court of the City of
Rio de Janeiro, State of Rio de Janeiro, Brazil. Botelho alleged that the Brazilian
subsidiary was infringing its intellectual property rights as a result of users selling
unauthorized copies of Botelhos courses through the Brazilian website. Botelho seeks an
injunction, fines, and compensatory and statutory damages, which was not yet analyzed by
the judge. In February, 2008, the Company presented arguments to give the judge support
and background to analyze the requested injunction. The Company presented its defense on
March 5, 2008. A conciliation and settlement hearing was held on September 29, 2008, but
no settlement was reached. A decision of the lower court judge is still pending.
On October 25, 2007, Iglesia Mesianica Mundial Sekai Kyusei Kio en la Argentina, or
Iglesia Mesianica, filed suit against the Companys Argentine subsidiary, MercadoLibre
S.A., in the Thirteenth Civil Court of the City of Buenos Aires, Argentina. Iglesia
Mesianica alleged in the complaint that the Argentine subsidiary should be held liable
as a result of users selling books that allegedly plagiarized certain Iglesia
Mesianicas books through the Argentine page of the Companys website. Iglesia Mesianica
seeks monetary damages in the amount of approximately $95,000. The Company presented its
defense in May 2008 and also filed a preliminary objection arguing the lack of
jurisdiction of the Civil Court and requested that the case should be heard by a Federal
Court instead. Iglesia Mesianica responded to the preliminary objection and the court
rejected it in September 2010. In November 2010 Iglesia Mesianica requested the court to
begin with the evidence stage, but the court ruled that Iglesia Mesianica should comply
with pending procedural issues before moving forward with the case. As of the date of
this report, according to the opinion of external legal counsel of the Company the risk
of loss of this case is remote.
On February 22, 2008, Nike International Ltd., or Nike, requested a preliminary
injunction against the Companys Argentine subsidiary DeRemate.com de Argentina S.A. in
the Court on Civil and Commercial Matters in Buenos Aires, Argentina. Nike alleged that
this subsidiary was infringing Nike trademarks as a result of sellers listing allegedly
counterfeit Nike branded products through the website www.deremate.com.ar. A preliminary
injunction was granted in February 2008 to suspend the offer of Nike-branded products
until sellers could be properly identified. The Company appealed the decision. In
November, 2008 the Federal Court of Appeals on Civil and Commercial Matters lifted the
prohibition to allow on the website of this subsidiary any listing related to Nike
branded products subject to our requesting certain personal information from users
listing those items. On March 25, 2008 Nike sued the Argentine subsidiary DeRemate.com
de Argentina S.A. in the same venue, for the same reasons argued in the request
preliminary injunction. The Company presented its defense on September 11, 2009. The
courts ruling is still pending. As of the date of this report, according to the opinion
of external legal counsel of the Company the risk of loss in this case is remote.
On July 25, 2008, Nike International Ltd. or Nike requested a preliminary
injunction against the Argentine subsidiary in the First Civil and Commercial Federal
Court, Argentina. The Company was officially notified on August 14, 2008. Nike requested
the injunction alleging that this subsidiary was infringing Nike trademarks as a result
of sellers listing allegedly counterfeit Nike branded products through the Argentine
page of MercadoLibres website. A preliminary injunction was granted on August 11, 2008
to suspend the offer of Nike-branded products until sellers could be properly
identified. The Company appealed the decision on August 22, 2008. On March 23, 2009 the
Federal Court of Appeals on Civil and Commercial Matters, lifted the prohibition to
allow in the Argentine website any listing related to Nike branded products subject to
our requesting certain personal information from users willing to list those items. On
May 22, 2009, the Company was summoned about a lawsuit file by Nike against the
Argentine subsidiary in the same venue, for the same reasons argued in the request
preliminary injunction. On May 27, 2009 the Company presented a preliminary objection
requesting that Nike deposit as a security bond for costs. The court established that a
bond for costs of approximately $3,500 should be deposited by Nike and both parties
appealed this amount which was confirmed by the same Federal Court of Appeals. The
Company presented its defense on April 21, 2010. As of the date of this report,
according to the opinion of external legal counsel of the Company the risk of loss in
this case is remote.
On August 25, 2010, Citizen Watch do Brasil S/A, or Citizen, sued MercadoLivre.com
Atividades de Internet Ltda., a Brazilian subsidiary, in the 31th Central Civil Court
State of São Paulo, Brazil. Citizen alleged that the Brazilian subsidiary was infringing
Citizens trademarks as a result of users selling allegedly counterfeit Citizen watches
through the Brazilian page of the Companys website. Citizen sought an order enjoining
the sale of Citizen-branded watches on the MercadoLibre marketplace with a $6,000 daily
non-compliance penalty. On September 23, 2010, the Brazilian subsidiary was summoned of
an injunction granted to prohibit the offer of Citizen products on its platform, but the
penalty was established at $6,000. On September 26, 2010, the Company presented its
defense and appealed the decision of the injunction on September 27, 2010. On October
22, 2010 the injunction granted to Citizen was suspended. The courts ruling is still
pending.
37
State of São Paulo Fraud Claim
On June 12, 2007, a state prosecutor of the State of São Paulo, Brazil presented a
claim against the Brazilian subsidiary. The state prosecutor alleges that the Brazilian
subsidiary should be held liable for any fraud committed by sellers on the Brazilian
version of the Companys website, or responsible for damages suffered by buyers when
purchasing an item on the Brazilian version of the MercadoLibre website. On June 26,
2009, the Judge of the first instance court ruled in favor of the State of São Paulo
prosecutor, declaring that the Brazilian subsidiary shall be held joint and severally
liable for frauds committed by sellers and damages suffered by buyers when using the
website, and ordering us to remove from the Terms of Service of the Brazilian website
any provision limiting the Companys responsibility, with a penalty of approximately
$2,500 per day of non-compliance. On June 29, 2009 the Company presented a recourse to
the lower court. On September 29, 2009 the Company presented an appeal and requested to
suspend the effects of the ruling issued by the lower court until the appeal is decided
by State Court of Appeals, which request was granted on December, 1, 2009. The decision
on the appeal is still pending.
City of São Paulo Tax Claim
On September 13, 2007, the Company paid to tax authorities in São Paulo, Brazil
approximately $1.1 million, consisting of $1.0 million in accrued taxes and $0.1 million
in fines, related to the Brazilian subsidiarys activities in São Paulo for the period
2002 through 2004. The Company had reserved approximately $1.1 million against these
taxes as of December 31, 2006 so no additional provision was recorded for the payment.
São Paulo tax authorities have also asserted taxes and fines against us relating to the
period from 2005 to 2007 in an approximate additional amount of $5.9 million according
to the exchange rate at that moment. In January 2005, the Brazilian subsidiary had moved
its operations to Santana de Parnaíba City, Brazil and began paying taxes to that
jurisdiction, therefore the Company believes it has strong defenses to the claims of the
São Paulo authorities with respect to this period. As of the date of this report, the
Company believes the risk of loss for this period is remote, and as a result, have not
reserved provisions for this claim. On August 31, 2007, the Company presented
administrative defenses against the authorities claim; however, their response is still
pending. On September, 12, 2009 the tax authorities ruled against the Brazilian
subsidiary. On October 13, 2009, the Company presented an appeal to the Conselho
Municipal de Tributos or São Paulo Municipal Council of Taxes. On January 19, 2011, São
Paulo Municipal Council of Taxes ruled our appeal and reduced the fine to approximately
$4.7million. The Company will appeal this decision.
Intellectual Property Claims
In the past third parties have from time to time claimed, and others may claim in
the future, that we have infringed their intellectual property rights. We have been
notified of several potential third-party claims for intellectual property infringement
through our website. These claims, whether meritorious or not, are time consuming, can
be costly to resolve, could cause service upgrade delays, and could require expensive
implementations of changes to our business methods to respond to these claims. See Item
1A Risk factorsRisks related to our businessWe could potentially face legal and
financial liability for the sale of items that infringe on the intellectual property
rights of others and for information disseminated on the MercadoLibre marketplace.
|
|
|
ITEM 4. |
|
(REMOVED AND RESERVED) |
PART II
|
|
|
ITEM 5. |
|
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Price of and Dividends on the Registrants Common Equity
Shares of our common stock, par value $0.001 per share, or our common stock, trade
on the Nasdaq Global Market (NASDAQ) under the symbol MELI. As of December 31, 2010,
the closing price of our common stock was $66.645 per share. As of February 17, 2011, we
had approximately 26 holders of record of our common stock. This figure does not reflect
the beneficial ownership of shares held in nominee name. The following table sets forth,
for the indicated periods, the high and low closing sale prices for our common
stock on the Nasdaq Global Market and the cash distributions declared per share:
|
|
|
|
|
|
|
|
|
|
|
Closing stock price |
|
|
|
High |
|
|
Low |
|
2009: |
|
|
|
|
|
|
|
|
1st quarter |
|
$ |
19.61 |
|
|
$ |
12.47 |
|
2nd quarter |
|
$ |
28.94 |
|
|
$ |
18.53 |
|
3rd quarter |
|
$ |
38.93 |
|
|
$ |
23.22 |
|
4th quarter |
|
$ |
54.45 |
|
|
$ |
35.60 |
|
2010: |
|
|
|
|
|
|
|
|
1st quarter |
|
$ |
51.88 |
|
|
$ |
36.37 |
|
2nd quarter |
|
$ |
60.75 |
|
|
$ |
44.79 |
|
3rd quarter |
|
$ |
75.14 |
|
|
$ |
52.13 |
|
4th quarter |
|
$ |
72.48 |
|
|
$ |
58.00 |
|
38
Recent Sales of Unregistered Securities
There were no sales of unregistered securities by us during the three-month period
ending December 31, 2010.
Dividend Policy
In February 2011, our board of directors declared our first quarterly cash dividend
in our history of $3.5 million on our outstanding shares of common stock. The dividend
is payable on April 15, 2011 to stockholders of record as of the close of business on
March 31, 2011. We currently expect to continue paying comparable cash dividends on a
quarterly basis. However, any future determination as to the declaration of dividends
on our common stock will be made at the discretion of our board of directors and will
depend on our earnings, operating and financial condition, capital requirements and
other factors deemed relevant by our board of directors, including the applicable
requirements of the Delaware General Corporation Law.
Equity Compensation Plan Information
Information regarding securities authorized for issuance under the Companys equity
compensation plan as of December 31, 2010 is set forth in Item 12, Security Ownership
of Certain Beneficial Owners and Management.
Performance Graph
The graph below shows the total stockholder return of an investment of $100 on
August 10, 2007 (the first day of trading of our common stock on the Nasdaq Stock
Exchange) through December 31, 2010 for (i) our common stock (ii) The Nasdaq Composite
Index (iii) The S&P 500 Index and (iv) the Dow Jones Ecommerce Index. The Dow Jones
Ecommerce Index is a weighted index of stocks of companies in the e-commerce industry.
Stock price performance show in the graph below is not indicative of future stock price
performance.
39
We cannot assure you that our share performance will continue into the future with
the same or similar trends depicted in the graph above. We will not make or endorse any
predictions as to our future stock performance.
The foregoing graph and chart shall not be deemed incorporated by reference by any
general statement incorporating by reference this Annual Report on Form 10-K into any
filing under the Securities Act of 1933, as amended, or under the Securities Exchange
Act of 1934, as amended, except to the extent we specifically incorporate this
information by reference, and shall not otherwise be deemed filed under those acts.
Issuer Purchases of Equity Securities
We did not repurchase any shares of common stock during the fourth quarter of 2010.
On November 14, 2008, we announced that our board of directors approved a share
repurchase plan authorizing us to repurchase, from available capital, up to $20 million
of our outstanding common stock from time to time through November 13, 2009. The timing
and amount of any share repurchase under the share repurchase plan was determined by our
management based on market conditions and other considerations, and repurchases were
effected in the open market, through derivative, accelerated repurchase and other
privately negotiated transactions and through plans designed to comply with Rules 10b-18
or 10b5-1(c) under the Exchange Act. The share repurchase plan did not require us to
acquire any specific number of shares and may be temporarily or permanently suspended or
discontinued by us at any time.
To enhance our share repurchase plan, during the year ended December 31, 2009, we
sold equity put options. We did not sell put options during the year ended December 31,
2010. These put options entitled the holders to sell shares of our common stock to us on
certain dates at specified prices. None of the put options sold has been exercised and
there were no options outstanding as of December 31, 2010.
The term of the stock repurchase plan expired on November 13, 2009.
40
|
|
|
ITEM 6. |
|
SELECTED FINANCIAL DATA |
The following summary financial data is qualified by reference to and should be
read in conjunction with Managements Discussion and Analysis of Financial Condition
and Results of Operations and our consolidated financial statements and related notes
thereto included elsewhere in this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
(in millions) |
|
2006 |
|
|
2007 |
|
|
2008 (3) |
|
|
2009 |
|
|
2010 |
|
Statement of income data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
52.1 |
|
|
$ |
85.1 |
|
|
$ |
137.0 |
|
|
$ |
172.8 |
|
|
$ |
216.7 |
|
Cost of net revenues |
|
|
(12.1 |
) |
|
|
(18.3 |
) |
|
|
(27.5 |
) |
|
|
(36.0 |
) |
|
|
(46.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
40 |
|
|
|
66.9 |
|
|
|
109.5 |
|
|
|
136.9 |
|
|
|
170.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product and technology development |
|
|
(3.1 |
) |
|
|
(4.4 |
) |
|
|
(7.3 |
) |
|
|
(12.1 |
) |
|
|
(15.9 |
) |
Sales and marketing |
|
|
(23.4 |
) |
|
|
(27.6 |
) |
|
|
(40.0 |
) |
|
|
(42.9 |
) |
|
|
(48.9 |
) |
General and administrative |
|
|
(8.2 |
) |
|
|
(13.2 |
) |
|
|
(22.8 |
) |
|
|
(25.8 |
) |
|
|
(30.8 |
) |
Compensation cost related to acquisitions |
|
|
|
|
|
|
|
|
|
|
(1.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
(34.6 |
) |
|
|
(45.2 |
) |
|
|
(72.0 |
) |
|
|
(80.9 |
) |
|
|
(95.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
5.4 |
|
|
|
21.7 |
|
|
|
37.5 |
|
|
|
56.0 |
|
|
|
74.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income and other financial gains |
|
|
0.5 |
|
|
|
1.6 |
|
|
|
1.8 |
|
|
|
2.7 |
|
|
|
4.9 |
|
Interest expense and other financial charges |
|
|
(1.7 |
) |
|
|
(2.7 |
) |
|
|
(8.4 |
) |
|
|
(13.4 |
) |
|
|
(7.6 |
) |
Foreign currency loss |
|
|
(0.4 |
) |
|
|
(3.1 |
) |
|
|
(1.5 |
) |
|
|
(2.7 |
) |
|
|
(0.1 |
) |
Other income (expenses), net |
|
|
(1.5 |
) |
|
|
(3.0 |
) |
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before income and asset tax and cumulative effect of change in accounting principle |
|
|
2.3 |
|
|
|
14.4 |
|
|
|
29.4 |
|
|
|
42.7 |
|
|
|
71.9 |
|
Income and asset tax (expense) benefit |
|
|
(1.2 |
) |
|
|
(4.7 |
) |
|
|
(10.6 |
) |
|
|
(9.5 |
) |
|
|
(15.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before cumulative effect of change in accounting principle and gain from discontinued operations |
|
|
1.1 |
|
|
|
9.7 |
|
|
|
18.8 |
|
|
|
33.2 |
|
|
|
56.0 |
|
Cumulative effect of change in accounting principle |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
1.1 |
|
|
|
9.7 |
|
|
|
18.8 |
|
|
|
33.2 |
|
|
|
56.0 |
|
Accretion of preferred stock |
|
|
(0.5 |
) |
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
$ |
0.6 |
|
|
$ |
9.4 |
|
|
$ |
18.8 |
|
|
$ |
33.2 |
|
|
$ |
56.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table above may not total due to rounding.
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, |
|
(in millions) |
|
2006 |
|
|
2007 |
|
|
2008 (3) |
|
|
2009 |
|
|
2010 |
|
Balance sheet data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
53.8 |
|
|
$ |
134.5 |
|
|
$ |
156.7 |
|
|
$ |
182.6 |
|
|
$ |
269.7 |
|
Long term debt |
|
|
9.0 |
|
|
|
|
|
|
|
3.1 |
|
|
|
|
|
|
|
0.2 |
|
Total liabilities |
|
|
30.5 |
|
|
|
42.8 |
|
|
|
63.3 |
|
|
|
68.4 |
|
|
|
98.0 |
|
Net assets |
|
|
23.3 |
|
|
|
91.7 |
|
|
|
93.4 |
|
|
|
114.2 |
|
|
|
171.7 |
|
Mandatorily redeemable
convertible preferred stock |
|
|
64.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.1 |
|
Stockholders equity (deficit) |
|
$ |
(40.7 |
) |
|
$ |
91.7 |
|
|
|
93.4 |
|
|
|
114.2 |
|
|
|
171.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
Earnings per share data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income
available to common
stockholders per common
share |
|
$ |
0.01 |
|
|
$ |
0.22 |
|
|
$ |
0.43 |
|
|
$ |
0.75 |
|
|
$ |
1.27 |
|
Diluted net income per
common share |
|
$ |
|
|
|
$ |
0.22 |
|
|
$ |
0.42 |
|
|
$ |
0.75 |
|
|
$ |
1.27 |
|
Weighted average shares
(2): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
13,149,139 |
|
|
|
25,149,405 |
(1) |
|
|
44,239,443 |
|
|
|
44,086,892 |
|
|
|
44,124,018 |
|
Diluted |
|
|
|
|
|
|
25,478,336 |
|
|
|
44,348,950 |
|
|
|
44,144,368 |
|
|
|
44,146,858 |
|
|
|
|
(1) |
|
Includes the effect of the issuance of 3,000,000 shares of our common stock in connection
with our initial public offering in August 2007. |
|
(2) |
|
Shares outstanding at December 31, 2010 were 44,131,376. |
|
(3) |
|
Includes the acquisition of DeRemate.com. See note 6 to our consolidated financial statements. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
(in millions) |
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
Other data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of confirmed registered
users at end of period (1) |
|
|
18.2 |
|
|
|
24.9 |
|
|
|
33.7 |
|
|
|
42.6 |
|
|
|
52.9 |
|
Number of confirmed new registered
users during period (2) |
|
|
6.0 |
|
|
|
6.7 |
|
|
|
8.8 |
|
|
|
8.9 |
|
|
|
10.3 |
|
Gross merchandise volume (3) |
|
$ |
1,075.1 |
|
|
$ |
1,511.5 |
|
|
$ |
2,078.9 |
|
|
$ |
2,750.7 |
|
|
$ |
3,405.9 |
|
Number of successful items sold (4) |
|
|
13.8 |
|
|
|
17.5 |
|
|
|
21.1 |
|
|
|
29.5 |
|
|
|
39.2 |
|
Total payment volume (5) |
|
$ |
89.0 |
|
|
$ |
158.0 |
|
|
$ |
255.9 |
|
|
$ |
382.5 |
|
|
$ |
697.5 |
|
Total payment transactions (6) |
|
|
|
|
|
|
1.3 |
|
|
|
1.9 |
|
|
|
3.1 |
|
|
|
6.7 |
|
Capital expenditures |
|
$ |
2.4 |
|
|
$ |
3.1 |
|
|
$ |
5.0 |
|
|
$ |
4.8 |
|
|
$ |
13.6 |
|
Depreciation and amortization |
|
$ |
2.0 |
|
|
$ |
2.3 |
|
|
$ |
3.3 |
|
|
$ |
3.9 |
|
|
$ |
4.9 |
|
|
|
|
(1) |
|
Measure of the cumulative number of users who have registered on
the MercadoLibre marketplace and confirmed their registration. |
|
(2) |
|
Measure of the number of new users who have registered on the
MercadoLibre marketplace and confirmed their registration. As of
December 31, 2008 the number of confirmed new registered users
includes 2.2 million coming from the DeRemate integration. |
42
|
|
|
(3) |
|
Measure of the total U.S. dollar sum of all transactions completed through the
MercadoLibre marketplace, excluding motor vehicles, vessels, aircraft and real
estate. |
|
(4) |
|
Measure of the number of items that were sold/purchased through the
MercadoLibre marketplace. |
|
(5) |
|
Measure of total U.S. dollar sum of all transactions paid for using MercadoPago. |
|
(6) |
|
Measure of the number of all transactions paid for using MercadoPago. |
|
|
|
ITEM 7. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS |
You should read the following discussion and analysis of our financial condition
and results of our operations in conjunction with our Selected Financial Data and our
audited consolidated financial statements and the notes to those statements included
elsewhere in this report. This discussion contains forward-looking statements reflecting
our current expectations that involve risks and uncertainties. Actual results and the
timing of events may differ materially from those contained in these forward-looking
statements due to a number of factors, including those discussed in the section entitled
Risk Factors and elsewhere in this report.
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 years ended December 31, 2008, 2009, and
2010; |
|
|
|
|
a discussion of the principal factors that influence our results of operations, financial condition and liquidity; |
|
|
|
|
a discussion of our liquidity and capital resources, a discussion of our capital expenditures and a description
of our contractual obligations; and |
|
|
|
|
a discussion of the market risks that we face. |
Overview
MercadoLibre, Inc. (together with its subsidiaries, us, we, our or the company or
MercadoLibre) hosts the largest online commerce platform in Latin America focused on
enabling e-commerce and its related services. Our services are designed to provide our users
with mechanisms for buying, selling, paying, collecting, generating leads and comparing via
e-commerce transactions in an effective and efficient manner.
Through our online commerce platform, we provide buyers and sellers with a robust online
commerce environment that fosters the development of a large and growing e-commerce
community in Latin America, a region with a population of over 550 million people and one of
the fastest-growing Internet penetration rates in the world. We believe that we offer a
technological and commercial solution that addresses the distinctive cultural and geographic
challenges of operating an online commerce platform in Latin America.
We offer to our users the MercadoLibre Marketplace, which we sometimes refer to as our
Marketplace business, is a fully-automated, topically-arranged and user-friendly online
commerce service. This service permits both businesses and individuals to list items and
conduct their sales and purchases online in either a fixed-price or auction-based format.
Additionally, through online classified listings, our registered users can list and purchase
motor vehicles, vessels, aircraft, real estate and services. Any Internet user can browse
through the various products and services that are listed on our web site and register with
MercadoLibre to list, bid for and purchase items and services.
To complement the MercadoLibre Marketplace, we developed MercadoPago, an integrated online
payments solution. MercadoPago is designed to facilitate transactions both on and off the
MercadoLibre Marketplace by providing a mechanism that allows our users to securely, easily
and promptly send and receive Payments online.
43
As a further enhancement to the MercadoLibre Marketplace, in 2009 we launched
our MercadoClics program to allow businesses to promote their products and services on
the Internet. Through MercadoClics users and advertisers are able to place display
and/or text advertisements on our web pages in order to promote their brands and
offerings. MercadoClics offers advertisers a cost efficient and automated platform
through which it will acquire traffic. Advertisers purchase, on a cost per clicks basis,
advertising space that appear alongside product search results for specific categories
and other pages. These advertising placements are clearly differentiated from product
search results and direct traffic both to and off platform to the advertisers
destination of choice.
During
2010, we launched the MercadoShops on-line stores solution. Through
MercadoShops users can set-up, manage and promote their own on-line
webstores. These webstores are hosted by MercadoLibre and offer
integration with the other marketplace, payments and advertising
services we offer. Users can choose from a basic, free webstore or
pay monthly subscriptions for enhanced functionality and added
services on their stores.
We were incorporated in Delaware in October 1999 and introduced web sites in
Argentina, Brazil, Mexico, Colombia, Chile, Uruguay and Venezuela by April 2000. In
order to build a critical mass of customers, we initially offered our services free of
charge in all of these markets.
In May 2000, we obtained significant financing and reached gross merchandise volume
of $14.3 million. In 2001, we launched a new version of our site and brand and launched
our operations in Ecuador. Our gross merchandise volume for the year ending December 31,
2001 grew to $21.3 million. Our gross merchandise volume reached $55.4 million for 2002,
$164.3 million for 2003 and $299.3 million for 2004. In November of 2005, we acquired
certain operations of DeRemate.com, Inc. and our gross merchandise volume reached $607.7
million. During 2006, we launched sites in Costa Rica, the Dominican Republic and
Panama, and our gross merchandise volume reached $1,075.1 million. Our gross merchandise
volume was $1,511.5 million for 2007.
In August 2007, we successfully completed our initial public offering through which
16,077,185 shares of our common stock were sold at a initial public offering price of
$18.00 per share less an underwriting discount of 4.5%. Out of that total, 2,608,696
shares of common stock were sold by us and 13,468,489 were sold by selling shareholders.
We, along with certain shareholders, granted to the underwriters an option, exercisable
for 30 days from August 9, 2007, to purchase up to 2,411,577 additional shares at the
public offering price less the underwriting discount. The option was exercised in full,
and of that total, an additional 391,304 shares were sold by us and 2,020,273 were sold
by the selling shareholders.
In January 2008, we acquired 100% of the issued and outstanding shares of capital
stock of Classified Media Group, Inc., or CMG, and its subsidiaries. CMG and its
subsidiaries operate an online classified advertisements platform primarily dedicated to
the sale of automobiles at www.tucarro.com in Venezuela, Colombia and Puerto Rico and
real estate at www.tuinmueble.com in Venezuela, Colombia, Panama, the United States,
Costa Rica and the Canary Islands. On the acquisition date, we paid $19 million subject
to certain escrows and working capital adjustment clauses. On June 27, 2008, the Company
released to the former CMG shareholders $1.9 millions in full satisfaction of the
management escrow. On January 22, 2009, we released the escrow balance of $1.1 million
to the sellers of CMG.
In September 2008, we completed the acquisition of DeRemate.com de Argentina S.A.,
DeRemate.com Chile S.A., Interactivos y Digitales México S.A. de C.V. and Compañía de
Negocios Interactiva de Colombia E.U. for an aggregate purchase price of $37.6 million.
We also purchased certain URLs, domains, trademarks, databases and intellectual property
rights related to those businesses for $2.4 million. On February 12, 2009, the purchase
price allocation period ended and we agreed with the Sellers to a working capital
adjustment of $480,912 to be paid by the Sellers to us.
Reporting Segments
Until the end of second quarter of 2010, we had two reportable business segments:
marketplace and payments. Starting in the third quarter of 2010, we have redefined our
segment reporting and have eliminated the business segmentation between marketplace and
payments to reflect changes in our business strategy and organization. Specifically, we
are no longer charging buyers a separate fee for using the MercadoPago payments platform
for their purchases on the Brazilian and Argentine MercadoLibre marketplace. We are now
offering this service for no added cost so as to encourage its adoption. Consequently,
payments revenues are now generated exclusively on off-platform or on consumer financing
charges, neither of which are material enough as of the year ended December 31, 2010 to
justify a stand alone reporting segment.
Given these changes, starting in the third quarter of 2010, our segment reporting
is only based on geographic areas, this being the current criteria we are using to
evaluate our segment performance. Our geography segments include Brazil, Argentina,
Mexico, Venezuela and other countries (such as Chile, Colombia, Costa Rica, Dominican
Republic, Ecuador, Panama, Peru, Portugal and Uruguay).
In addition, we operate a real estate classifieds platform that covers some areas of
Florida in the United States, the operations of which are included in our segment for
other countries.
During 2010, our gross merchandise volume reached $3,405.9 million and visitors to
our web site were able to browse an average of over 7.9 million listings on any given
day, organized by country, in over 2,000 different product categories. We believe that
we have achieved a critical mass of active buyers, sellers and product listings in most
of the countries where we operate and that our business can be readily scaled to handle
increases in our user base and transaction volume. At December 31, 2010, we had 52.9
million confirmed registered MercadoLibre users. For 2010, we had 3.9 million unique
sellers, 11.3 million unique buyers and 39.2 million successful items sold.
44
For 2010, our net revenues were $216.7 million. Of those $216.7 million in
revenues approximately 56.7% were attributable to our Brazilian business, 18.4% to our
Argentine business, 9.6% to our Venezuelan business, 8.8% to our Mexican business, and
6.5% to other countries. Although we discuss long-term trends in our business, it is our
policy to not provide earnings guidance in the traditional sense. We believe that
uncertain conditions make the forecasting of near-term results difficult. Further, we
seek to make decisions focused primarily on the long-term welfare of our company and
believe focusing on short term earnings does not best serve the interests of our
stockholders. We believe that execution of key strategic initiatives as well as our
expectations for long-term growth in our markets will best create stockholder value. We,
therefore, encourage potential investors to consider this strategy before making an
investment in our common stock. A long-term focus may make it more difficult for
industry analysts and the market to evaluate the value of our company, which could
reduce the value of our common stock or permit competitors with short term tactics to
grow stronger than us.
Description of line items
Net revenues
We recognize revenues in each of our five reporting segments. Our reporting segments
include our operations in Brazil, Argentina, Mexico, Venezuela and other countries
(Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Panama, Peru, Portugal and
Uruguay).
Historically, we have generated revenues from the MercadoLibre Marketplace transacctions
from:
|
|
|
listing fees; |
|
|
|
|
optional feature fees; |
|
|
|
|
final value fees; and |
|
|
|
|
online advertising fees. |
During the third quarter of 2009, we modified our pricing structure by replacing our
previous listing fees and optional feature fees with consolidated up-front fees which
bundle these features. We now offer three types of up-front fees for three different
combinations of placement and features. Up-front fees are charged at the time the listing
is uploaded onto our platform and are not subject to successful sale of the items listed.
Following this fee structure modification, revenues for the MercadoLibre Marketplace
transacctions are now generated by:
|
|
|
up front fees; |
|
|
|
|
final value fees; and |
|
|
|
|
online advertising fees. |
As from the third quarter of 2010, we offer payment processing through our
MercadoPago solution at no added cost in Brazil and Argentina. This change in pricing
implies that for Marketplace transactions we no longer charge our users a specific fee
for processing on-platform payments as we did in the past. We do continue, however, to
generate payment related revenues, reported within each of our reporting segments,
attributable to:
|
|
|
commissions charged to sellers for the use of the
MercadoPago platform with respect to transactions that
occur outside of our Marketplace platform; |
|
|
|
|
revenues from a financial charge when a buyer elects to pay
in installments through our MercadoPago platform, both on
transaction occurs on or off our Marketplace platform. |
45
The following table sets forth the percentage of consolidated net revenues by
country for each of 2008, 2009 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
(% of total consolidated net revenues) |
|
2008 |
|
|
2009 |
|
|
2010 |
|
Brazil |
|
|
53.8 |
% |
|
|
53.9 |
% |
|
|
56.7 |
% |
Argentina |
|
|
14.5 |
|
|
|
15.5 |
|
|
|
18.4 |
|
Venezuela |
|
|
16.9 |
|
|
|
15.8 |
|
|
|
9.6 |
|
Mexico |
|
|
10.1 |
|
|
|
8.9 |
|
|
|
8.8 |
|
Other countries |
|
|
4.7 |
|
|
|
6.0 |
|
|
|
6.5 |
|
The following table summarizes the changes in net revenues for the years ended
December 31, 2008, 2009 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Change from 2009 |
|
|
Year Ended |
|
|
Change from 2008 to |
|
|
|
December 31, |
|
|
to 2010 (*) |
|
|
December 31, |
|
|
2009 (*) |
|
|
|
2010 |
|
|
2009 |
|
|
in Dollars |
|
|
in % |
|
|
2009 |
|
|
2008 |
|
|
in Dollars |
|
|
in % |
|
|
|
(in millions, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brazil |
|
$ |
122.8 |
|
|
$ |
93.1 |
|
|
$ |
29.7 |
|
|
|
31.9 |
% |
|
$ |
93.1 |
|
|
$ |
73.7 |
|
|
$ |
19.4 |
|
|
|
26.3 |
% |
Argentina |
|
|
39.9 |
|
|
|
26.7 |
|
|
|
13.2 |
|
|
|
49.2 |
% |
|
$ |
26.7 |
|
|
$ |
19.9 |
|
|
|
6.8 |
|
|
|
34.6 |
% |
Venezuela |
|
|
20.9 |
|
|
|
27.3 |
|
|
|
(6.4 |
) |
|
|
-23.6 |
% |
|
$ |
27.3 |
|
|
$ |
23.1 |
|
|
|
4.2 |
|
|
|
18.2 |
% |
Mexico |
|
|
19.0 |
|
|
|
15.3 |
|
|
|
3.6 |
|
|
|
23.7 |
% |
|
$ |
15.3 |
|
|
$ |
13.9 |
|
|
|
1.4 |
|
|
|
10.2 |
% |
Other Countries |
|
|
14.2 |
|
|
|
10.4 |
|
|
|
3.8 |
|
|
|
36.5 |
% |
|
$ |
10.4 |
|
|
$ |
6.4 |
|
|
|
4.0 |
|
|
|
60.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Revenues |
|
$ |
216.7 |
|
|
$ |
172.8 |
|
|
$ |
43.9 |
|
|
|
25.4 |
% |
|
$ |
172.8 |
|
|
$ |
137.0 |
|
|
$ |
35.8 |
|
|
|
26.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*) |
|
Percentages have been calculated using whole-dollar amounts rather than rounded
amounts that appear in the table. |
The table above may not total due to rounding.
We have a highly fragmented customer revenue base given the large numbers of sellers
and buyers who use our platforms. For the years ended December 31, 2010, 2009 and 2008,
no single customer accounted for more than 1.0% of our net revenues in our MercadoLibre
Marketplace or our MercadoPago payment solution. Our MercadoLibre Marketplace is
available in thirteen countries (Argentina, Brazil, Chile, Colombia, Costa Rica,
Dominican Republic, Ecuador, Mexico, Panama, Peru, Portugal, Uruguay and Venezuela), and
MercadoPago is available in six countries (Argentina, Brazil, Chile, Colombia, Mexico and
Venezuela). The functional currency for each countrys operations is the local currency,
except for Venezuela whose functional currency is the US dollar due to Venezuelas status
as a highly inflationary economy. See Critical accounting policies and estimates
Foreign Currency Translation included in this report. Therefore, our net revenues are
generated in multiple foreign currencies and then translated into US dollars at the
average monthly exchange rate.
Our subsidiaries in Brazil, Argentina, Venezuela and Colombia are subject to
certain taxes on revenues which are classified as costs of net revenues. These taxes
represented 6.0%, 6.2% and 6.9% of net revenues for 2008, 2009 and 2010, respectively.
Cost of net revenues
Cost of net revenues primarily represents bank and credit card processing charges
for transactions and fees paid with credit cards and other payment methods, certain
taxes on revenues, compensation for customer support personnel, ISP connectivity
charges, depreciation and amortization and hosting and site operation fees.
Product and technology development expenses
Our product and technology development related expenses consist primarily of
depreciation and amortization costs related to product and technology development,
compensation for our engineering and web-development staff, telecommunications costs and
payments to third-party suppliers who provide technology maintenance services to our
company.
Sales and marketing expenses
Our sales and marketing expenses consist primarily of marketing costs for our
platforms through online and offline advertising, bad debt charges, the salaries of
employees involved in these activities, public relations costs, marketing activities for
our users and depreciation and amortization costs.
We carry out the vast majority of our marketing efforts on the Internet. In that
context, we enter into agreements with portals, search engines, social networks, ad
networks and other sites in order to attract Internet users to the MercadoLibre
Marketplace and convert them into confirmed registered users and active traders on our
platform. Additionally, we allocate a portion of our marketing budget to cable television
advertising in order to improve our brand awareness and to complement our online efforts.
46
We also work intensively on attracting, developing and growing our seller
community through our supply efforts. We have dedicated professionals in most of our
operations that work with sellers, through trade show participation, seminars and
meetings to provide them with important tools and skills to become effective sellers on
our platform.
General and administrative expenses
Our general and administrative expenses consist primarily of salaries for management
and administrative staff, compensation for outside directors, long term retention plan
compensation, expenses for legal, accounting and other professional services, insurance
expenses, office space rental expenses, travel and business expenses, as well as
depreciation and amortization costs. General and administrative expenses include the
costs of the following areas of our company: general management, finance, administration,
accounting, legal and human resources.
Compensation cost related to acquisitions
As part of our acquisition of CMG, which closed in the first quarter of 2008, we
entered into a management escrow agreement to secure the obligations of the CMG
shareholders that remained as managers. We accrued those compensation expenses as
operating expenses, instead of considering them part of the purchase price. (See Note 6
to our consolidated financial statements included in this report).
Other income (expenses), net
Other income (expenses) consists of interest income derived primarily from our
investments and cash equivalents, foreign currency gains or losses, the effect of changes
in the fair value of derivative instruments, and other non-operating results. In
addition, other income (expenses) included mainly interest expense related to the working
capital requirements for our MercadoPago operations through the second quarter of 2010.
Beginning in the third quarter of 2010 and as long as we continue pre-selling credit card
receivables there will be no interest expense included in Other income (expenses) line.
Income and asset tax
We are subject to federal and state taxes in the United States, as well as foreign
taxes in the multiple jurisdictions where we operate. Our tax obligations consist of
current and deferred income taxes and asset taxes incurred in these jurisdictions. We
account for income taxes following the liability method of accounting. Therefore, our
income tax expense consists of taxes currently payable, if any (given that in certain
jurisdictions we still have net operating loss carry-forwards), plus the change during
the period in our deferred tax assets and liabilities.
The following table summarizes the composition of our income/asset taxes for the
years ended December 31, 2008, 2009 and 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
(in millions) |
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Foreign |
|
|
8.1 |
|
|
|
11.5 |
|
|
|
22.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.1 |
|
|
|
11.5 |
|
|
|
22.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
|
|
|
|
|
|
|
|
0.4 |
|
Foreign |
|
|
1.6 |
|
|
|
(2.5 |
) |
|
|
(6.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.6 |
|
|
|
(2.5 |
) |
|
|
(6.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.8 |
|
|
|
9.0 |
|
|
|
15.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Tax: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
0.8 |
|
|
|
0.5 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.8 |
|
|
|
0.5 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income / asset tax expense |
|
$ |
10.6 |
|
|
$ |
9.5 |
|
|
$ |
15.8 |
|
|
|
|
|
|
|
|
|
|
|
47
Seasonality
The following table presents certain unaudited quarterly financial information for
each of the twelve quarters set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
March 31, |
|
|
June 30, |
|
|
September 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues |
|
$ |
45,937,774 |
|
|
$ |
52,510,331 |
|
|
$ |
55,951,378 |
|
|
$ |
62,316,230 |
|
Gross profit |
|
|
36,044,723 |
|
|
|
41,098,770 |
|
|
|
44,500,459 |
|
|
|
48,521,916 |
|
Net Income |
|
|
9,620,601 |
|
|
|
11,673,962 |
|
|
|
18,790,963 |
|
|
|
15,939,493 |
|
Net Income per share-basic |
|
|
0.22 |
|
|
|
0.26 |
|
|
|
0.43 |
|
|
|
0.36 |
|
Net Income per share-diluted |
|
|
0.22 |
|
|
|
0.26 |
|
|
|
0.43 |
|
|
|
0.36 |
|
Weighted average shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
44,113,595 |
|
|
|
44,121,087 |
|
|
|
44,129,762 |
|
|
|
44,131,376 |
|
Diluted |
|
|
44,149,700 |
|
|
|
44,145,255 |
|
|
|
44,151,367 |
|
|
|
44,151,762 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues |
|
$ |
32,322,501 |
|
|
$ |
40,901,799 |
|
|
$ |
50,599,276 |
|
|
$ |
49,020,045 |
|
Gross profit |
|
|
25,688,515 |
|
|
|
32,306,322 |
|
|
|
40,208,605 |
|
|
|
38,682,129 |
|
Net Income |
|
|
5,391,176 |
|
|
|
6,679,779 |
|
|
|
9,852,268 |
|
|
|
11,285,570 |
|
Net Income per share-basic |
|
|
0.12 |
|
|
|
0.15 |
|
|
|
0.22 |
|
|
|
0.26 |
|
Net Income per share-diluted |
|
|
0.12 |
|
|
|
0.15 |
|
|
|
0.22 |
|
|
|
0.26 |
|
Weighted average shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
44,069,134 |
|
|
|
44,074,462 |
|
|
|
44,088,936 |
|
|
|
44,108,207 |
|
Diluted |
|
|
44,130,866 |
|
|
|
44,127,208 |
|
|
|
44,138,031 |
|
|
|
44,143,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues |
|
$ |
28,840,730 |
|
|
$ |
34,471,508 |
|
|
$ |
40,260,643 |
|
|
$ |
33,449,739 |
|
Gross profit |
|
|
22,822,449 |
|
|
|
27,570,005 |
|
|
|
32,106,781 |
|
|
|
26,986,812 |
|
Net Income |
|
|
2,067,677 |
|
|
|
2,947,095 |
|
|
|
5,875,792 |
|
|
|
7,921,097 |
|
Net Income per share-basic |
|
|
0.05 |
|
|
|
0.07 |
|
|
|
0.13 |
|
|
|
0.18 |
|
Net Income per share-diluted |
|
|
0.05 |
|
|
|
0.07 |
|
|
|
0.13 |
|
|
|
0.17 |
|
Weighted average shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
44,227,460 |
|
|
|
44,238,166 |
|
|
|
44,290,540 |
|
|
|
44,264,906 |
|
Diluted |
|
|
44,368,011 |
|
|
|
44,369,317 |
|
|
|
44,379,682 |
|
|
|
44,369,635 |
|
48
Seasonal fluctuations in Internet usage and retail seasonality have affected, and
are likely to continue to affect, our business. Typically, the fourth quarter of the
year is the strongest in every country where we operate due to the significant increase
in transactions before the Christmas season. However, the result of our operations in
the fourth quarter of 2008 were impacted by the global economic crisis and, for that
reason, our 2008 fourth quarter revenues were lower when measured in US dollars than the
third quarter revenues, as a result of local currencies depreciating versus the U.S.
dollar during the period. In addition, the result of our operations in the fourth
quarter of 2009 were impacted by the change in Venezuelan translation rate as described
in Foreign currency translation below, for that reason, our 2009 fourth quarter revenues
were lower when measured in U.S. dollars than the third quarter revenues. Our slowest
period is typically the first quarter of the year. The months of January, February and
March normally correspond to summer vacation time in Argentina, Brazil, Chile, Peru and
Uruguay. Additionally, the Easter holiday falls in March or April, and Brazil celebrates
Carnival for one week in February or March. This is partially mitigated by the countries
located in the northern hemisphere, such as Colombia, Mexico and Venezuela for which the
slowest months are their summer months of July, August and September.
Critical accounting policies and estimates
The preparation of our consolidated financial statements and related notes requires
us to make judgments, estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. We have based our estimates on historical experience and on various
other assumptions that we believe to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Our management has
discussed the development, selection and disclosure of these estimates with our audit
committee and our board of directors. Actual results may differ from these estimates
under different assumptions or conditions.
An accounting policy is considered to be critical if it requires an accounting
estimate to be made based on assumptions about matters that are highly uncertain at the
time the estimate is made, and if different estimates that reasonably could have been
used, or changes in the accounting estimates that are reasonably likely to occur
periodically, could materially impact the consolidated financial statements. We believe
that the following critical accounting policies reflect the more significant estimates
and assumptions used in the preparation of our consolidated financial statements. You
should read the following descriptions of critical accounting policies, judgments and
estimates in conjunction with our audited consolidated financial statements and the
notes thereto and other disclosures included in with this report.
Foreign Currency Translation
Historically, all of our foreign operations have used the local currency as their
functional currency. Accordingly, these foreign subsidiaries translate assets and
liabilities from their local currencies to US dollars using year end exchange rates while
income and expense accounts are translated at the average rates in effect during the
year. The resulting translation adjustment is recorded as part of other comprehensive
income (loss), a component of shareholders equity. Gains and losses resulting from
transactions denominated in non-functional currencies are recognized in earnings. Net
foreign currency exchange losses or gains are included in the consolidated statements of
income under the caption Foreign currency gain /(loss).
Until September 30, 2009, our Venezuelan subsidiaries assets, liabilities, income and
expenses were translated at the official exchange rate of 2.15 Bolivares Fuertes per US
dollar.
In the fourth quarter of 2009, we began to use the parallel exchange rate rather than the
official exchange rate to translate our Venezuelan financial statements. The following
facts and circumstances have been considered in our analysis of the applicable exchange
rate:
|
|
|
At the date we changed the translation exchange rate (and as of the date of this report), we have not
obtained dividends remittances at the official exchange rate (and we have not at the date of this
report), |
|
|
|
|
The industry in which we operate may not influence our ability to access to the official exchange rate, |
|
|
|
|
The Commission for the Administration of Foreign Exchange (CADIVI) volume of approvals of the use of
the Official Rate was down 50% on a year-to-year basis as of July 2009. |
|
|
|
|
CADIVI has not only delayed approvals but also removed many items from priority lists (current
priorities appear to be food and medicine) causing delays in the repatriation of dividends for many
companies. |
49
Consequently, in the fourth quarter of 2009, we translated our Venezuelan subsidiaries
assets, liabilities, income and expense accounts using the parallel exchange rate.
As of the date of this report the Company did not buy dollars at the CADIVI official
rate.
In accordance with US GAAP, we have classified our Venezuelan operations as highly
inflationary as of January 1, 2010 and have used the US dollar to be the functional
currency for purposes of our financial statements. Therefore, no translation effect was
accounted for in other comprehensive income during the three- and nine-month periods
ended September 30, 2010 related to our Venezuelan operations.
Until May 13, 2010, the only way by which US dollars could be purchased outside the
official currency market was using an indirect mechanism consisting in the purchase and
sale of securities, including national public debt bonds (DPNs) denominated in Bolivares
Fuertes and bonds issued by the government that were denominated in US dollars. This
mechanism for transactions in certain securities created an indirect parallel foreign
currency exchange market in Venezuela that enabled entities to obtain foreign currency
through financial brokers without going through CADIVI. Although the parallel exchange
rate was higher, and accordingly less beneficial, than the official exchange rate, some
entities have used the parallel market to exchange currency because, as it was already
mentioned, CADIVI used not to approve in a timely manner the exchange of currency
requested by such entities. Until May 13, 2010, our Venezuelan subsidiaries used this
mechanism to buy US dollars and accordingly we used the parallel average exchange rate to
re-measure those foreign currency transactions.
However, on May 14th, 2010, the Venezuelan government enacted reforms to its exchange
regulations and close-down such parallel market by declaring that
foreign-currency-denominated securities issued by Venezuelan entities were included in
the definition of foreign currency, thus making the Venezuelan Central Bank (BCV) the
only institution that could legally authorize the purchase or sale of foreign currency
bonds, thereby excluding non-authorized brokers from the foreign exchange market.
Trading of foreign currencies was re-opened as a regulated market on June 9, 2010 with
the Venezuelan Central Bank as the only institution through which foreign
currency-denominated transactions can be brokered. Under the new system, known as the
Foreign Currency Securities Transactions System (SITME), entities domiciled in Venezuela
can buy US dollardenominated securities only through banks authorized by the BCV to
import goods, services or capital inputs. Additionally, the SITME imposes volume
restrictions on an entitys trading activity, limiting such activity to a maximum
equivalent of $50,000 per day, not to exceed $350,000 in a calendar month. This
limitation is non-cumulative, meaning that an entity cannot carry over unused volume from
one month to the next.
As a consequence of this new system, commencing on June 9, 2010, we have transitioned
from the parallel exchange rate to the SITME rate and started re-measuring foreign
currency transactions using the SITME rate published by BCV, which was 5.27 Bolivares
Fuertes per US dollar as of June 9, 2010.
For the period beginning on May 14, 2010 and ended on June 8, 2010 (during which there
was no open foreign currency markets), we applied US GAAP guidelines, which state that if
exchangeability between two currencies is temporarily lacking at the transaction date or
balance sheet date, the first subsequent rate at which exchanges could be made shall be
used.
Accordingly, the June 9, 2010 exchange rate published by the Venezuelan Central Bank has
been used to re-measure transactions during the above-mentioned period.
The net investment in the Venezuelan subsidiaries, before intercompany eliminations,
amounts to $13,715,759 and $8,914,007 as of December 31, 2010 and 2009.
We have assessed the new regulations and have concluded that, as currently formulated,
there has not been a material impact on the normal running of our business in Venezuela.
Impairment of long-lived assets and goodwill
We review long-lived assets for impairments whenever events or changes in
circumstances indicate that the carrying value of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the carrying
amount of an asset to undiscounted future net cash flows expected to be generated by the
asset. If such assets are considered to be impaired on this basis, the impairment loss
to be recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets.
50
Goodwill and certain indefinite life trademarks are reviewed at the end of the
year for impairment or more frequently when events or changes in circumstances indicate
that the carrying value may not be recoverable. Impairment of goodwill and certain
trademarks are tested at the reporting unit level (considering each segment of the
Company as a reporting unit) by comparing the reporting units carrying amount,
including goodwill and certain trademarks, to the fair value of the reporting unit. The
fair values of the reporting units are estimated using a combination of the income or
discounted cash flows approach and the market approach, which utilizes comparable
companies data. Cash flow projections used are based on financial budgets approved by
management. The growth rates applied do not exceed the long-term average growth rate for
the business in which the reporting unit operates. The average discount rate used is
18.9% which reflects our real weighted average cost of capital. Key drivers in the
analysis include Confirmed Registered Users (CRUs) and Gross Merchandise Volume
(GMV) which represents a measure of the total U.S. dollar amount of all transactions
completed through the MercadoLibre marketplace, excluding motor vehicles, vessels,
aircraft, real estate, and services and take rate defined as marketplace revenues as a
percentage of gross merchandise volume. In addition, the benchmark in the analysis
includes a business to e-commerce rate, which represents growth of e-commerce as a
percentage of GDP, internet penetration rates as well as trends in our market share. If
the carrying amount of the reporting unit exceeds its fair value, goodwill or indefinite
useful life intangible assets are considered impaired and a second step is performed to
measure the amount of impairment loss, if any. No impairments were recognized during the
reporting periods and managements assessment of each reporting units fair value
materially exceeds its carrying value. As of December 31, 2010, there is no goodwill at
reporting unit level that is at risk of failing step one of the impairment test.
We believe that the accounting estimate related to impairment of long lived assets
and goodwill is critical since it is highly susceptible to change from period to period
because: (i) it requires management to make assumptions about gross merchandise volume
growth, future interest rates, sales and costs; and (ii) the impact that recognizing an
impairment would have on the assets reported on our balance sheet as well as our net
income would be material. Managements assumptions about future sales and future costs
require significant judgment.
Allowance for doubtful accounts and chargebacks
We are exposed to losses due to uncollectible accounts and credits to sellers.
Provisions for these items represent our estimate of future losses based on our
historical experience. Our allowance for doubtful accounts and chargebacks amounted to
$8.7 million at December 31, 2008, $3.8 million at December 31, 2009 and $11.7 million
at December 31, 2010. The decrease in the 2009 allowance for doubtful accounts was due
to change in our write-off policy. Until 2008, we write off accounts receivable with an
aging of 366 days or more, whereas, since 2009 we have written off accounts receivable
with an aging of 181 days or more. The allowance for doubtful accounts is recorded as a
charge to sales and marketing expenses. The increase in the 2010 allowance for doubtful
accounts mainly relates to an increase in our net revenues. In addition during 2010 we
changed our billing cycle period. In 2009 we billed to customers
several times per month and in
2010 we billed to customers once a month.
The following table illustrates our bad debt charges as a percentage of net
revenues for 2008, 2009 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
(in millions, except percentages) |
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
137.0 |
|
|
$ |
172.8 |
|
|
$ |
216.7 |
|
Bad debt charges |
|
|
8.7 |
|
|
|
10.0 |
|
|
|
14.9 |
|
Bad debt charges as a percentage of net revenues |
|
|
6.3 |
% |
|
|
5.8 |
% |
|
|
6.9 |
% |
Historically, our actual losses have been consistent with our charges. However,
future changes in trends could result in a material impact to future consolidated
statements of income and cash flows.
We believe that the accounting estimate related to allowances for doubtful accounts
and chargebacks is a critical accounting estimate because it requires management to make
assumptions about future collections and credit analysis. Our managements assumptions
about future collections require significant judgment.
Legal Contingencies
In connection with certain pending litigation and other claims, we have estimated
the range of probable loss and provided for such losses through charges to our condensed
consolidated statement of income. These estimates are based on our assessment of the
facts and circumstances and historical information related to actions filed against the
Company at each balance sheet date and are subject to change based upon new information
and future events.
From time to time, we are involved in disputes that arise in the ordinary course of
business. We are currently involved in certain legal proceedings as discussed in
BusinessLegal Proceedings, and in Note 15 to our audited consolidated financial
statements. We believe that we have meritorious defenses to the claims against us, and
we will defend ourselves vigorously. However, even if successful, our defense could be
costly and could divert managements time. If the plaintiffs were to prevail on certain
claims, we might be forced to pay damages or modify our business practices. Any of these
results could materially harm our business and could have a material adverse impact on
our financial position, results of operations or cash flows.
51
Income taxes
We are required to recognize a provision for income taxes based upon taxable income
and temporary differences between the book and tax bases of our assets and liabilities
for each of the tax jurisdictions in which we operate. This process requires a
calculation of taxes payable under currently enacted tax laws in each jurisdiction and an
analysis of temporary differences between the book and tax bases of our assets and
liabilities, including various accruals, allowances, depreciation and amortization. The
tax effect of these temporary differences and the estimated tax benefit from our tax net
operating losses are reported as deferred tax assets and liabilities in our condensed
consolidated balance sheet. We also assess the likelihood that our net deferred tax
assets will be realized from future taxable income. To the extent we believe that it is
more likely than not that some portion or all of deferred tax asset will not be realized,
we establish a valuation allowance. At December 31, 2010, we had a valuation allowance on
certain foreign net operating losses based on our assessment that it is more likely than
not that the deferred tax asset will not be realized. To the extent we establish a
valuation allowance or change the allowance in a period, we reflect the change with a
corresponding increase or decrease in our Income/asset tax expense line in our
consolidated statement of income.
The following table summarizes the composition of our deferred tax assets for the
years ended December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
|
December 31, |
|
|
December 31, |
|
Deferred tax assets |
|
2010 |
|
|
in % (*) |
|
|
2009 |
|
|
in % (*) |
|
|
|
(in millions, except percentages) |
|
|
(in millions, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 DeRemate.com acquisition |
|
|
5.9 |
|
|
|
28.6 |
% |
|
|
5.5 |
|
|
|
28.4 |
% |
Brazilian operations |
|
|
5.3 |
|
|
|
25.6 |
% |
|
|
4.7 |
|
|
|
24.5 |
% |
Foreign tax credits & others
domestic deferred tax assets |
|
|
2.8 |
|
|
|
13.3 |
% |
|
|
3.1 |
|
|
|
16.0 |
% |
Operations in others countries |
|
|
1.2 |
|
|
|
6.0 |
% |
|
|
1.1 |
|
|
|
6.0 |
% |
2008 DeRemate.com acquisition |
|
|
0.6 |
|
|
|
2.9 |
% |
|
|
1.0 |
|
|
|
5.5 |
% |
Mexican operations |
|
|
1.2 |
|
|
|
5.7 |
% |
|
|
0.9 |
|
|
|
4.7 |
% |
Venezuelan operations |
|
|
1.1 |
|
|
|
5.4 |
% |
|
|
0.9 |
|
|
|
4.6 |
% |
Argentine operations |
|
|
2.6 |
|
|
|
12.6 |
% |
|
|
2.0 |
|
|
|
10.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
20.7 |
|
|
|
100 |
% |
|
|
19.2 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
(*) Percentages have been calculated using the whole figures, instead on rounding
figures.
The table above may
not total due to rounding.
At December 31, 2010, our deferred tax assets are comprised mainly of loss
carryforwards and foreign tax credits representing 44.5% and 11.8%, respectively of the
total deferred tax assets. At December 31, 2009, our deferred tax assets are comprised
mainly of loss carryforwards and foreign tax credits representing 54.9% and 15.0%,
respectively of the total deferred tax assets.
52
The following table summarizes the composition of our loss carry forward for the
years ended December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
|
December 31, |
|
|
December 31, |
|
Loss carryforwards |
|
2010 |
|
|
in % (*) |
|
|
2009 |
|
|
in % (*) |
|
|
|
(in millions, except percentages) |
|
|
(in millions, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 DeRemate.com acquisition |
|
|
3.9 |
|
|
|
42.7 |
% |
|
|
5.0 |
|
|
|
47.1 |
% |
Brazilian operations |
|
|
3.0 |
|
|
|
32.7 |
% |
|
|
3.0 |
|
|
|
28.2 |
% |
2008 DeRemate.com acquisition |
|
|
0.5 |
|
|
|
5.8 |
% |
|
|
1.0 |
|
|
|
9.4 |
% |
Mexican operations |
|
|
0.9 |
|
|
|
10.3 |
% |
|
|
0.6 |
|
|
|
5.9 |
% |
Domestic loss carry forwards |
|
|
0.1 |
|
|
|
1.1 |
% |
|
|
0.1 |
|
|
|
0.5 |
% |
Chilean operations |
|
|
0.7 |
|
|
|
7.1 |
% |
|
|
0.5 |
|
|
|
5.2 |
% |
Operations in others countries |
|
|
0.1 |
|
|
|
0.4 |
% |
|
|
0.4 |
|
|
|
3.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
9.2 |
|
|
|
100 |
% |
|
|
10.5 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*) |
|
Percentages have been calculated using the whole figures, instead on
rounding figures. |
The table above may not total due to rounding.
We also assess the likelihood that our net deferred tax assets will be
realized from future taxable income. To the extent we believe that it is more likely
than not that some portion or all of deferred tax asset will not be realized, we
establish a valuation allowance.
At December 31, 2010 and 2009, our valuation allowance amounted to $4.8 million and
$9.3 million, respectively.
The following table summarizes the composition of our valuation allowance for the
years ended December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
|
December 31, |
|
|
December 31, |
|
Valuation Allowance |
|
2010 |
|
|
in % (*) |
|
|
2009 |
|
|
in % (*) |
|
|
|
(in millions, except percentages) |
|
|
(in millions, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 DeRemate.com acquisition |
|
|
0.1 |
|
|
|
1.8 |
% |
|
|
4.6 |
|
|
|
49.9 |
% |
Brazilian operations |
|
|
2.1 |
|
|
|
42.6 |
% |
|
|
2.0 |
|
|
|
21.4 |
% |
2008 DeRemate.com acquisition |
|
|
0.6 |
|
|
|
12.4 |
% |
|
|
1.0 |
|
|
|
11.3 |
% |
Operations in others countries |
|
|
2.1 |
|
|
|
43.2 |
% |
|
|
1.6 |
|
|
|
17.4 |
% |
United States |
|
|
0.0 |
|
|
|
0.0 |
% |
|
|
0.0 |
|
|
|
0.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
4.8 |
|
|
|
100 |
% |
|
|
9.3 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*) |
|
Percentages have been calculated using the whole figures, instead on rounding
figures. |
The table above may not total due to rounding.
Our valuation allowance is based on our assessment that it is more likely than
not that the deferred tax asset will not be realized. The fluctuations in the valuation
allowance will depend on the capacity of each country operation to generate taxable
income or our execution of future tax planning strategies that allow us to use the
aforementioned deferred tax assets. To the extent we establish a valuation allowance or
change the allowance in a period, we reflect the change with a corresponding increase or
decrease in our tax provision in our consolidated statement of income.
During the year ended December 31, 2010 and 2009, the Company has reversed
$4,648,574 and $4,055,323, respectively related to certain foreign and
domestic valuation allowances based on the assessment that it is more likely than not
that the deferred tax asset will be realized.
As of December 31, 2010 there are $45.6 million of non-U.S. subsidiaries
undistributed earnings. We have not considered some of the non-U.S. subsidiaries
undistributed earnings as of December 31, 2010 for U.S. federal income tax purposes because such
earnings are intended to be indefinitely reinvested in our international operations and
potential acquisitions related to those operations. Upon distribution of those earnings
in the form of dividends or otherwise, we would be subject to U.S. income taxes if such
distribution exceeds available foreign tax credits. It is not practicable to determine
the income tax liability that might be incurred if these earnings were to be
distributed.
53
The following table sets forth the blended tax rates for 2008, 2009 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
(in millions, except percentages) |
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income and asset tax expense |
|
$ |
(10.6 |
) |
|
$ |
(9.5 |
) |
|
$ |
(15.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of income before income and asset tax |
|
|
(36.1 |
)% |
|
|
(22.3 |
)% |
|
|
(22.0 |
)% |
|
|
|
|
|
|
|
|
|
|
Our effective tax rates for the years ended December 31, 2010 and 2009 are
30.8% and 26.9%, respectively. Historically, these provisions have adequately provided
for our actual income tax liabilities. Our future effective tax rates could be adversely
affected by earnings being lower than anticipated in countries where we have lower
statutory rates and higher than anticipated in countries where we have higher statutory
rates, by changes in the valuations of our deferred tax assets or liabilities, or by
changes or interpretations in tax laws, regulations or accounting principles.
Stock-based compensation
During 2008 and 2009, we granted our outside directors restricted shares of our
common stock (Restricted Shares) as part of their compensation, as described in the
following table:
|
|
|
|
|
|
|
Number of |
|
|
|
restricted |
|
Grant date |
|
Shares |
|
January 24, 2008 |
|
|
600 |
|
June 9, 2008 |
|
|
1,348 |
|
June 10, 2009 |
|
|
2,305 |
|
June 10, 2009 |
|
|
8,350 |
|
During the year ended December 31, 2010, we did not grant any restricted share of
our common stock.
Under the compensation plan adopted in September 2007, each outside director is
entitled to receive an annual grant of Restricted Shares. Each grant of Restricted
Shares vests in full twelve months following the grant date. On September 17, 2007, we
awarded two of our outside directors 1,000 Restricted Shares each for their original
grants. On January 24, 2008, we awarded another outside director 600 Restricted Shares
for his original grant. On June 9, 2008, we awarded the remaining two outside directors
674 Restricted Shares each for their original grants.
For the first and second year of board service following the date each outside
director received his initial grant, he or she is entitled to receive a grant of
additional Restricted Shares having a value equal to $30,000 and $40,000, respectively.
Beginning in 2009, Restricted Shares issuable to the directors during the relevant year
were issued on the date of our annual stockholders meeting. Restricted shares were
valued at the closing sale price of our common stock on the day preceding the annual
meeting. As a result of moving the grant dates, other than the initial grants to
directors in January and June 2008, we did not issue any Restricted Shares to any of the
outside directors in 2008 and, accordingly, made catch up Restricted Share grants on the
date of the 2009 stockholders annual meeting.
In accordance with SFAS 123(R) these Restricted Share awards are measured at the
grant-date fair value of our shares as if these shares were vested and issued on the
grant date. Based on the fair value of our shares at the grant date, total compensation
cost for the 3,948 restricted shares awarded during 2007 and 2008 amounted to $149,470.
For the years ended December 31, 2010, 2009 and 2008, we recognized $nil, $27,944 and
$105,560 of compensation expense related to these awards, respectively, which are
included in operating expenses in the accompanying consolidated statements of income. As
of December 31, 2010, the Restricted Shares issued in 2007 and 2008 are fully vested and
no longer subject to forfeiture.
The additional grants of shares for fixed amounts of $30,000 and $40,000 were
classified as liabilities in the accompanying consolidated balance sheet up to June 10,
2009, the issuance date. On June 10, 2009, the Company issued 2,305 and 8,350 shares
related to the abovementioned additional Restricted Shares for the first and second year
of board service following the date each outside director received their initial grant,
respectively. The 8,350 shares related to the second year vested on June 10, 2010.
Non-vested shares awarded to employees are measured at their fair market value by the
grant-date price of our shares. As from the issuance date, the outstanding liabilities
amounting to $171,099 as well as all future compensation cost is classified as equity.
For the years ended December 31, 2010, 2009 and 2008, we recognized $37,696, $85,689 and
$115,566, respectively, of compensation expense related to these awards, which are
included in operating expenses in the accompanying consolidated statement of income.
54
To date, all Restricted Shares have been granted pursuant to our Amended and
Restated 1999 Stock Option and Restricted Stock Plan.
In addition, on August 8, 2008, our Board of Directors approved a four year
employee retention program (the 2008 LTRP) payable 50% in cash and 50% in shares
subject to certain performance conditions which were satsified. Subject to an employees
continued employment as of the applicable payment date, the vesting schedule for awards
under the 2008 LTRP is as follows:
|
|
|
Year One Paid on or before March 31, 2009: 17% (8.5% in cash and 8.5% in common stock); |
|
|
|
|
Year Two Paid on or before March 31, 2010: 22% (11% in cash and 11% in common stock); |
|
|
|
|
Year Three Paid on or before March 31, 2011: 27% (13.5% in cash and 13.5% in common stock); and |
|
|
|
|
Year Four Paid on or before March 31, 2012: 34% (17% in cash and 17% in common stock). |
The compensation cost is recognized in accordance with the graded-vesting
attribution method and is accrued up to each payment date.
55
The total compensation cost of the 2008 LTRP amounts to approximately $1.6
million, including cash and shares. The 21,591 shares to be issued in the four years of
the plan were valued at the grant-date fair market value of $36.8 per share. For the
year ended December 31, 2010, the related accrued compensation expense was $0.2 million
corresponding $0.1 million to the share portion of the award credited to Additional
Paid-in Capital and $0.1 million to the cash portion included in the Balance Sheet as
Social security payable. For the year ended December 31, 2009, the related accrued
compensation expense was $0.4 million corresponding $0.2 million to the share portion of
the award credited to Additional Paid-in Capital and $0.2 million to the cash portion
included in the Balance Sheet as Social security payable. As of December 31, 2008, the
related accrued compensation expense was $0.8 million corresponding $0.3 million to the
share portion of the award credited to Additional Paid-in Capital and $0.5 million to
the cash portion which includes the Social security payable.
During 2008, we granted 3,082 restricted shares to an employee in connection with
his hiring. These restricted shares vested in four equal amounts over a four year period.
The related compensation cost was recognized in accordance with the straight-line vesting
attribution method. The total compensation cost of this contract
amounted to
approximately $0.1 million. For purposes of determining compensation cost, the shares
granted were valued at the grant date fair value of the shares. During 2010, the
restricted shares were forfeited as a result of the termination of that individuals
employment with us.
On July 15, 2009, our board of directors adopted the 2009 Long Term Retention Plan
(the 2009 LTRP). If earned, payments to eligible employees under the 2009 LTRP will be
in addition to payments of base salary and cash bonus, if earned, made to these
employees.
In order to receive an award under the 2009 LTRP, each eligible employee must satisfy
the performance conditions established by the board of directors for him or her. 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 2009 LTRP bonus, payable as follows:
|
|
|
the eligible employee will receive a fixed cash payment
equal to 6.25% of his or her 2009 LTRP bonus once a year for
a period of eight years starting in 2010 (the Annual Fixed
Payment); and |
|
|
|
|
on each date we pay the Annual Fixed Payment to an eligible
employee, he or she will also receive a cash payment (the
Variable Payment) equal to the product of (i) 6.25% of the
applicable 2009 LTRP bonus and (ii) the quotient of (a)
divided by (b), where (a), the numerator, equals the
Applicable Year Stock Price (as defined below) and (b), the
denominator, equals the 2008 Stock Price, defined as $13.81,
which was the average closing price of the Companys common
stock on the NASDAQ Global Market during the final 60
trading days of 2008. The Applicable Year Stock Price
shall equal the average closing price of the Companys
common stock on the NASDAQ Global Market during the final 60
trading days of the year preceding the applicable payment
date. |
The compensation cost related to the Annual Fixed Payments is recognized on a
straight line basis using the equal annual accrual method. The compensation cost related
to the Variable Payments is recognized in accordance with the graded-vesting attribution
method and is accrued up to each payment day.
As of December 31, 2010, the total compensation cost of the 2009 LTRP amounts to
approximately $7.1 million and the related accrued compensation expense for the year
ended December 31, 2010 and 2009 was $1.7 million and $1.5 million, respectively.
On June 25, 2010, our board of directors adopted the 2010 Long Term Retention Plan (the
2010 LTRP). If earned, payments to eligible employees under the 2010 LTRP will be in
addition to payments of base salary and cash bonus, if earned, made to these employees.
In order to receive an award under the 2010 LTRP, each eligible employee must satisfy
the performance conditions established by the board of directors for him or her. 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
2010 LTRP bonus, payable as follows:
|
|
|
the eligible employee will receive a fixed cash payment
equal to 6.25% of his or her 2010 LTRP bonus once a year for
a period of eight years starting in 2011 (the Annual Fixed
Payment); and |
|
|
|
|
on each date we pay the Annual Fixed Payment to an eligible
employee, he or she will also receive a cash payment (the
Variable Payment) equal to the product of (i) 6.25% of the
applicable 2010 LTRP bonus 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 2009 Stock Price, defined as $45.75,
which was the average closing price of our common stock on
the NASDAQ Global Market during the final 60 trading days of
2009. The Applicable Year Stock Price shall equal the
average closing price of our common stock on the NASDAQ
Global Market during the final 60 trading days of the year
preceding the applicable payment date. |
56
The compensation cost related to the Annual Fixed Payments is recognized on a
straight line basis using the equal annual accrual method. The compensation cost related
to the Variable Payments is recognized in accordance with the graded-vesting attribution
method and is accrued up to each payment day.
As of December 31, 2010, the total compensation cost of the 2010 LTRP is expected to be
approximately $7.3 million and the related accrued compensation expense for the year
ended December 31, 2010 was $1.7 million.
On June 25, 2010, our board of directors, upon the recommendation of the
compensation committee of our board, adopted the 2010 Director Compensation Program (the
Plan) for outside directors. Under the terms of the 2010 Director Plan, starting in
2011, each outside director will be entitled to receive the following compensation for
services provided as a director of the Company:
|
|
an annual fixed cash retainer for service on the board (the Fixed Retainer); |
|
|
|
an annual fixed cash retainer for service as chairman of the audit committee
(the Audit Chairman Retainer), compensation committee (the Compensation Chairman
Retainer), nominating and corporate governance committee (the Nominating Chairman
Retainer) and lead independent director (the Lead Director Retainer), as applicable;
and |
|
|
|
an annual variable cash retainer based upon the change in our stock price from
year to year (the Variable Retainer). |
The amount of the Variable Retainer payable in any year is determined by multiplying the
target Variable Retainer award amount (the Target Variable Retainer) for such year by
the quotient of (a) divided by (b), where (a), the numerator, equals the Prior Year
Stock Price (as defined below) and (b), the denominator, equals the Current Year Stock
Price (as defined below). For purposes of the 2010 Director Plan, the Applicable Year
Stock Price shall equal the average closing price of our common stock on the NASDAQ
Global Market during the 30 trading day period preceding the date of the annual
stockholders meeting held in the year the payment is made and the Prior Year Stock
Price shall equal the average closing price of our common stock on the NASDAQ Global
Market during the 30 trading day period preceding the date of our annual stockholders
meeting held in the year prior to the year in which the payment is made.
The Fixed Retainer and Target Variable Retainer payable in 2011 following the 2011
annual stockholders meeting for services provided in 2010 are $32,436 and $43,248,
respectively. The Audit Chairman Retainer, Compensation Chairman Retainer, Nominating
Chairman Retainer and Lead Director retainer for the same period are $16,218, $12,974,
$5,406 and $10,812, respectively. Under the 2010 Director Plan, the amount of each
retainer is scheduled to increase by approximately 16% in each of 2012 and 2013. The
2010 Director Plan is scheduled to terminate following the 2013 Annual Stockholders
Meeting.
The total accrued compensation cost for the Plan for the year ended December 31, 2010
amounts to $280,247.
Stock option awards granted under the Amended and Restated 1999 Stock Option and
Restricted Stock Plan, (the Plan) are at the discretion of the Companys Board of
Directors and may be in the form of either incentive or nonqualified stock options.
Options granted under the Plan generally vest over a three to four year period and
expire ten years after the date of grant. As of December 31, 2010, there were 279,893
shares of Common Stock available for additional awards under the Plan.
Stock options are accounted for at their grant date fair value. Fair value of stock
options is calculated using the Black-Scholes option pricing model. This calculation is
affected by the Companys stock price as well as assumptions regarding a number of
highly complex and subjective variables. The use of a Black-Scholes model requires
extensive actual employee exercise behavior data and a number of complex assumptions
including expected life, expected volatility, risk-free interest rate and dividend
yield. As a result, the future stock-based compensation expense may differ from
historical amounts.
Stock-based compensation expense related to stock options for the years ended
December 31, 2010, 2009 and 2008 was $244, $1,752, and $4,719 respectively. Stock-based
compensation expense is based on the estimated portion of the awards that are expected
to vest.
57
As of December 31, 2010, all stock-based compensation expense related to non-vested
stock options has been recognized.
No stock options were greanted during the period from January 1, 2007 to December
31, 2010.
Recent accounting pronouncements
Accounting for stock-based compensation
On April 16, 2010, the FASB issued an amendment to the accounting of stock-based
compensation related to the effect of Denominating the Exercise Price of a Share-Based
Payment Award in the Currency of the Market in Which the Underlying Equity Security
Primarily Trades. The amendment clarifies that a share-based payment award with an
exercise price denominated in the currency of a market in which a substantial portion of
the entitys equity securities trades must not be considered to contain a market,
performance, or service condition. Therefore, an entity should not classify such an award
as a liability if it otherwise qualifies for classification in equity. The new accounting
guidance is effective for interim and annual periods beginning on or after December 15,
2010, and will be applied prospectively. Management estimates that the implementation of
the new accounting guidance will not have significant effect on the companys financial
statements.
Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit
Losses
On July 21, 2010, the FASB issued ASU 2010-20, which amends ASC 310 by requiring more
robust and disaggregated disclosures about the credit quality of an entitys financing
receivables and its allowance for credit losses. The objective of enhancing these
disclosures is to improve financial statement users understanding of (1) the nature of
an entitys credit risk associated with its financing receivables and (2) the entitys
assessment of that risk in estimating its allowance for credit losses as well as changes
in the allowance and the reasons for those changes. The new and amended disclosures that
relate to information as of the end of a reporting period will be effective for the first
interim or annual reporting periods ending on or after December 15, 2010. The disclosures
that include information for activity that occurs during a reporting period will be
effective for the first interim or annual periods beginning after December 15, 2010.
Those disclosures include (1) the activity in the allowance for credit losses for each
period and (2) disclosures about modifications of financing receivables. Management
estimates that there will be no significant effect on the companys financial statements.
Results of operations
The following table sets forth, for the periods presented, certain data from our
consolidated statement of income. This information should be read in conjunction with
our audited consolidated financial statements and the notes to those statements included
elsewhere in this report.
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
(In millions) |
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
137.0 |
|
|
$ |
172.8 |
|
|
$ |
216.7 |
|
Cost of net revenues |
|
|
(27.5 |
) |
|
|
(36.0 |
) |
|
|
(46.5 |
) |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
109.5 |
|
|
|
136.9 |
|
|
|
170.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product and technology development |
|
|
(7.3 |
) |
|
|
(12.1 |
) |
|
|
(15.9 |
) |
Sales and marketing |
|
|
(40.0 |
) |
|
|
(42.9 |
) |
|
|
(48.9 |
) |
General and administrative |
|
|
(22.8 |
) |
|
|
(25.8 |
) |
|
|
(30.8 |
) |
Compensation Cost related to acquisitions |
|
|
(1.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
(72.0 |
) |
|
|
(80.9 |
) |
|
|
(95.6 |
) |
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
37.5 |
|
|
|
56.0 |
|
|
|
74.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income and other financial gains |
|
|
1.8 |
|
|
|
2.7 |
|
|
|
4.9 |
|
Interest expense and other financial
charges |
|
|
(8.4 |
) |
|
|
(13.4 |
) |
|
|
(7.6 |
) |
Foreign currency gains / losses |
|
|
(1.5 |
) |
|
|
(2.7 |
) |
|
|
(0.1 |
) |
Other income (expenses), net |
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before income / asset tax expense |
|
|
29.4 |
|
|
|
42.7 |
|
|
|
71.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income / asset tax expense |
|
|
(10.6 |
) |
|
|
(9.5 |
) |
|
|
(15.8 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
18.8 |
|
|
$ |
33.2 |
|
|
$ |
56.0 |
|
|
|
|
|
|
|
|
|
|
|
The table above may not total due to rounding.
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
(% of net revenues) |
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
Cost of net revenues |
|
|
(20.1 |
) |
|
|
(20.8 |
) |
|
|
(21.5 |
) |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
79.9 |
|
|
|
79.2 |
|
|
|
78.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product and technology development |
|
|
(5.3 |
) |
|
|
(7.0 |
) |
|
|
(7.3 |
) |
Sales and marketing |
|
|
(29.2 |
) |
|
|
(24.8 |
) |
|
|
(22.6 |
) |
General and administrative |
|
|
(16.6 |
) |
|
|
(15.0 |
) |
|
|
(14.2 |
) |
Compensation Cost related to acquisitions |
|
|
(1.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
(52.5 |
) |
|
|
(46.8 |
) |
|
|
(44.1 |
) |
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
27.4 |
|
|
|
32.4 |
|
|
|
34.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income and other financial gains |
|
|
1.3 |
|
|
|
1.6 |
|
|
|
2.3 |
|
Interest expense and other financial
charges |
|
|
(6.2 |
) |
|
|
(7.7 |
) |
|
|
(3.5 |
) |
Foreign currency loss |
|
|
(1.1 |
) |
|
|
(1.5 |
) |
|
|
|
|
Other expenses, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before income / asset tax expenses |
|
|
21.5 |
|
|
|
24.7 |
|
|
|
33.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income / asset tax expense |
|
|
(7.8 |
) |
|
|
(5.5 |
) |
|
|
(7.3 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
13.7 |
|
|
|
19.2 |
|
|
|
25.9 |
|
|
|
|
|
|
|
|
|
|
|
Principal trends in results of operations
Growth in net revenues from year to year
Since our inception, we have consistently generated revenue growth from our
MercadoLibre marketplace and from MercadoPago, driven by the strong growth of our key
operational metrics. From 2008 to 2009, our gross merchandise volume increased by 32.3%,
our successful items sold increased by 39.6% and MercadoPago total payment volume
increased by 49.5%. From 2009 to 2010, the growth rates for the same key operational
metrics were 23.8%, 33.1% and 82.3%, respectively. Our growth in net revenues was 26.1%
from 2008 to 2009 and 25.4% from 2009 to 2010. We believe that the growth in net
revenues should continue in the future. However, despite this positive historical trend,
current weak global macro-economic conditions, coupled with devaluations of certain
local currencies in Latin America versus the U.S. dollar, the effect of Venezuelan
translation and high interest rates, could lead us to a declining year-to-year net
revenues, particularly as measured in U.S. dollars.
Gross profit margins
Our business has generated sustained high gross profit margins over time, as
defined by total net revenues minus total cost of net revenues, as a percentage of net
revenues. Historically, gains in gross profit margins have been mainly attributable to
increased economies of scale in customer service, Internet Service Provider (ISP)
connectivity and site operations and improved economic terms obtained from payment
processors.
Our gross profit margins were 79.9% for 2008, 79.2% for 2009 and 78.5% for 2010. In
2010, variations in gross profit margins are mainly a result of the higher penetration
of our payment solution into our Marketplace, which has a higher cost of net revenue. In
the future, gross profit margins could decline if the cost of net revenues as a
percentage of net revenues increases as the penetration of our payment solution grows
faster than our Marketplace, or if we cannot sustain the economies of scale that we have
achieved.
60
Improving Operating income margins
We have generated and expect to continue generating economies of scale in operating
expenses. For the past three years, our operating income margins, defined as our income
from operations as a percentage of net revenues has improved from 27.4% for 2008, to
32.4% for 2009 and to 34.4% for 2010, mostly as a result of the impact of economies of
scale. We anticipate, however, that as we continue to invest in product development,
sales and marketing and human resources in order to promote our services and capture the
long term business opportunity offered by the Internet in Latin America, it is
increasingly difficult to sustain growth in operating income margins, and at some point
in the future we could experience decreasing operating income margins.
Growth in Net Income
We have generated growth in our net income as a consequence of the above mentioned
trends. In 2008, our net income was $18.8 million. For 2009 our net income grew 76.5% to
$33.2 million. For 2010, our net income grew 68.7% to $56.0 million. However, as
mentioned above, if any of these trends were to revert, our net income growth could be
affected, or could even become negative on a year-to-year basis.
Year ended December 31, 2010 compared to year ended December 31, 2009
Net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Change from |
|
|
|
December 31, |
|
|
2009 to 2010 (*) |
|
|
|
2010 |
|
|
2009 |
|
|
in Dollars |
|
|
in % |
|
|
|
(in millions, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Revenues |
|
$ |
216.7 |
|
|
$ |
172.8 |
|
|
$ |
43.9 |
|
|
|
25.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of net revenues (*) |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
(*) |
|
Percentages have been calculated using whole-dollar amounts rather than rounded
amounts that appear in the table. |
The 25.4% growth in net revenues from the year ended December 31, 2009 to the year
ended December 31, 2010 resulted principally from a 23.8% increase in the gross merchandise
volume (GMV) transacted through our platform from 2009 to 2010. In addition, US dollars
figures were positively impacted during this year mainly because of the appreciation of the
Brazilian Reais, which was partially offset by a decrease in US dollar revenues provided by
our Venezuelan subsidiaries as a consequence of the Venezuelan devaluation where we used to
report our results at the previous official exchange rate of 2.15 (for the first nine months
of 2009) and currently we are reporting it at 5.3. See Critical accounting policies and
estimates Foreign currency translation for more detail.
Measured in local currencies, net revenues grew 31.3% in the year ended December 31,
2010, compared to the same period in 2009. The local currency revenue growth was calculated
by using the average monthly exchange rates for each month during 2009 and applying them to
the corresponding months in 2010, so as to calculate what our financial results would have
been had exchange rates remained stable from one year to the next.
In addition, net revenues increased slightly due to an increase in our take rate, defined as
net revenues as a percentage of gross merchandise volume, from 6.3% for year ended December
31, 2009 to 6.4% for the year ended December 31, 2010.
61
The following table summarizes the changes in net revenues by segment for the years
ended December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Change from 2009 |
|
|
|
December 31, |
|
|
to 2010 (*) |
|
|
|
2010 |
|
|
2009 |
|
|
in Dollars |
|
|
in % |
|
|
|
(in millions, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brazil |
|
$ |
122.8 |
|
|
$ |
93.1 |
|
|
$ |
29.7 |
|
|
|
31.9 |
% |
Argentina |
|
|
39.9 |
|
|
|
26.7 |
|
|
|
13.2 |
|
|
|
49.2 |
% |
Venezuela |
|
|
20.9 |
|
|
|
27.3 |
|
|
|
(6.4 |
) |
|
|
-23.6 |
% |
Mexico |
|
|
19.0 |
|
|
|
15.3 |
|
|
|
3.6 |
|
|
|
23.7 |
% |
Other Countries |
|
|
14.2 |
|
|
|
10.4 |
|
|
|
3.8 |
|
|
|
36.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Revenues |
|
$ |
216.7 |
|
|
$ |
172.8 |
|
|
$ |
43.9 |
|
|
|
25.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*) |
|
Percentages have been calculated using whole-dollar amounts rather than rounded
amounts that appear in the table. |
On a segment basis, our net revenues for the year ended December 31, 2010 as
compared to the year ended December 31, 2009, increased across all segments except for
the Venezuelan segment which, measured in US dollars, decreased 23.6%. The decrease in
net revenues for the Venezuelan segment is attributable to the re-measurement of our
Venezuelan revenues as discussed above. In local currency, our revenues in Venezuela
grew 56.9% in the year ended December 31, 2010 compared to the same period a year
earlier.
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) (*) |
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues |
|
$ |
45.9 |
|
|
$ |
52.5 |
|
|
$ |
56.0 |
|
|
$ |
62.3 |
|
Percent change from
prior quarter |
|
|
-6 |
% |
|
|
14 |
% |
|
|
7 |
% |
|
|
11 |
% |
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues |
|
$ |
32.3 |
|
|
$ |
40.9 |
|
|
$ |
50.6 |
|
|
$ |
49.0 |
|
Percent change from
prior quarter |
|
|
-3 |
% |
|
|
27 |
% |
|
|
24 |
% |
|
|
-3 |
% |
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues |
|
$ |
28.8 |
|
|
$ |
34.5 |
|
|
$ |
40.3 |
|
|
$ |
33.4 |
|
Percent change from
prior quarter |
|
|
7 |
% |
|
|
20 |
% |
|
|
17 |
% |
|
|
-17 |
% |
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues |
|
$ |
16.5 |
|
|
$ |
19.0 |
|
|
$ |
22.8 |
|
|
$ |
26.9 |
|
Percent change from
prior quarter |
|
|
6 |
% |
|
|
15 |
% |
|
|
20 |
% |
|
|
18 |
% |
|
|
|
(*) |
|
Percentages have been calculated using whole-dollar amounts rather than rounded
amounts that appear in the table. |
The 2009 fourth quarter decrease in net revenues is a consequence of the change in
our Venezuelan translation rate from the official exchange rate of 2.15 to the parallel
exchange rate of 5.67. See Critical accounting policies and estimates Foreign
Currency Translation for more detail.
62
Cost of net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Change from |
|
|
|
December 31, |
|
|
2009 to 2010 (*) |
|
|
|
2010 |
|
|
2009 |
|
|
in Dollars |
|
|
in % |
|
|
|
(in millions, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of net revenues |
|
$ |
46.5 |
|
|
$ |
36.0 |
|
|
$ |
10.5 |
|
|
|
29.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of net
revenues (*) |
|
|
21.5 |
% |
|
|
20.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
(*) |
|
Percentages have been calculated using whole-dollar amounts rather than rounded
amounts that appear in the table. |
The increase in cost of net revenues was primarily attributable to a $5.4 million
increase in collection fees. The increase in collection fees, which occurred primarily
in Brazil and Argentina, was a result of the higher penetration of MercadoPago, our
payment solution, into our Marketplace, which has a higher collection fee cost. In
addition, sales taxes on our net revenues increased by $4.3 million, or 39.9% for the
year ended December 31, 2010, compared to the same period of 2009 as a consequence of
decreases in deductions we can compute with respect to our Brazilian sales taxes.
Moreover, during the year ended December 31, 2010 as compared to the same period in the
prior year, expenditures related to our in-house customer support operations increased
by $3.3 million primarily driven by an increase in compensation costs, recruitment,
investments in improved service and initiatives to combat fraud, illegal items and fee
evasion. The increase in our in-house customer support operations was partially offset
by a $2.7 million decrease in other costs mainly related to a charge attributable to the
re-measurement of the US dollar denominated expenses of our Venezuelan subsidiaries
during the first nine months of 2009. These expenses were re-measured at an average
parallel exchange rate of 6.3 Bolivares Fuertes per US dollar and translated at the
official exchange rate (2.15 Bolivares Fuertes per US dollar). We did not have any
similar re-measurement charge in 2010 (See Critical accounting policies and estimates
Foreign currency translation for more detail).
The cost of net revenues margin increased 70 basis points from 20.8% in 2009 to
21.5% in 2010 due the higher penetration of our Payment solution into our Marketplace.
Product and technology development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Change from 2009 |
|
|
|
December 31, |
|
|
to 2010 (*) |
|
|
|
2010 |
|
|
2009 |
|
|
in Dollars |
|
|
in % |
|
|
|
(in millions, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product and technology development |
|
$ |
15.9 |
|
|
$ |
12.1 |
|
|
$ |
3.8 |
|
|
|
30.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of net revenues (*) |
|
|
7.3 |
% |
|
|
7.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
(*) |
|
Percentages have been calculated using whole-dollar amounts rather than rounded
amounts that appear in the table. |
The growth in product and technology development expenses in 2010 as compared to
the same periods in 2009 was primarily attributable to an increase of $2.2 million or a
39.0% increase in compensation costs. These additional compensation expenses were
primarily related to the addition of engineers and, to a lesser extent, to increases in
salaries, as we continue to invest in top quality talent to develop enhancements and new
features across our platforms. We believe product development is one of our key
competitive advantages and intend to continue to invest in adding engineers to meet the
increasingly sophisticated product expectations of our customer base.
Product and technology development expenses also grew in 2010 as a consequence of
an increase in depreciation and amortization expenses related to product and technology
development of $0.8 million, or 30.3% compared to 2009 and an increase in maintenance
expenses of $0.5 million compared to 2009.
63
Sales and marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Change from 2009 |
|
|
|
December 31, |
|
|
to 2010 (*) |
|
|
|
2010 |
|
|
2009 |
|
|
in Dollars |
|
|
in % |
|
|
|
(in millions, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
$ |
48.9 |
|
|
$ |
42.9 |
|
|
$ |
6.0 |
|
|
|
14.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of
net revenues (*) |
|
|
22.6 |
% |
|
|
24.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
(*) |
|
Percentages have been calculated using whole-dollar amounts rather than rounded
amounts that appear in the table. |
The increase in sales and marketing expenses in 2010 when compared to the same
period in 2009 was primarily attributable to a $4.9 million increase in bad debt
charges. Bad debt charges for the year ended December 31, 2010 represented 6.9% of net
revenues versus 5.8% for the same period in 2009. In addition, sales and marketing
expenses also grew in 2010 due to a $1.2 million or 63.5% increase in other marketing
expenses related to our payments solution, a $0.9 million or 10.8% increase in
compensation costs driven by higher salaries to retain talent, and a $0.8 million
increase in trust and safety expenses due to the implementation of our buyer protection
program developed to compensate buyers for unfulfilled transactions or other claims
related to the quality of the purchased goods.
The increase in sales and marketing expenses for the year ended December 31, 2010
was partially offset by a $1.4 million decrease in our online advertising expenses
related to specific deals, as we have optimized investment allocation over the previous
year and also related to decreases in our affiliate program. Online advertising
represented 8.2% of our net revenues in the year ended December 31, 2010, down from
11.1% for the same period in 2009.
General and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Change from 2009 |
|
|
|
December 31, |
|
|
to 2010 (*) |
|
|
|
2010 |
|
|
2009 |
|
|
in Dollars |
|
|
in % |
|
|
|
(in millions, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
$ |
30.8 |
|
|
$ |
25.8 |
|
|
$ |
5.0 |
|
|
|
19.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of net
revenues (*) |
|
|
14.2 |
% |
|
|
15.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
(*) |
|
Percentages have been calculated using whole-dollar amounts rather than rounded
amounts that appear in the table. |
The increase in general and administrative expenses in 2010 as compared to the same
period of 2009, was primarily attributable to a $4.1 million increase in compensation
costs related to our long term retention plans, increases in salaries to retain talent,
to a $1.0 million increase in outside services mainly related to legal and tax fees and
to a $0.6 million increase in travel and accommodation and offices expenses. The
increase in general and administrative expenses was partially offset by a $0.9 million
decrease in other general and administrative expenses related to the re-measurement of
the US dollar denominated expenses of our Venezuelan subsidiaries at an average parallel
exchange rate of 6.3 Bolivares Fuertes per US dollar and the translation of these
expenses at the official exchange rate (2.15 Bolivares Fuertes per US dollar). We did
not have any similar translation effect due to the change in functional currency in the
year ended December 31, 2010 (See Critical accounting policies and estimates Foreign
currency translation for more detail).
64
Other income (expenses), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Change from 2009 |
|
|
|
December 31, |
|
|
to 2010 (*) |
|
|
|
2010 |
|
|
2009 |
|
|
in Dollars |
|
|
in % |
|
|
|
(in millions, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expenses) income |
|
$ |
(2.7 |
) |
|
$ |
(13.3 |
) |
|
$ |
10.6 |
|
|
|
-79.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of net
revenues |
|
|
-1.3 |
% |
|
|
-7.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
(*) |
|
Percentages have been calculated using whole-dollar amounts rather than rounded
amounts that appear in the table. |
The decrease in other expenses in 2010 was primarily a result of: (a) a $5.8
million decrease in financial expenses, as a consequence of a greater funding of working
capital needs for installment-related financing receivables related to our payment
solution in 2009, while during 2010 we pre-sold some of those installment related
receivables to better manage credit risk and (b) a $2.6 million decrease in foreign
currency losses. The decrease in foreign currency losses for the year ended December 31,
2010, was primarily due to losses in Brazil attributable to the impact of the local
currency appreciation on the cash balances held by those subsidiaries in US dollars
during the year ended December 31, 2009, versus a lesser impact in the same period of
2010.
In addition, interest income and other financial charges increased by $2.2 million
from $2.7 million in the year ended December 31, 2009 to $4.9 million in the same period
of 2010. These increases are mainly related to higher interest income earned on our
investments driven by higher interest rates and a greater volume of investments,
particularly in Brazil.
Income and asset tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Change from 2009 |
|
|
|
December 31, |
|
|
to 2010 (*) |
|
|
|
2010 |
|
|
2009 |
|
|
in Dollars |
|
|
in % |
|
|
|
(in millions, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income and asset tax |
|
|
15.8 |
|
|
|
9.5 |
|
|
|
6.3 |
|
|
|
66.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of
net revenues (*) |
|
|
7.3 |
% |
|
|
5.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
(*) |
|
Percentages have been calculated using whole-dollar amounts rather than rounded
amounts that appear in the table. |
The increase in our income and asset tax expense from the year ended December 31,
2009 to the same period in 2010 was primarily a result of increases in income tax
charges in Brazil and Argentina, driven by higher taxable income period over period
partially offset by a $4.6 million reversal of tax valuation allowance related to our
Brazilian subsidiaries. The reversal of the tax valuation allowance was derived from our
tax planning strategies implemented during the year which were designed to more
efficiently use our accumulated tax loss carryforward credits from acquired companies.
Our blended tax rate is defined as income and asset tax expense as a percentage of
income before income and asset tax. Our effective income tax rate is defined as the
provision for income taxes (net of charges related to dividend distribution from foreign
subsidiaries which are offset with domestic foreign tax credits) as a percentage of pre
tax income. The effective income tax rate excludes the effects of the deferred income
tax, and of the Mexican tax called Impuesto Empresarial a Tasa Única (IETU).
65
The following table summarizes the changes in our blended and effective tax
rate for the years ended December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
December 31, |
|
|
|
2010 |
|
2009 |
|
|
|
|
|
|
|
|
|
|
Blended tax rate |
|
|
22.0 |
% |
|
|
22.3 |
% |
Effective tax rate |
|
|
30.8 |
% |
|
|
26.9 |
% |
Year ended December 31, 2009 compared to year ended December 31, 2008
Net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Change from 2008 |
|
|
|
December 31, |
|
|
to 2009 |
|
|
|
2009 |
|
|
2008 |
|
|
in Dollars |
|
|
in % |
|
|
|
(in millions, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Revenues |
|
$ |
172.8 |
|
|
$ |
137.0 |
|
|
$ |
35.8 |
|
|
|
26.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues increased by 26.1% from 2008 to 2009. Measured in local
currencies, net revenues grew 42.6% in the year ended December 31, 2009 compared to
2008. The local currency revenue growth was calculated by using the average monthly
exchange rates for each month during 2008 and applying them to the corresponding months
in 2009, so as to calculate what our financial results would have been had exchange
rates remained stable from one year to the next.
The growth in net revenues from 2008 to 2009 resulted principally from a 32.3%
increase in the gross merchandise volume transacted through our platform, a 49.5%
increase in the total payments volume completed on our MercadoPago payments platform
partially offset by a decrease in our consolidted take rate, defined as net revenues as
a percentage of gross merchandise volume, from 6.6% for 2008 to 6.3% for 2009. The
decrease in take rate was principally due to (i) higher growth in our smaller country
operations that have a lower take rate, (ii) higher growth of final value listings as
compared to up-front fee listings, which have a marginally lower take rate and (iii) the
impact of currency devaluation on certain fixed components of our fee structure. In
addition, there was a 39.6% increase in our successful items sold, defined as the number
of items that were sold through the marketplace.
The following table summarizes the changes in net revenues by segment for the years
ended December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Change from 2008 |
|
|
|
December 31, |
|
|
to 2009 |
|
|
|
2009 |
|
|
2008 |
|
|
in Dollars |
|
|
in % |
|
|
|
(in millions, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues by Segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brazil |
|
$ |
93.1 |
|
|
$ |
73.7 |
|
|
$ |
19.4 |
|
|
|
26.3 |
% |
Venezuela |
|
|
27.3 |
|
|
|
23.1 |
|
|
|
4.2 |
|
|
|
18.2 |
% |
Argentina |
|
|
26.7 |
|
|
|
19.9 |
|
|
|
6.8 |
|
|
|
34.6 |
% |
México |
|
|
15.3 |
|
|
|
13.9 |
|
|
|
1.4 |
|
|
|
10.2 |
% |
Other Countries |
|
|
10.4 |
|
|
|
6.4 |
|
|
|
4.0 |
|
|
|
60.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Revenues |
|
$ |
172.8 |
|
|
$ |
137.0 |
|
|
$ |
35.8 |
|
|
|
26.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
66
On segment basis, our net revenues for the year ended December 31, 2009 as
compared to the same period ended December 31, 2008, increased across all geographies.
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) |
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues |
|
$ |
32.3 |
|
|
$ |
40.9 |
|
|
$ |
50.6 |
|
|
$ |
49.0 |
|
Percent change from prior quarter |
|
|
-3 |
% |
|
|
27 |
% |
|
|
24 |
% |
|
|
-3 |
% |
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues |
|
$ |
28.8 |
|
|
$ |
34.5 |
|
|
$ |
40.3 |
|
|
$ |
33.4 |
|
Percent change from prior quarter |
|
|
7 |
% |
|
|
20 |
% |
|
|
17 |
% |
|
|
-17 |
% |
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues |
|
$ |
16.5 |
|
|
$ |
19.0 |
|
|
$ |
22.8 |
|
|
$ |
26.9 |
|
Percent change from prior quarter |
|
|
6 |
% |
|
|
15 |
% |
|
|
20 |
% |
|
|
18 |
% |
The 2009 fourth quarter decrease in net revenues is a consequence of the change in
our Venezuelan translation rate from the official exchange rate of 2.15 to the parallel
exchange rate of 5.67. See Critical accounting policies and estimates Foreign
Currency Translation for more detail.
Cost of net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Change from 2008 |
|
|
|
December 31, |
|
|
to 2009 |
|
|
|
2009 |
|
|
2008 |
|
|
in Dollars |
|
|
in % |
|
|
|
(in millions, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of net revenues |
|
$ |
36.0 |
|
|
$ |
27.5 |
|
|
$ |
8.5 |
|
|
|
30.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of net revenues |
|
|
20.8 |
% |
|
|
20.1 |
% |
|
|
|
|
|
|
|
|
The increase in cost of net revenues was primarily attributable to additional
collections costs, sales taxes, other costs related to the re-measurement of the US
dollar denominated expenses of our Venezuelan subsidiaries and customer support
expenditures. The collections fees increased by $3.1 million, or 28.1% in 2009 compared
to 2008. Collections charges tend to increase at about the same pace as net revenues,
since most of the associated costs grow with our transaction volume. Taxes on our net
revenues increased by $2.6 million, or 31.5%. These taxes represented 6.2% of net
revenues in 2009. Other costs related to the re-measurement of the US dollar denominated
expenses of our Venezuelan subsidiaries increased by $1.5, or 528.8% for 2009 compared
to 2008. For the year ended December 31, 2009, these expenses were re-measured until
September 30, 2009 at an average parallel exchange rate of 6.15 Bolivares Fuertes per
U.S. dollar, then translated at the official exchange rate (2.15 Bolivares Fuertes per
U.S. dollar) and since October 1, 2009 were translated at the parallel exchange rate
(the average parallel exchange rate for the fourth quarter was 5.67 Bolivares Fuertes
per U.S. dollar). In 2008, the dollar denominated expenses of our Venezuelan
subsidiaries were measured at 2.15 Bolivares Fuertes per U.S. dollar and the
difference between the parallel exchange rate and the official exchange rate was
reflected on the foreign currency line whenever cash in Venezuela was transferred to the
U.S.
We also increased expenditures for our in-house customer support operations in the
amount of $1.6 million, an increase of 24.2% compared to 2008, as compensation costs
increased and we invested in improved service and initiatives to combat fraud, illegal
items and fee evasion. The cost of net revenues margin increase 0.7% from 20.1% in 2008
to 20.8% in 2009 due to a faster growth of our payment solution as compared to our
marketplace. Our payment solution has a lower gross profit margin than our Marketplace.
67
Product and technology development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Change from 2008 |
|
|
|
December 31, |
|
|
to 2009 |
|
|
|
2009 |
|
|
2008 |
|
|
in Dollars |
|
|
in % |
|
|
|
(in millions, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product and technology development |
|
$ |
12.1 |
|
|
$ |
7.3 |
|
|
$ |
4.8 |
|
|
|
66.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of net revenues |
|
|
7.0 |
% |
|
|
5.3 |
% |
|
|
|
|
|
|
|
|
The growth in product and technology development expenses was primarily
attributable to $1.8 million of expenses for certain income tax withholdings related to
our Argentine and Brazilian operations for the year ended December 31, 2009, and a $1.9
million or 49.4% increase in compensation costs for the year ended December 31, 2009
over the same period for 2008. These additional compensation expenses were primarily
related to the addition of engineers and, to a lesser extent, to increases in salaries,
as we continue to invest in top quality talent to develop enhancements and new features
across our platforms. We believe product development is one of our key competitive
advantages and intend to continue to invest in adding engineers to meet the increasingly
sophisticated product expectations of our customer base.
In addition, for the year ended December 31, 2009, product and technology
development expenses increased by $0.7 million, over the comparable period for 2008 due
to the re-measurement of the US dollar denominated expenses of our Venezuelan
subsidiaries. For the year ended December 31, 2009, these expenses were re-measured
until September 30, 2009 at an average parallel exchange rate of 6.15 Bolivares
Fuertes per U.S. dollar, then translated at the official exchange rate (2.15 Bolivares
Fuertes per U.S. dollar) until September 30, 2009 and since October 1, 2009 were
translated at the parallel exchange rate (the average parallel exchange rate for the
fourth quarter was 5.67 Bolivares Fuertes per U.S. dollar). In 2008, the dollar
denominated expenses of our Venezuelan subsidiaries were measured at 2.15 Bolivares
Fuertes per U.S. dollar and the difference between the parallel exchange rate and the
official exchange rate was reflected on the foreign currency line whenever cash in
Venezuela was transferred to the U.S.
Sales and marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Change from 2008 |
|
|
|
December 31, |
|
|
to 2009 |
|
|
|
2009 |
|
|
2008 |
|
|
in Dollars |
|
|
in % |
|
|
|
(in millions, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
$ |
42.9 |
|
|
$ |
40.0 |
|
|
$ |
2.9 |
|
|
|
7.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of net revenues |
|
|
24.8 |
% |
|
|
29.2 |
% |
|
|
|
|
|
|
|
|
Sales and marketing expenses increased by $2.0 million or 31.1%, due to increases
in salaries to retain talent. The increase in sales and marketing expense was also
related to a $1.7 million increase in expenses related to our affiliate program during
the year ended December 31, 2009 as compared to the previous year. Bad debt charges for
the year ended December 31, 2009, increased by $1.4 million from 2008, and represented
5.8% of net revenues in 2009, versus 6.3% for the same period in 2008. The increase in
sales and marketing expenses for the year ended December 31, 2009 was partially offset
by a $4.3 million decrease in our online advertising expenses related to strategic
deals, as we have found better rates at which to drive traffic to our sites over the
year ended December 31, 2009. The decrease in online advertising expense was partially
offset by an increase of $0.6 million related to off-line marketing expenses and a $1.5
million charge related to the re-measurement of the U.S. dollars denominated online
advertising expenses of our Venezuelan subsidiaries. For the year ended December 31,
2009, these expenses were re-measured until September 30, 2009 at an average parallel
exchange rate of 6.15 Bolivares Fuertes per U.S. dollar, then translated at the
official exchange rate (2.15 Bolivares Fuertes per U.S. dollar) and since October 1,
2009 were translated at the parallel exchange rate (the average parallel exchange rate
for the fourth quarter was 5.67 Bolivares Fuertes per U.S. dollar). In 2008, the
dollar denominated expenses of our Venezuelan subsidiaries were measured at 2.15
Bolivares Fuertes per U.S. dollar and the difference between the parallel exchange
rate and the official exchange rate was reflected on the foreign currency line whenever
cash in Venezuela was transferred to the U.S. Online advertising represented 11.1% of
our net revenues in the year ended December 31, 2009, down from 14.8% for 2008.
68
General and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Change from 2008 |
|
|
|
December 31, |
|
|
to 2009 |
|
|
|
2009 |
|
|
2008 |
|
|
in Dollars |
|
|
in % |
|
|
|
(in millions, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
$ |
25.8 |
|
|
$ |
22.8 |
|
|
$ |
3.1 |
|
|
|
13.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of net revenues |
|
|
15.0 |
% |
|
|
16.6 |
% |
|
|
|
|
|
|
|
|
The major component that drove the increase in general and administrative expenses
in 2009 was a $2.5 million charge related to the re-measurement of the US dollar
denominated expenses of our Venezuelan subsidiaries discussed in detail above and
certain income tax withholdings related to our Argentine and Brazilian operations. In
addition, general and administrative expenses grew as a consequence of an increase in
compensation costs of $1.8 million or 17.2% from 2008 to 2009. These added compensation
costs are primarily attributable to the 2008 and 2009 long term retention plan
compensation costs accrued in 2009 versus a lower impact in 2008, increases in salaries
to retain talent, hiring of more senior managers in Brazil and compensation for outside
directors.
The increase in general and administrative expenses was partially offset by a $0.8
million decrease of outside service fees attributable to decreased legal expenses
primarily in Brazil and the U.S. and decreased audit expenses and a $0.4 million
decrease in travel and accommodation expenses and other general and administrative
expenses.
Compensation cost related to acquisitions
As part of CMG acquisition, which closed in the first quarter of 2008, $2.0 million
of the purchase price was placed into an escrow account for twelve months in order to
secure the obligations of the shareholders that remained as managers. On June 27, 2008,
we released to the former shareholders $1.9 million of the total Management Escrow
Agreement, in exchange for a discount. This amount was recorded as operating expense,
instead of considering such payment as part of the purchase price (See note 6 to our
consolidated financial statements included in this report). The compensation expenses
related to the acquisition were fully accrued in the second quarter of 2008.
Other income (expenses), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Change from 2008 |
|
|
|
December 31, |
|
|
to 2009 |
|
|
|
2009 |
|
|
2008 |
|
|
in Dollars |
|
|
in % |
|
|
|
(in millions, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses) |
|
$ |
-13.3 |
|
|
$ |
-8.1 |
|
|
$ |
-5.2 |
|
|
|
64.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of net revenues |
|
|
-7.7 |
% |
|
|
-5.9 |
% |
|
|
|
|
|
|
|
|
The increase in other expenses during the year ended December 31, 2009 was
primarily a result of an increase in interest expense and other financial charges from
$8.5 million in 2008 to $13.4 million in 2009. The increase of interest expense was
mainly attributable to a $4.5 million increase in interest expenses from $7.2 million
for 2008 to $11.7 million for 2009, as a result of financing incurred to fund working
capital needs in our Payments operations in Brazil and to a $0.4 million increase from
$0.3 million in 2008 to $0.7 million in 2009 related to the seller financing of the
DeRemate acquisition. In addition, other expenses grew due to a $1.2 million increase in
foreign currency losses, from $1.5 million for 2008 to $2.7 million in 2009. The
increase in foreign currency losses was primarily due to losses in Brazil attributable
to the impact of the local currency appreciation on the cash balances held by our
Brazilian subsidiary in U.S. dollars.
The interest expense and foreign losses increases were partially offset by a $0.9
million increase in interest income and other financial charges to $2.7 million in 2009
from $1.8 million in 2008. The increase in interest income and other financial charges
are mainly attributable to interest income from our investments and also to accrued
gains related to changes in the fair value of put options.
69
Income and asset tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Change from 2008 |
|
|
|
December 31, |
|
|
to 2009 |
|
|
|
2009 |
|
|
2008 |
|
|
in Dollars |
|
|
in % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income and asset tax |
|
|
9.5 |
|
|
|
10.6 |
|
|
|
(1.1 |
) |
|
|
-10.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of net revenues |
|
|
5.5 |
% |
|
|
7.8 |
% |
|
|
|
|
|
|
|
|
The decrease in our Income and asset tax expense was driven by the reversal of
certain foreign and domestic valuation allowances for $4.1 million derived from our tax
planning strategies implemented during the year designed to more efficiently use our
accumulated tax loss carryforward credits from acquired companies. We are still
evaluating other tax planning strategies which at the date of this report are not
considered feasible. In addition, the decrease in our income and asset tax expense was a
consequence of a $0.3 million reduction of the impact of the Mexican tax called
Impuesto Empresarial a Tasa Única (IETU) from $0.8 million in 2008 to $0.5 million
in 2009. Additionally, in year ended December 31, 2008, part of the foreign exchange
losses in Venezuela were not deductible and our blended tax rate was impacted by $1.9
million of accrued compensation expenses related to CMG acquisition (See Compensation
Cost related to acquisitions above), as this charge reduced pre-tax income, but the
related tax credit had a full valuation allowance.
Our blended tax rate is defined as income and asset tax expense as a percentage of
income before income and asset tax. Our effective income tax rate is defined as the
provision for income taxes as a percentage of pre tax income. The effective income tax
rate excludes the effects of the deferred income tax, and of the IETU tax.
The following table summarizes the changes in our blended and effective tax rate
for the years ended December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Blended tax rate |
|
|
22.3 |
% |
|
|
36.1 |
% |
Effective tax rate |
|
|
26.9 |
% |
|
|
27.7 |
% |
Factors affecting results of operations and financial condition
Our total net assets balances as of December 31, 2010 have increased as compared
to December 31, 2009 as a result of our net income of the year in an amount of $56
million and other movements affecting Shareholders equity.
Assets and liabilities balances relating to operations have in general changed in
line and as a result of the increase in operations (transactions volume and total
value). Our GMV increased in 23.8%, successful items sold increased 33.1% and total
volume payments increased 82.3%.
Assets and liabilities that changed for other reasons apart from the general trend
of operations and non-operating assets and liabilities changes were:
|
|
|
Accounts receivables, net increased 159.2% mainly as a result of
a change in the billing cicle period. In 2009 we billed to customers on a
daily basis and in 2010 we billed to customers once a month. |
|
|
|
|
Other assets increased 123.8%, due to an increase in VAT related
to the possession of the office building in Argentina and an increase in
withholding taxes. |
|
|
|
|
Deferred income tax increased 234.1% mainly as a result of a
reversal of the valuation allowance to net operating loss carryforwards in
Brazil for an amount of 4.6 million. |
Our prospects must be considered in light of the risks, uncertainties, expenses and
difficulties frequently encountered by companies in new and rapidly evolving markets
such as online commerce and emerging markets like Latin America. To address these risks
and uncertainties, we must, among other things, maintain and increase the number of our
confirmed registered users, items listed on our service and completed transactions,
maintain and enhance our brand, implement and execute our business and marketing
strategy successfully, continue to develop and upgrade our technology and
information-processing systems, continue to enhance the MercadoLibre and MercadoPago
services to meet the needs of a changing market, provide superior customer service,
respond to competitive developments, and attract, integrate, retain and motivate
qualified personnel. Accordingly, we intend to invest heavily in marketing and
promotion, site development, technology and operating infrastructure development and
personnel. We cannot, however, assure you that we will be successful in accomplishing
all of these goals, and the failure to do so could have a material adverse effect on our
business, results of operations and financial condition.
70
Although we have experienced significant revenue growth and significant growth in
the number of our confirmed registered users and items listed by our users in recent
periods, such growth rates are not sustainable and will decrease in the future. In view
of the rapidly evolving nature of our business and our limited operating history, we
believe that period-to-period comparisons of our operating results are not necessarily
meaningful and should not be relied upon as indications of future performance.
Our operating results have varied on an annual basis during our short
operating history and may fluctuate significantly as a result of a variety of factors,
many of which are outside our control. The following list includes factors that may
affect our operating results:
|
|
|
continued growth of online commerce and Internet usage in Latin America; |
|
|
|
|
our ability to expand our operations and adapt to rapidly changing technologies; |
|
|
|
|
governmental regulation in the countries where we operate, including exchange controls; |
|
|
|
|
litigation, legal liability and intellectual property rights enforcement; |
|
|
|
|
system interruptions or failures; |
|
|
|
|
our ability to attract and retain qualified personnel; |
|
|
|
|
the announcement or introduction of new sites, services and products by us or our
competitors, and price competition; |
|
|
|
|
reliance on third-party service providers; |
|
|
|
|
increasing consumer confidence in and acceptance of the Internet and other online services
for commerce and, in particular, the trading of products such as those listed on our web
site; |
|
|
|
|
security breaches and consumer confidence in the security of transactions over the Internet; |
|
|
|
|
consumer trends and popularity of certain categories of items; |
|
|
|
|
our ability to attract new customers, retain existing customers and increase revenues; |
|
|
|
|
seasonal fluctuations; and |
|
|
|
|
political, social and economic conditions in Latin America, particularly Venezuela,
including foreign exchange rate fluctuations. |
Also see Item 1A Risk Factors for a discussion of material risks that could
adversely affect our results of operations.
Liquidity and capital resources
Our main cash requirement historically has been working capital to fund MercadoPago
financing operation in Brazil. We also require cash for capital expenditures relating to
technology infrastructure, software applications and office space and will in the future
require cash to pay dividends on shares of our common stock.
Since our inception, we have funded our operations primarily through contributions
received from our stockholders during the first two years of operations, from funds
raised during our initial public offering, and from cash generated from our operations.
We have funded MercadoPago by discounting credit card receivables, with loans backed
with credit card receivables and through cash advances derived from our business.
At December 31, 2010, our principal source of liquidity was $62.2 million of cash
and cash equivalents and short-term investments and $78.8 million of long-term
investments provided by cash generated from operations.
The significant components of our working capital are cash and cash equivalents,
short-term investments, accounts receivable, accounts payable and accrued expenses,
funds receivable from and payable to MercadoPago users, and short-term debt. As long as
we continue transferring credit card receivables to financial institutions in return for
cash, as we have done since the last quarter of 2008, we will continue generating cash.
71
In the event we change the way we manage our business, the working capital needs
could be funded, as we did in the past, through a combination of the sale of credit card
coupons to financial institutions, loans backed by credit card receivables and cash
advances from our business.
The following table presents our cash flows from operating activities, investing
activities and financing activities for the three years ended December 31, 2008, 2009
and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
(In millions) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Net cash provided by operating activities |
|
$ |
67.9 |
|
|
$ |
49.7 |
|
|
$ |
55.8 |
|
Net cash used in investing activities |
|
|
(58.8 |
) |
|
|
(3.1 |
) |
|
|
(38.9 |
) |
Net cash (used in) provided by financing activities |
|
|
(3.0 |
) |
|
|
(15.3 |
) |
|
|
(11.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash and cash equivalents |
|
|
0.9 |
|
|
|
1.0 |
|
|
|
(3.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase in cash and cash equivalents |
|
$ |
7.0 |
|
|
$ |
32.3 |
|
|
$ |
1.8 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
Change from 2009
to 2010 |
|
|
|
2010 |
|
|
2009 |
|
|
in Dollars |
|
|
in % |
|
|
|
(in millions, except percentages) |
|
|
|
(*) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash provided by: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
67.9 |
|
|
$ |
49.7 |
|
|
$ |
18.2 |
|
|
|
36.6 |
% |
(*) |
|
Percentages have been calculated using whole-dollar amounts rather than rounded amounts
that appear in the table. |
The $18.2 million increase in net cash provided by operating activities during the
year ended December 31, 2010 compared to the same period in 2009 was mainly attributable
to a $22.8 million increase in net income. Additionally, net cash provided by operating
activities was impacted by a $1.0 million increase in changes in accounts payable and
other liabilities related to our Brazilian and Argentine operations and a $1.7 million
increases in working capital related to our Payment solution, derived mostly from
increases of funds payable to customers due to a higher amount of transactions in 2010.
These increases in cash provided by operations were partially offset by
a $4.1 million increase in changes in account receivables in the year ended December 31,
2010 versus the same period of 2009, and a $3.4 million increase in non-cash gains such
as deferred income tax charges related to the reversal of our Brazilian tax valuation
allowance (See Income and Asset tax for more detail).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Change from 2008 |
|
|
|
December 31, |
|
|
to 2009 |
|
|
|
2009 |
|
|
2008 |
|
|
in Dollars |
|
|
in % |
|
|
|
(in millions, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash provided by: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
49.7 |
|
|
$ |
55.8 |
|
|
$ |
-6.1 |
|
|
|
-10.9 |
% |
The decrease in net cash provided by operating activities during the year ended December
31, 2009 was mainly attributable to a $17.4 million decreases in working capital in our
Payments segment, derived mostly from the sale of credit cards receivables to financial
institutions and increases of funds payable to customers due to a higher amount of
transactions in 2009. Net cash provided by operating activities in 2008 included
approximately $35 million mostly related to the one-off effect of discounting previous
quarters MercadoPago credit cards receivables in October. Net cash provided by operating
activities also decreased due to a $7.0 million increase in accounts receivable, a $2.4
million decrease in other liabilities and a $1.9 million decrease in accounts payable
and accrued expenses.
72
These decreases in cash provided by operations were partially offset by a $14.4 million
increase in net income. In addition, cash provided by operations in 2008 was affected by
the decrease in non-cash charges to earnings such as foreign currency gains of $7.8
million related to our Venezuelan cash and cash equivalents and investments (See Item
7. Managements Discussion and Analysis of Financial Condition and Results of Operations
Year ended December 31, 2008 compared to year ended December 31, 2007 Other income
(expenses), and Note 5 Other Non Current Assets to our consolidated financial
statements for more detail).
Net cash used in investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
Change from 2009
to 2010 |
|
|
|
2010 |
|
|
2009 |
|
|
in Dollars |
|
|
in % |
|
|
|
(in millions, except percentages) |
|
|
|
(*) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash used in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities |
|
$ |
(58.8 |
) |
|
$ |
(3.1 |
) |
|
$ |
(55.7 |
) |
|
|
1806.3 |
% |
|
|
|
(*) |
|
Percentages have been calculated using whole-dollar amounts rather than rounded amounts
that appear in the table. |
Net cash used in investing activities in the year ended December 31, 2010 resulted
mainly from purchases of investments for $121.3 million. Additionally, we used $13.6
million of cash in the year ended December 31, 2010 to make capital expenditures related
to technological equipment, software licenses and new office space and office equipment
in Argentina. During the year ended December 31, 2010, the increase in cash used in
investment activities was partially offset by proceeds from the sale and maturity of
$76.1 million of investments as part of our financial strategy.
As of December 31, 2009, net cash used in investing activities resulted primarily
from purchases of investments for $80.1 million. Additionally, in the year ended
December 31, 2009, we used $4.8 million of cash for capital expenditures related to
technological equipment, software licenses and, to a lesser degree, office equipment.
During the year ended December 31, 2009, the increase in cash used in investment
activities was partially offset by proceeds from the sale and maturity of $81.7 million
of investments as part of our financial strategy.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Change from 2008 |
|
|
|
December 31, |
|
|
to 2009 |
|
|
|
2009 |
|
|
2008 |
|
|
in Dollars |
|
|
In % |
|
|
|
(in millions, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash (used in) provided by: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment activities |
|
$ |
(3.1 |
) |
|
$ |
(38.9 |
) |
|
$ |
35.8 |
|
|
|
-92.1 |
% |
Net cash used in investing activities in 2009 resulted from $4.8 million of cash in
the year ended December 31, 2009 to make capital expenditures related to technological
equipment, software licenses and to a lesser degree office equipment. Additionally,
purchases of investments for $80.1 million were offset by proceeds from the sale and
maturity of investments for $81.7 million as part of our financial strategy.
73
As of December 31, 2008, net cash used in investing activities resulted primarily
from the payments for CMG and DeRemate acquisitions, net of cash acquired for $39.2
million. The purchase of DeRemate includes the fair value of the assets and liabilities
acquired of $(0.8) million, customer lists and non-compete agreement net of tax of $1.2
million and goodwill of $39.6 million. The related DeRemate acquisition outflow on our
statement of cash flow does not include $18.0 million of promissory notes issued to the
seller. The purchase of 100% of the issued and outstanding shares of capital stock of
CMG includes the fair value of the assets and liabilities acquired of $0.7 million,
trademarks of $5.6 million and goodwill of $13.0 million. The outflow shown in our
statement of cash flow is net of $(0.5) million of cash acquired and does not consider
$1.9 million recorded as compensation expense and not as part of the purchase price (See
Note 6 to our consolidated financial statements and Compensation Cost related to
acquisitions above). Additionally, purchases of investments accounted for $110.1
million of cash used in investing activities during the year ended December 31, 2008, as
part of our financial investment strategy and capital expenditures of $5.0 million. This
consumption of cash was partially offset during the first nine months of 2008 by
proceeds from the sale of investments for $115.3 million also part of our financial
strategy.
Net cash used in financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
Change from 2009 to 2010 |
|
|
|
2010 |
|
|
2009 |
|
|
in Dollars |
|
|
in % |
|
|
|
(in millions, except percentages) |
|
|
|
(*) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash used in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities |
|
$ |
(3.0 |
) |
|
$ |
(15.3 |
) |
|
$ |
12.3 |
|
|
|
-80.5 |
% |
|
|
|
(*) |
|
Percentages have been calculated using whole-dollar amounts rather than rounded amounts that appear in the table. |
For the year ended December 31, 2010, our primary use of cash for
financing activities was a reduction in short term debt as we paid $3.2 million of notes
outstanding which were issued in connection with the DeRemate acquisition. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Change from 2008 |
|
|
|
December 31, |
|
|
to 2009 |
|
|
|
2009 |
|
|
2008 |
|
|
in Dollars |
|
|
in % |
|
|
|
(in millions, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash used in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities |
|
$ |
(15.3 |
) |
|
$ |
(11.7 |
) |
|
$ |
(3.6 |
) |
|
|
31.2 |
% |
For the year ended December 31, 2009, our primary use of cash for financing
activities was related to a reduction in short term debts related to a $15.0 million
payment of DeRemate acquisition seller financing. For the year ended December 31, 2008,
our primary use of cash for financing activities was a reduction in our financing from
loans backed by Payments credit card receivables. Since the fourth quarter of 2008, we
began to sell all the credit card coupons related to Funds Receivable from Customers
in our MercadoPago business to financial institutions and accounted for as a sale of
financial assets. For that reason we no longer recognized the credit card portfolio as
assets and no liability was recorded. The difference in the accounting treatment
generates a decrease in net cash used in financing activities.
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.
74
Debt
In connection with the DeRemate acquisition, on September 5, 2008, we issued to the
seller ten unsecured promissory notes in the aggregate principal amount of $18 million.
On June 3, 2009, August 31, 2009, December 4, 2009 and March 4, 2010, we paid the Sellers
$3.1 million, $9.5 million, $3.0 million and $3.2 million, respectively, in full
repayment of all outstanding principal and accrued interest. As of December 31, 2010, we
have no debt outstanding related to DeRemate acquisition.
As of December 31, 2009 the outstanding balance of the promissory notes was
disclosed in our balance sheet for $3.0 million as principal and $0.2 million as
interest accrued.
As of December 31, 2010, our outstanding debt of $0.2 million is related to an
Argentine car lease contract. See Contratual obligations for more detail.
Cash Dividends
In February 2011, our board of directors declared our first quarterly cash dividend
in our history of $3.5 million on our outstanding shares of common stock. The dividend
is payable on April 15, 2011 to stockholders of record as of the close of business on
March 31, 2011. We currently expect to continue paying comparable cash dividends on a
quarterly basis. However, any future determination as to the declaration of dividends
on our common stock will be made at the discretion of our board of directors.
Capital expenditures
Our capital expenditures increased $8.8 million, to $13.6 million in 2010 as
compared to $4.8 million in 2009. The Company increased the level of investment on
hardware and software licenses necessary to increased and update the technology of our
platform, cost of computer software developed internally and office equipment and new
office space in Argentina and Brazil. We anticipate continued investments in capital
expenditures in the future as we strive to maintain our position in the Latin American
e-commerce market.
In 2008, our Argentine subsidiary invested in a real estate trust. The investment
in this trust represents a beneficial ownership interest in 5,340 square meters divided
in five floors of an office building and 70 parking spots under construction in the City
of Buenos Aires, Argentina, where we expect to relocate our office headquarters upon
completion of the building. As of December 31, 2010, the Argentine subsidiary has paid
$8.9 million into the trust and is expected to invest an additional $0.1 million in
order to cover higher construction costs in January 2011. Certain of our officers and
former officers also entered into an investment in a portion of the trust, which
investment represents a beneficial ownership interest in a separate floor of the same
building. We do not intend to occupy the space to be owned by this group. For US GAAP
purposes, the investment was recorded as a long term investment instead of as Property
and Equipment through the second quarter of 2010. Since August 31, 2010, this investment
is accounted for as Property and Equipment because our Argentine subsidiary received
the certificate of possession of the building and started incurring in additional cost
in order to bring the building into conditions of being used.
We believe that our existing cash and cash equivalents, including the sale of
credit card receivables and cash generated from operations will be sufficient to fund
our operating activities, property and equipment expenditures and to pay or repay
obligations going forward.
Off-balance sheet arrangements
At December 31, 2010, we did not have any off-balance sheet arrangements or
relationships with unconsolidated entities for the purpose of facilitating contractually
narrow or limited purposes.
Contractual obligations
We have certain fixed contractual obligations and commitments that include future
estimated payments. Changes in our business needs, cancellation provisions and other
factors may result in actual payments differing materially from the estimates. We cannot
provide certainty regarding the timing and amount of payments. Below is a summary of the
most significant assumptions used in our determination of amounts presented in the
table. Contractual obligations at December 31, 2010 are as follows:
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|
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|
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|
|
|
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|
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Payment due by period |
|
|
|
|
|
|
|
Less than |
|
|
1 to 3 |
|
|
3 to 5 |
|
|
More than |
|
(in millions) |
|
Total |
|
|
1 year |
|
|
Years |
|
|
years |
|
|
5 years |
|
Capital lease obligations (1) |
|
$ |
0.3 |
|
|
$ |
0.1 |
|
|
$ |
0.2 |
|
|
$ |
|
|
|
$ |
|
|
Operating lease obligations (2) |
|
|
4.3 |
|
|
|
1.7 |
|
|
|
1.8 |
|
|
|
0.7 |
|
|
|
0.1 |
|
Purchase obligations |
|
|
4.6 |
|
|
|
4.2 |
|
|
|
0.4 |
|
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|
|
|
|
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|
|
|
|
|
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
Total |
|
$ |
9.2 |
|
|
$ |
6.0 |
|
|
$ |
2.4 |
|
|
$ |
0.7 |
|
|
$ |
0.1 |
|
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|
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(1) |
|
On February 22, 2010, our Argentina subsidiary signed a Company
car lease contract to buy 12 cars for certain employees of the
Company. The total lease contract amounts to $0.4 million and
matures in July 2013. |
|
(2) |
|
Includes leases of office space. |
75
We have leases for office space in certain countries in which we operate and leases
for Company cars in Argentina. These are our only operating leases. Purchase obligation
amounts include a purchase obligation in the real estate trust for our new Argentina
office space, minimum purchase commitments for advertising, capital expenditures
(technological equipment and software licenses) and other goods and services that were
entered into in the ordinary course of business. We have developed estimates to project
payment obligations based upon historical trends, when available, and our anticipated
future obligations. Given the significance of performance requirements within our
advertising and other arrangements, actual Payments could differ significantly from these
estimates.
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ITEM 7A. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are exposed to market risks arising from our business operations. These market
risks arise mainly from the possibility that changes in interest rates and the US dollar
exchange rate with local currencies, particularly the Brazilian reais due to Brazils
share of our revenues, may affect the value of our financial assets and liabilities.
Foreign Currencies Risk
At December 31, 2010, 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 local
currency. As a result, our subsidiaries use their local currency as their functional
currency, except for our Venezuelan subsidiaries which functional currency is the US
dollar due to a highly inflationary accounting. At December 31, 2010, the total cash and
cash equivalents denominated in foreign currencies totaled $26.7 million, short-term
investments denominated in foreign currencies totaled $4.9 million, long-term investments
denominated in foreign currencies totaled $40.4 million and accounts receivable and funds
receivable from customers in foreign currencies totaled $18.6 million. To manage exchange
rate risk, our treasury policy is to transfer most cash and cash equivalents in excess of
working capital requirements into dollar-denominated accounts in the United States. At
December 31, 2010, our dollar-denominated cash and cash equivalents and short-term
investments totaled $30.5 million and our dollar-denominated long-term investments
totaled $38.4 million. For the year ended December 31, 2010, we incurred foreign currency
losses in the amount of $0.1 million as the cash and investment balances of the
subsidiaries held in US dollars depreciated in local current terms. (See Management
Discussion and Analysis of Financial Condition and Results of Operations Results of
operations for the Year ended December 31, 2010, compared to year ended December 31, 2009
Other income (expenses) for more detail).
In accordance with US GAAP, we have transitioned our Venezuelan operations to highly
inflationary status as of January 1, 2010 and have been using the US dollar as the
functional currency for these operations since then. In accordance with US GAAP,
translation adjustments for prior periods were not removed from equity and the translated
amounts for nonmonetary assets at December 31, 2009, become the accounting basis for
those assets. Monetary assets and liabilities in Bolivares Fuertes were re-measured to
the US dollar at the closing parallel exchange rate and the results of the operations in
Bolivares Fuertes were re-measured to the US Dollars at the average monthly parallel
exchange rate up to May 13, 2010.
However, on May 14th, 2010, the Venezuelan government enacted reforms to its
exchange regulations and closed down the parallel market by declaring that
foreign-currency-denominated securities issued by Venezuelan entities were included in
the definition of foreign currency, thus making the Venezuelan Central Bank (BCV) the
only institution that could legally authorize the purchase or sale of foreign currency
bonds, thereby excluding non-authorized brokers from the foreign exchange market.
Trading of foreign currencies was re-opened as a regulated market on June 9, 2010
with the BCV as the only institution through which foreign currency-denominated
transactions can be brokered. Under the new system, known as the Foreign Currency
Securities Transactions System (SITME), entities domiciled in Venezuela can buy US
dollardenominated securities only through banks authorized by the BCV to import goods,
services or capital inputs. Additionally, the SITME imposes volume restrictions on an
entitys trading activity, limiting such activity to a maximum equivalent of $50,000 per
day, not to exceed $350,000 in a calendar month. This limitation is non-cumulative,
meaning that an entity cannot carry over unused volume from one month to the next.
76
As a consequence of this new system, commencing on June 9, 2010, we have
transitioned from the parallel exchange rate to the SITME rate and started re-measuring
foreign currency transactions using the SITME rate published by BCV, which was 5.27
Bolivares Fuertes per US dollar as of June 9, 2010.
For the period beginning on May 14, 2010 and ending on June 8, 2010 (during which
there was no open foreign currency markets) we applied US GAAP guidelines which state
that if exchangeability between two currencies is temporarily lacking at the transaction
date or balance sheet date, the first subsequent rate at which exchanges could be made
shall be used.
Accordingly, the June 9, 2010 exchange rate published by the Venezuelan Central Bank
has been used to re-measure transactions during the abovementioned period.
If the US dollar weakens against foreign currencies, the translation of these
foreign-currency-denominated transactions will result in increased net revenues,
operating expenses, and net income while the re-measurement of our net asset position in
US dollars will have a negative impact in our Statement of Income. Similarly, our net
revenues, operating expenses and net income will decrease if the US dollar strengthens
against foreign currencies, while the re-measurement of our net asset position in US
dollars will have a positive impact in our Statement of Income. During the year ended
December 31, 2010, 56.7% of our revenues were denominated in Brazilian reais, 18.4% in
Argentine pesos, 9.6% in Venezuelan Bolivares Fuertes, 8.8% in Mexican pesos and 6.5%
in the currency of other countries.
The following table summarizes the distribution of net revenues by segment:
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|
|
|
|
|
|
|
|
Year ended December 31, |
|
(In millions) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(in millions, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Brazil |
|
$ |
122.8 |
|
|
$ |
93.1 |
|
|
$ |
73.7 |
|
Argentina |
|
|
39.9 |
|
|
|
26.7 |
|
|
|
19.9 |
|
Venezuela |
|
|
20.9 |
|
|
|
27.3 |
|
|
|
23.1 |
|
Mexico |
|
|
19.0 |
|
|
|
15.3 |
|
|
|
13.9 |
|
Other Countries |
|
|
14.2 |
|
|
|
10.4 |
|
|
|
6.4 |
|
|
|
|
|
|
|
|
|
|
|
Total Net Revenues |
|
$ |
216.7 |
|
|
$ |
172.8 |
|
|
$ |
137.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*) |
|
Percentages have been calculated using whole-dollar amounts rather than rounded
amounts that appear in the table. |
The table above may not total due to rounding.
77
The table below shows the impact on the Companys Net Revenues, Expenses,
Other income and Income tax, Net Income and Shareholders Equity for a positive or
negative 10% fluctuation on all the foreign currencies to which we are exposed as of
December 31, 2010 and for the year ended December 31, 2010:
Foreign Currency Sensitivity Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
-10% |
|
|
Actual |
|
|
+10% |
|
|
|
(1) |
|
|
|
|
|
(2) |
|
Net revenues |
|
|
240.7 |
|
|
|
216.7 |
|
|
|
197.1 |
|
Expenses |
|
|
(157.7 |
) |
|
|
(142.1 |
) |
|
|
(129.3 |
) |
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
82.9 |
|
|
|
74.6 |
|
|
|
67.8 |
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses) and income tax related to P&L items |
|
|
(20.6 |
) |
|
|
(18.5 |
) |
|
|
(16.9 |
) |
Foreign
Currency impact related to the remeasurement of our Net Asset position
|
|
|
(8.7 |
) |
|
|
(0.1 |
) |
|
|
7.1 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
53.7 |
|
|
|
56.0 |
|
|
|
57.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Shareholders Equity |
|
|
177.6 |
|
|
|
171.7 |
|
|
|
166.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Apreciation of the subsidiaries local currency against U.S. Dollar |
|
(2) |
|
Depreciation of the subsidiaries local currency against U.S. Dollar |
The table above may not total due to rounding.
The table above shows a decrease in our net income when the U.S. dollar weakens
against foreign currencies because the re-measurement of our net asset position in US
dollars has a greater impact than the increase in net revenues, operating expenses, and
other income (expenses) and income tax lines related to the translation effect.
Similarly, the table above shows an increase in our net income when the U.S. dollar
strengthens against foreign currencies because the re-measurement of our net asset
position in US dollars has a greater impact than the decrease in net revenues, operating
expenses, and other income (expenses) and income tax lines related to the translation
effect.
In the past we have entered into transactions to hedge portions of our foreign
currency translation exposure but during 2010 we did not enter into any such agreement.
Interest Rate Risk
Our earnings and cash flows are also affected by changes in interest rates. These
changes can have an impact on our interest expenses derived from selling our MercadoPago
receivables. At December 31, 2010, MercadoPago funds receivable from customers totaled
approximately $6.2 million. Interest fluctuations could also negatively affect certain of
our fixed rate and floating rate investments comprised primarily of time deposits, money
market funds, investment grade corporate debt securities, and sovereign debt securities.
Investments in both fixed rate and floating rate interest earning products carry a degree
of interest rate risk. Fixed rate securities may have their fair market value adversely
impacted due to a rise in interest rates, while floating rate securities may produce less
income than predicted if interest rates fall.
Under our current policies, we do not use interest rate derivative instruments to
manage exposure to interest rate changes. Because to all our long-term investments do not
exceed a two year period, a 100 basis point movement in market interest rates would not
have a material impact on the total fair market value of our portfolio as of December 31,
2010 or the cost derived from discounting our MercadoPago receivables.
Our short-term and long-term investments, which are classified on our balance sheet
as current assets in the amount of $5.3 million and as non-current assets in the amount
of $78.8 million, respectively, 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. Time deposits are considered held-to-maturity
securities. The book value of held-to-maturity securities approximates their respective
fair values and consequently there are no significant unrecognized gains or losses.
78
Equity Price Risk
Our board of directors adopted the 2009 long-term retention plan (the 2009 LTRP)
payable as follows:
|
|
|
the eligible employee will receive a fixed cash payment
equal to 6.25% of his or her 2009 LTRP bonus once a year for
a period of eight years starting in 2010 (the 2009 Annual
Fixed Payment); and |
|
|
|
|
on each date we pay the Annual Fixed Payment to an eligible
employee, he or she will also receive a cash payment (the
2009 Variable Payment) equal to the product of (i) 6.25%
of the applicable 2009 LTRP bonus and (ii) the quotient of
(a) divided by (b), where (a), the numerator, equals the
Applicable Year Stock Price (as defined below) and (b), the
denominator, equals the 2008 Stock Price, defined as $13.81,
which was the average closing price of the Companys common
stock on the NASDAQ Global Market during the final 60
trading days of 2008. The Applicable Year Stock Price
shall equal the average closing price of the Companys
common stock on the NASDAQ Global Market during the final 60
trading days of the year preceding the applicable payment
date. |
In addition, on June 25, 2010, our board of directors adopted the 2010 Long Term Retention
Plan (the 2010 LTRP), payable as follows:
|
|
|
the eligible employee will receive a fixed cash payment
equal to 6.25% of his or her 2010 LTRP bonus once a year for
a period of eight years starting in 2011 (the 2010 Annual
Fixed Payment); and |
|
|
|
|
on each date the Company pays the Annual Fixed Payment to an
eligible employee, he or she will also receive a cash
payment (the 2010 Variable Payment) equal to the product
of (i) 6.25% of the applicable 2010 LTRP bonus and (ii) the
quotient of (a) divided by (b), where (a), the numerator,
equals the Applicable Year Stock Price and (b), the
denominator, equals the 2009 Stock Price, defined as $45.75,
which was the average closing price of the Companys common
stock on the NASDAQ Global Market during the final 60
trading days of 2009. The Applicable Year Stock Price
shall equal the average closing price of the Companys
common stock on the NASDAQ Global Market during the final 60
trading days of the year preceding the applicable payment
date. |
The 2009 and 2010 Variable Payment LTRP liability subjects us to equity price risk. At
December 31, 2010, the total contractual obligation fair value of our 2009 and 2010 Variable
Payment LTRP liability amounts to $9,379,227. As of December 31, 2010, the accrued liability
related to the 2009 and 2010 Variable Payment portion of the LTRP included in Social
security payable in our consolidated balance sheet amounts to $3,608,647. The following
table shows a sensitivity analysis of the risk associated with our total contractual
obligation related to the 2009 and 2010 variable payment if our stock price were to
increases or decreases by up to 40%.
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010 |
|
|
|
|
MercadoLibre, Inc |
|
|
2009 and 2010 variable |
|
(In US dollars) |
|
|
Equity Price |
|
|
LTRP liability |
|
Change in equity
price in percentage |
|
|
|
|
|
|
|
|
|
40% |
|
|
|
91.58 |
|
|
|
13,130,918 |
|
30% |
|
|
|
85.04 |
|
|
|
12,192,995 |
|
20% |
|
|
|
78.50 |
|
|
|
11,255,072 |
|
10% |
|
|
|
71.96 |
|
|
|
10,317,150 |
|
Static
(*) |
|
|
|
65.41 |
|
|
|
9,379,227 |
|
-10% |
|
|
|
58.87 |
|
|
|
8,441,304 |
|
-20% |
|
|
|
52.33 |
|
|
|
7,503,382 |
|
-30% |
|
|
|
45.79 |
|
|
|
6,565,459 |
|
-40% |
|
|
|
39.25 |
|
|
|
5,627,536 |
|
|
|
|
(*) |
|
Average closing stock price for the last 60 trading days of the closing date |
|
|
|
ITEM 8. |
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The consolidated financial statements and accompanying notes listed in Part IV,
Item 15(a)(1) of this report are included elsewhere in this report and incorporated
herein by reference.
|
|
|
ITEM 9. |
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES |
Not applicable.
79
|
|
|
ITEM 9A. |
|
CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
Based on the evaluation of our disclosure control and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
Exchange Act)) as of the end of the period covered by this report, our Chief Executive
Officer and our Chief Financial Officer have concluded that our disclosure controls and
procedures are effective to provide reasonable assurance that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is recorded,
processed, summarized, and reported within the time periods specified in SEC rules and
forms, and is accumulated and communicated to management as appropriate to allow timely
decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal controls over financial reporting as defined
in Exchange Act Rule 13a-15(f) that occurred during our most recently completed fiscal
quarter that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
Managements Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) to provide reasonable assurance regarding the reliability of our financial
reporting and the preparation of financial statements for external purposes in
accordance with U.S. generally accepted accounting principles.
Our management, including our Chief Executive Officer and our Chief Financial
Officer, conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Managements assessment included evaluation of elements such as the design and operating
effectiveness of key financial reporting controls, process documentation, accounting
policies, and our overall control environment. Based on its evaluation under the
framework in Internal Control Integrated Framework, our management concluded that our
internal control over financial reporting was effective as of December 31, 2010 to
provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external reporting purposes in accordance with
U.S. generally accepted accounting principles. We reviewed the results of managements
assessment with the Audit Committee of our Board of Directors.
The effectiveness of our internal control over financial reporting as of December
31, 2010 has been audited by Deloitte & Co. S.R.L., an independent registered public
accounting firm, as stated in their report which appears in Item 15(a) of this Annual
Report on Form 10-K.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure controls or our internal control over financial
reporting will prevent or detect all error and all fraud. A control system, no matter
how well designed and operated, can provide only reasonable, not absolute, assurance
that the control systems objectives will be met. The design of a control system must
reflect the fact that there are resource constraints, and the benefits of controls must
be considered relative to their costs. Further, because of the inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance that
misstatements due to error or fraud will not occur or that all control issues and
instances of fraud, if any, have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty and that breakdowns can occur
because of simple error or mistake. Controls can also be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management override of
the controls. The design of any system of controls is based in part on certain
assumptions about the likelihood of future events, and there can be no assurance that
any design will succeed in achieving its stated goals under all potential future
conditions. Projections of any evaluation of controls effectiveness to future periods
are subject to risks. Over time, controls may become inadequate because of changes in
conditions or deterioration in the degree of compliance with policies or procedures.
|
|
|
ITEM 9B. |
|
OTHER INFORMATION |
Not applicable.
80
PART III
|
|
|
ITEM 10. |
|
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The information required by this item is included in our Proxy Statement for our
2011 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the
end of the fiscal year ended December 31, 2010 (the 2011 Proxy Statement) and is
incorporated herein by reference.
|
|
|
ITEM 11. |
|
EXECUTIVE COMPENSATION |
The information required by this item is included in the 2011 Proxy Statement and
is incorporated herein by reference.
|
|
|
ITEM 12. |
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDERS MATTERS |
Except as set forth below, the information required by this item is included in the
2011 Proxy Statement and is incorporated herein by reference.
The following table represents information as of December 31, 2010 with respect to
equity compensation plans under which shares of the Companys common stock are
authorized for issuance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Compensation Plan Information |
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
|
|
|
|
|
securities |
|
|
|
|
|
|
|
|
|
|
|
remaining |
|
|
|
|
|
|
|
|
|
|
|
available for |
|
|
|
|
|
|
|
|
|
|
|
future issuance |
|
|
|
Number of |
|
|
|
|
|
|
under |
|
|
|
securities |
|
|
|
|
|
|
equity |
|
|
|
to be issued |
|
|
|
|
|
|
compensation |
|
|
|
upon exercise |
|
|
|
|
|
|
plans |
|
|
|
of outstanding |
|
|
Weighted-average |
|
|
(excluding |
|
|
|
options, |
|
|
exercise price of |
|
|
securities |
|
|
|
Warrants and |
|
|
outstanding options, |
|
|
reflected in |
|
Plan Category |
|
Rights |
|
|
Warrants and rights |
|
|
column (a)) |
|
|
|
(a) |
|
|
(b) |
|
|
(c) |
|
Equity compensation plans approved by security holders (1) |
|
|
|
|
|
|
|
|
|
|
279,893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not approved by security holders(2) |
|
|
11,763 |
|
|
|
1.69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
11,763 |
|
|
|
1.69 |
|
|
|
279,893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents our 2009 Equity Compensation which was approved by our
stockholders on June 10, 2009 |
|
(2) |
|
Our Amended and Restated 1999 Stock Option and Restricted Stock
Plan was entered into prior to our IPO. |
Description of Amended and Restated 1999 Stock Option and Restricted Stock Plan
Our Amended and Restricted 1999 Stock Option and Restricted Stock Plan (the Stock
Option Plan) was adopted by the Board on November 3, 1999. The Stock Option Plan
provides for the grant of incentive stock options, within the meaning of Section 422 of
the Internal Revenue Code of 1986, as amended (the Internal Revenue Code), to our
employees, and non-qualified stock options and restricted stock to our employees,
directors, agents, advisors, independent consultants and contractors. Incentive stock
options and non-qualified stock options are referred to as stock options, and together
with restricted stock are referred to as awards. The Stock option Plan expired on
November 3, 2009 and as a result, no new awards may be made under this plan. However,
any outstanding awards at the expiration shall remain in effect until the earlier of the
exercise, termination or expiration of such outstanding awards. At December 31, 2010,
options to purchase a total of 11,763 shares of common stock were outstanding under the
Stock Option Plan at a weighted average price of $1.69 per share.
81
Number of shares of common stock available under the stock option plan. A total of
4,732,400 shares of common stock were reserved for issuance pursuant to the Stock Option
Plan. Shares covered by awards that are forfeited or terminated without exercise will be
available for future awards. The shares of common stock issuable under the Stock Option
Plan shall be (1) authorized but unissued shares, (2) shares of common stock held in our
treasury, or (3) a combination of (1) and (2).
Administration of the stock option plan. The Stock Option Plan is administered by
our Board or a committee appointed by the Board (the body in charge of administering the
Stock Option Plan is referred to as the administrator). If the common stock is
registered under Section 12(b) or 12(g) of the Exchange Act, the board shall consider in
selecting the administrator and the membership of any committee acting as administrator
the provisions of Section 162(m) of the Internal Revenue Code regarding outside
directors and the provisions of Rule 16b-3 under the Exchange Act regarding
non-employee directors. The administrator determines the recipients of awards, times
at which awards are granted, number of shares subject to each type of award, the time
for vesting of each award and the duration of the exercise period for options.
Price, exercise and termination of awards. The exercise price for each share of
common stock subject to an option is determined by the administrator, and in the case of
an incentive stock option the exercise price cannot be less than 100% of the fair market
value of the shares of common stock on the date of the grant (or 110% in the case of
employees who directly or indirectly own more than 10% of the total combined voting
power of all classes of our stock).
Options are exercisable on their vesting date, which is determined by the
administrator and set forth in the Award Agreement governing any particular option.
Vesting dates can be accelerated on the occurrence of a specified event, as provided in
an Award Agreement, or can be accelerated at the discretion of the administrator.
If a participant in the Stock Option Plan ceases to be employed or perform services
for us, we have the right to repurchase any unvested shares at the exercise price paid
per share. The terms and procedures of a repurchase are to be set forth in the Award
Agreement that governs the relevant unvested shares.
If an option expires or is terminated or canceled without having been exercised it
shall become null and void and of no further force and effect. The term of an option may
not exceed beyond the tenth anniversary on which the option is granted (or the fifth
anniversary in the case of incentive stock options granted to employees who directly or
indirectly own 10% of the total combined voting power of all classes of our stock.) An
option terminates 30 days after a participant ceases to be an employee or director as a
result of a termination without cause, and after 10 days of termination in the case of a
termination for cause. Cause includes the conviction of a crime involving fraud, theft,
dishonesty or moral turpitude, the participants continuous disregard of or willful
misconduct in carrying lawful instructions of superiors, continued use of alcohol or
drugs that interfered with the performance of the participants duties, the conviction
of participant for committing a felony or similar foreign crime, and any other cause for
termination set forth in a participants employment agreement. An option terminates 10
days after a participant ceases to be an independent consultant, contractor or advisor
to us or agent of ours for any reason. It also terminates three months after the death
or permanent disability of a participant, or, if the participant is a party to an
employment agreement, the disability of such participant as defined in the employment
agreement. Other reasons for termination may be set out in the Award Agreement.
An option will not be considered an incentive stock option to the extent that the
aggregate fair market value (on the date of the grant of the incentive stock option) of
all stock with respect to which incentive stock options are exercisable for the first
time by a participant during any calendar year is greater than $100,000. No option shall
be affected by a change of duties or position of a participant (including transfer to
our subsidiaries) as long as the participant continues to be our employee or an employee
of our subsidiaries.
Adjustments upon the occurrence of material transactions. In the event we undergo
dissolution or liquidation, a reorganization, merger or consolidation in which we are
not the surviving entity, or a sale of all or substantially all of our assets (each, a
Material Transaction) holders of options will be given 10-day prior written notice and
will decide within those 10 days whether to exercise their respective options. Any
option that is not so exercised will terminate. However, such notice and exercise
mechanism would not apply if provision is made in connection with a Material Transaction
for assumption of outstanding options, or substitution of options for new options or
equity securities, with any appropriate adjustments as to the number, kind and prices of
shares subject to options.
Transferability. Unless the prior written consent of the administrator is
obtained, no option can be assigned or otherwise transferred by any participant except
by will or by the laws of descent and distribution. Except in the case of an approved
transfer, an option may be exercised during the lifetime of a participant only by the
participant or his/her legal representative if the participant is legally disabled.
82
Restricted stock. Restricted stock awards are awards of shares of common stock
that vest according to the terms and conditions established by the administrator. The
administrator may impose whatever restrictions on transferability, risk of forfeiture
and other restrictions as it determines. A holder of restricted stock has the rights of
a stockholder, including the right to vote the restricted stock. During the restricted
period applicable to the restricted stock, it may not be sold, transferred, pledged,
hypothecated, margined or otherwise encumbered. Except as otherwise determined by the
administrator, restricted stock that is subject to restrictions is subject to forfeiture
upon termination of a participants employment.
Amendment. The Board may modify the Stock Option Plan at any time. The approval by
a majority of our stockholders is necessary if required by law or necessary to comply
with any applicable laws and regulations. No amendment will affect the terms of any
award granted prior to the effectiveness of such amendment, except with the consent of
the holder of the award.
|
|
|
ITEM 13. |
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE |
The information required by this item is included in the 2011 Proxy Statement and
is incorporated herein by reference.
|
|
|
ITEM 14. |
|
PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information required by this item is included in the 2011 Proxy Statement and
is incorporated herein by reference.
PART IV
|
|
|
ITEM 15. |
|
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a) Financial Statements and Schedules. The following financial statements and
schedules are included in this report:
|
|
|
|
|
|
|
Page |
|
|
|
|
|
|
Consolidated Financial Statements |
|
|
|
|
|
|
|
|
|
|
|
|
F-1 |
|
|
|
|
|
|
|
|
|
F-4 |
|
|
|
|
|
|
|
|
|
F-5 |
|
|
|
|
|
|
|
|
|
F-6 |
|
|
|
|
|
|
|
|
|
F-8 |
|
|
|
|
|
|
|
|
|
F-10 |
|
|
|
|
|
|
83
(b) Exhibits. The exhibits required by Item 601 of Regulation S-K are listed
below.
|
|
|
|
|
Exhibit |
|
|
Number |
|
Exhibit Title |
|
|
|
|
|
|
2.01 |
|
|
Stock Purchase Agreement, dated August 25, 2008, by and among
Hammer.com, LLC, MercadoLibre, Inc., Hispanoamerican Educational
Investments BV, S.A. La Nación, DeRemate.com de Argentina S.A.,
DeRemate.com Chile S.A., Interactivos y Digitales México S.A. de
C.V. and Compañía de Negocios Interactiva de Colombia E.U. (4) |
|
|
|
|
|
|
2.02 |
|
|
Asset Purchase Agreement, dated August 25, 2008, by and among
Hispanoamerican Educational Investments BV, S.A. La Nación,
Intangible Assets LLC, Emprendimientos Veta, S.A., DeRemate.com
USA, Inc., MercadoLibre, Inc. and Hammer.com, LLC. (4) |
|
|
|
|
|
|
3.01 |
|
|
Registrants Amended and Restated Certificate of Incorporation. (1) |
|
|
|
|
|
|
3.02 |
|
|
Registrants Amended and Restated Bylaws. (1) |
|
|
|
|
|
|
4.01 |
|
|
Form of Specimen Certificate for Registrants Common Stock (5) |
|
|
|
|
|
|
4.02 |
|
|
Second Amended and Restated Registration Rights Agreement, dated
September 24, 2001, by and among the Registrant and the investors
named therein. (1) |
|
|
|
|
|
|
10.01 |
|
|
Form of Indemnity Agreement entered into by Registrant with each
of its directors and executive officers. (2) |
|
|
|
|
|
|
10.02 |
|
|
Lease Agreement, dated as of March 31, 2007, between Curtidos San
Luis S.A. and MercadoLibre S.A. (2) (translated from Spanish) |
|
|
|
|
|
|
10.03 |
|
|
Amendment Agreement, dated as of November 13, 2008, to the Lease
Agreement, dated March 31, 2007, between Curtidos San Luis S.A.
and MercadoLibre S.A. (5) (translated from Spanish) |
|
|
|
|
|
|
10.04 |
|
|
Lease Agreement, dated as of April 1, 2008, between Curtidos San
Luis S.A. and MercadoLibre S.A. (translated from Spanish) (5) |
|
|
|
|
|
|
10.05 |
|
|
Lease Agreement, dated as of May 5, 2008, between Curtidos San
Luis S.A. and MercadoLibre S.A. (translated from Spanish) (5) |
|
|
|
|
|
|
10.06 |
|
|
Concession Contract, dated as February 7, 2007, between Borders
Parking S.R.L. and MercadoLibre S.A. (1) |
|
|
|
|
|
84
|
|
|
|
|
Exhibit |
|
|
Number |
|
Exhibit Title |
|
|
|
|
|
|
10.7 |
|
|
Arias Trust Contract, dated as of June 5, 2006 and amended as of May 29, 2008 (translated from
Spanish) (5) |
|
|
|
|
|
|
10.8 |
|
|
Management Incentive Bonus Plan of the Registrant. (2) |
|
|
|
|
|
|
10.9 |
|
|
Amended and Restated 1999 Stock Option and Restricted Stock Plan (2) |
|
|
|
|
|
|
10.10 |
|
|
Employment Agreements with Officers.(2) |
|
|
|
|
|
|
10.11 |
|
|
Form of Restricted Stock Award for Outside directors. (3) |
|
|
|
|
|
|
10.12 |
|
|
Employment Agreement with Osvaldo Gimenez, dated as of March 26, 2008* (5) |
|
|
|
|
|
|
10.13 |
|
|
2009 Equity Compensation Plan* (7) |
|
|
|
|
|
|
10.14 |
|
|
2008 Long-Term Retention Plan (6) |
|
|
|
|
|
|
10.15 |
|
|
2009 Long-Term Retention Plan (6) |
|
|
|
|
|
|
10.16 |
|
|
Property Lease Agreement, dated February 1, 2011, between MercadoLibre Colombia S.A and
Mongiana Ltda* |
|
|
|
|
|
|
10.17 |
|
|
Property Lease Amendment, dated May 5, 2008, between MercadoLibre Venezuela S.A. and G4 Grupo 4
Inmobiliaria Internacional Industrial Comercial, C.A. (8) |
|
|
|
|
|
|
10.18 |
|
|
Property Lease Agreement, dated July 6, 2010 between
MercadoLivre.com Atividades de Internet Ltda. and STM Sociedade
Técnica de Montageus Ltda.* |
85
|
|
|
|
|
Exhibit |
|
|
Number |
|
Exhibit Title |
|
|
|
|
|
|
21.01 |
|
|
List of Subsidiaries* |
|
|
|
|
|
|
23.01 |
|
|
Consent of Deloitte & Co. S.R.L., Independent Registered Public Accounting Firm* |
|
|
|
|
|
|
23.02 |
|
|
Consent of Price Watherhouse & Co. S.R.L., Independent Registered Public Accounting Firm* |
|
|
|
|
|
|
31.01 |
|
|
CEO Certification pursuant to Securities Exchange Act Rule 13a-14, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002* |
|
|
|
|
|
|
31.02 |
|
|
CFO Certification pursuant to Securities Exchange Act Rule 13a-14, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002* |
|
|
|
|
|
|
32.01 |
|
|
CEO Certification required by 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002** |
|
|
|
|
|
|
32.02 |
|
|
CFO Certification required by 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002** |
|
|
|
|
|
|
101.INS |
|
|
XBRL Instance Document*** |
|
|
|
|
|
|
101.SCH |
|
|
XBRL Taxonomy Extension Schema Document*** |
|
|
|
|
|
|
101.CAL |
|
|
XBRL Taxonomy Extension Calculation Linkbase Document*** |
|
|
|
|
|
|
101.LAB |
|
|
XBRL Taxonomy Extension Label Linkbase Document*** |
|
|
|
|
|
|
101.PRE |
|
|
XBRL Taxonomy Extension Presentation Linkbase Document*** |
|
|
|
* |
|
Filed Herewith |
|
** |
|
Furnished Herewith |
|
*** |
|
Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are
deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or
12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of
the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability
under those sections. |
|
(1) |
|
Incorporated by reference to the Registration Statement on Form S-1 of MercadoLibre, Inc.
filed on May 11, 2007; |
|
(2) |
|
Incorporated by reference to Amendment No. 1 to the Registration Statement on Form S-1 of
MercadoLibre, Inc. filed on July 13, 2007. |
|
(3) |
|
Incorporated by reference to the Registration Statement on Form S-1 of MercadoLibre, Inc.
filed on January 25, 2008 |
|
(4) |
|
Incorporated by reference to the Current Report on Form 8-K filed on August 26, 2008. |
|
(5) |
|
Incorporated by reference to the Annual Report on Form 10-K for the year ended December
31, 2008 filed on February 27, 2009 |
|
(6) |
|
Incorporated by reference to the Current Report on Form 8-K filed on July 21, 2009 |
|
(7) |
|
Incorporated by reference to the Registration Statement on Form S-8 filed on June 11, 2009 |
|
(8) |
|
Incorporated by reference to the Annual Report on Form 10-K for the year ended December
31, 2009 filed on February 26, 2010 |
86
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, as amended, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
|
|
|
|
MERCADOLIBRE, INC. |
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Marcos Galperín
Marcos Galperín
|
|
|
|
|
|
|
Chief Executive Officer |
|
|
|
|
|
|
|
|
Date: February 25, 2011 |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
/s/ Marcos Galperín
Marcos Galperín
|
|
Chief Executive Officer and Director
(Principal Executive Officer)
|
|
February 25, 2011 |
|
|
|
|
|
/s/ Hernán Kazah
Hernán Kazah
|
|
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
|
|
February 25, 2011 |
|
|
|
|
|
/s/ Mario Vazquez
Mario Vazquez
|
|
Director
|
|
February 25, 2011 |
|
|
|
|
|
/s/ Anton Levy
Anton Levy
|
|
Director
|
|
February 25, 2011 |
|
|
|
|
|
/s/ Michael Spence
Michael Spence
|
|
Director
|
|
February 25, 2011 |
|
|
|
|
|
/s/ Verónica Allende Serra
Veronica Allende Serra
|
|
Director
|
|
February 25, 2011 |
|
|
|
|
|
/s/ Nicolás Galperín
Nicolás Galperín
|
|
Director
|
|
February 25, 2011 |
|
|
|
|
|
/s/ Emiliano Calemzuk
Emiliano Calemzuk
|
|
Director
|
|
February 25, 2011 |
|
|
|
|
|
/s/ Martin de los Santos
Martin de los Santos
|
|
Director
|
|
February 25, 2011 |
87
EXHIBIT INDEX
|
|
|
|
|
Exhibit |
|
|
Number |
|
Exhibit Title |
|
|
|
|
|
|
2.01 |
|
|
Stock Purchase Agreement, dated August 25, 2008, by and among
Hammer.com, LLC, MercadoLibre, Inc., Hispanoamerican Educational
Investments BV, S.A. La Nación, DeRemate.com de Argentina S.A.,
DeRemate.com Chile S.A., Interactivos y Digitales México S.A. de
C.V. and Compañía de Negocios Interactiva de Colombia E.U. (4) |
|
|
|
|
|
|
2.02 |
|
|
Asset Purchase Agreement, dated August 25, 2008, by and among
Hispanoamerican Educational Investments BV, S.A. La Nación,
Intangible Assets LLC, Emprendimientos Veta, S.A., DeRemate.com
USA, Inc., MercadoLibre, Inc. and Hammer.com, LLC. (4) |
|
|
|
|
|
|
3.01 |
|
|
Registrants Amended and Restated Certificate of Incorporation. (1) |
|
|
|
|
|
|
3.02 |
|
|
Registrants Amended and Restated Bylaws. (1) |
|
|
|
|
|
|
4.01 |
|
|
Form of Specimen Certificate for Registrants Common Stock (5) |
|
|
|
|
|
|
4.02 |
|
|
Second Amended and Restated Registration Rights Agreement, dated
September 24, 2001, by and among the Registrant and the investors
named therein. (1) |
|
|
|
|
|
|
10.01 |
|
|
Form of Indemnity Agreement entered into by Registrant with each of
its directors and executive officers. (2) |
|
|
|
|
|
|
10.02 |
|
|
Lease Agreement, dated as of March 31, 2007, between Curtidos San
Luis S.A. and MercadoLibre S.A. (2) (translated from Spanish) |
|
|
|
|
|
|
10.03 |
|
|
Amendment Agreement, dated as of November 13, 2008, to the Lease
Agreement, dated March 31, 2007, between Curtidos San Luis S.A. and
MercadoLibre S.A. (5) (translated from Spanish) |
|
|
|
|
|
|
10.04 |
|
|
Lease Agreement, dated as of April 1, 2008, between Curtidos San
Luis S.A. and MercadoLibre S.A. (translated from Spanish) (5) |
|
|
|
|
|
|
10.05 |
|
|
Lease Agreement, dated as of May 5, 2008, between Curtidos San Luis
S.A. and MercadoLibre S.A. (translated from Spanish) (5) |
|
|
|
|
|
|
10.06 |
|
|
Concession Contract, dated as February 7, 2007, between Borders
Parking S.R.L. and MercadoLibre S.A. (1) |
|
|
|
|
|
|
10.07 |
|
|
Arias Trust Contract, dated as of June 5, 2006 and amended as of
May 29, 2008 (translated from Spanish) (5) |
|
|
|
|
|
|
10.08 |
|
|
Management Incentive Bonus Plan of the Registrant. (2) |
|
|
|
|
|
|
10.09 |
|
|
Amended and Restated 1999 Stock Option and Restricted Stock Plan (2) |
|
|
|
|
|
|
10.10 |
|
|
Employment Agreements with Officers.(2) |
|
|
|
|
|
|
10.11 |
|
|
Form of Restricted Stock Award for Outside directors. (3) |
|
|
|
|
|
|
10.12 |
|
|
Employment Agreement with Osvaldo Gimenez, dated as of March 26, 2008* (5) |
|
|
|
|
|
|
10.13 |
|
|
2009 Equity Compensation Plan* (7) |
88
|
|
|
|
|
Exhibit |
|
|
Number |
|
Exhibit Title |
|
|
|
|
|
|
10.14 |
|
|
2008 Long-Term Retention Plan (6) |
|
|
|
|
|
|
10.15 |
|
|
2009 Long-Term Retention Plan (6) |
|
|
|
|
|
|
10.16 |
|
|
Property Lease Agreement, dated February 1, 2011, between MercadoLibre Colombia S.A and
Mongiana Ltda* |
|
|
|
|
|
|
10.17 |
|
|
Property Lease Amendment, dated May 5, 2008, between MercadoLibre Venezuela S.A. and G4 Grupo 4
Inmobiliaria Internacional Industrial Comercial, C.A. (8) |
|
|
|
|
|
|
10.18 |
|
|
Property Lease Agreement, dated July 6, 2010 between
MercadoLivre.com Atividades de Internet Ltda. and STM Sociedade
Técnica de Montageus Ltda.* |
|
|
|
|
|
|
21.01 |
|
|
List of Subsidiaries* |
|
|
|
|
|
|
23.01 |
|
|
Consent of Deloitte & Co. S.R.L., Independent Registered Public Accounting Firm* |
|
|
|
|
|
|
23.02 |
|
|
Consent of Price Watherhouse & Co. S.R.L., Independent Registered Public Accounting Firm* |
|
|
|
|
|
|
31.01 |
|
|
CEO Certification pursuant to Securities Exchange Act Rule 13a-14, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002* |
|
|
|
|
|
|
31.02 |
|
|
CFO Certification pursuant to Securities Exchange Act Rule 13a-14, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002* |
|
|
|
|
|
|
32.01 |
|
|
CEO Certification required by 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002** |
|
|
|
|
|
|
32.02 |
|
|
CFO Certification required by 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002** |
|
|
|
|
|
|
101.INS |
|
|
XBRL Instance Document*** |
|
|
|
|
|
|
101.SCH |
|
|
XBRL Taxonomy Extension Schema Document*** |
|
|
|
|
|
|
101.CAL |
|
|
XBRL Taxonomy Extension Calculation Linkbase Document*** |
|
|
|
|
|
|
101.LAB |
|
|
XBRL Taxonomy Extension Label Linkbase Document*** |
|
|
|
|
|
|
101.PRE |
|
|
XBRL Taxonomy Extension Presentation Linkbase Document*** |
|
|
|
* |
|
Filed Herewith |
|
** |
|
Furnished Herewith |
|
*** |
|
Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are
deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933,
as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not
subject to liability under those sections. |
|
(1) |
|
Incorporated by reference to the Registration Statement on Form S-1 of MercadoLibre, Inc.
filed on May 11, 2007; |
|
(2) |
|
Incorporate by reference to Amendment No. 1 to the Registration Statement on Form S-1 of
MercadoLibre, Inc. filed on July 13, 2007. |
|
(3) |
|
Incorporated by reference to the Registration Statement on Form S-1 of MercadoLibre, Inc.
filed on January 25, 2008 |
|
(4) |
|
Incorporated by reference to the Current Report on Form 8-K filed on August 26, 2008. |
|
(5) |
|
Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31,
2008 filed on February 27, 2009 |
|
(6) |
|
Incorporated by reference to the Current Report on Form 8-K filed on July 21, 2009 |
|
(7) |
|
Incorporated by reference to the Registration Statement on Form S-8 filed on June 11, 2009 |
|
(8) |
|
Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31,
2009 filed on February 26, 2010 |
|
(9) |
|
Incorporated by reference to the Quarterly Report on Form 10-Q for the quarter ended March
31,
2010 filed on May 7, 2010 |
|
(10) |
|
Incorporated by reference to the Current Report on Form 8-K filed on June 29, 2010. |
|
(11) |
|
Incorporated by reference to the Quarterly Report on Form 10-Q for the quarter ended June 30,
2010 filed on August 6, 2010 |
89
MercadoLibre, Inc.
Consolidated Financial Statements
as of December 31, 2010 and 2009
and for the three years in the period
ended December 31, 2010
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Shareholders of MercadoLibre, Inc.
Buenos Aires city, Argentina
We have audited the accompanying consolidated balance sheet of MercadoLibre, Inc. and its
subsidiaries (the Company) as of December 31, 2010, and the related consolidated statement of
income, shareholders equity, and cash flows for the year ended December 31, 2010. We also have
audited the Companys internal control over financial reporting as of December 31, 2010, based on
criteria established in Internal Control Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Companys Management is responsible
for these financial statements, for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Managements Report on Internal Control over Financial
Reporting (Item 9A). Our responsibility is to express an opinion on these financial statements and
an opinion on the Companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement and
whether effective internal control over financial reporting was maintained in all material
respects. Our audit of the financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting included obtaining
an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provide a reasonable basis for
our opinion.
A companys internal control over financial reporting is a process designed by, or under the
supervision of, the companys principal executive and principal financial officers, or persons
performing similar functions, and effected by the companys board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A companys internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition
of the companys assets that could have a material effect on the
financial statements. Because of the inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material misstatements due to
error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
F-1
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of MercadoLibre, Inc. and its subsidiaries as of December
31, 2010, and the results of their operations and their cash flows for the fiscal year ended
December 31, 2010, in conformity with generally accepted accounting principles in the United States
of America. Also, in our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2010, based on the criteria
established in Internal Control Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
Buenos Aires city, Argentina
February 25, 2011
DELOITTE & Co. S.R.L.
Alberto Lopez Carnabucci
Partner
F-2
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Shareholders of MercadoLibre, Inc.:
In our opinion, the consolidated balance sheet as of December 31, 2009 and the related consolidated
statements of income, of changes in shareholders equity and of cash flows for each of two years in
the period ended December 31, 2009 present fairly, in all material respects, the financial position
of MercadoLibre, Inc. and its subsidiaries at December 31, 2009, and the results of their
operations and their cash flows for each of the two years in the period ended December 31, 2009, in
conformity with accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audits. We conducted our audits of
these statements in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
Price Waterhouse & Co. S.R.L.
|
|
|
|
|
By
|
|
|
(Partner) |
|
|
|
Carlos Martín Barbafina
|
|
|
Buenos Aires, Argentina
February 26, 2010, except for the change in the composition of reportable segments discussed in
Note 7 to the consolidated financial statements, as to which the date is February 25, 2011
F-3
MercadoLibre Inc.
Consolidated Balance Sheets
As of December 31, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
56,830,466 |
|
|
$ |
49,803,402 |
|
Short-term investments |
|
|
5,342,766 |
|
|
|
14,580,185 |
|
Accounts receivable, net |
|
|
12,618,173 |
|
|
|
4,868,377 |
|
Funds receivable from customers |
|
|
6,151,518 |
|
|
|
3,785,802 |
|
Prepaid expenses |
|
|
913,262 |
|
|
|
547,138 |
|
Deferred tax assets |
|
|
12,911,256 |
|
|
|
5,481,182 |
|
Other assets |
|
|
6,867,767 |
|
|
|
3,068,930 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
101,635,208 |
|
|
|
82,135,016 |
|
Non-current assets: |
|
|
|
|
|
|
|
|
Long-term investments |
|
|
78,846,281 |
|
|
|
26,627,357 |
|
Property and equipment, net |
|
|
20,817,712 |
|
|
|
5,948,276 |
|
Goodwill, net |
|
|
60,496,314 |
|
|
|
59,822,746 |
|
Intangible assets, net |
|
|
4,141,167 |
|
|
|
4,515,818 |
|
Deferred tax assets |
|
|
2,975,118 |
|
|
|
2,897,492 |
|
Other assets |
|
|
771,223 |
|
|
|
667,944 |
|
|
|
|
|
|
|
|
Total non-current assets |
|
|
168,047,815 |
|
|
|
100,479,633 |
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
269,683,023 |
|
|
$ |
182,614,649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
$ |
17,232,103 |
|
|
$ |
11,599,634 |
|
Funds payable to customers |
|
|
48,788,225 |
|
|
|
31,453,410 |
|
Payroll and social security payable |
|
|
10,786,534 |
|
|
|
7,428,340 |
|
Taxes payable |
|
|
11,487,574 |
|
|
|
6,797,516 |
|
Loans payable and other financial liabilities |
|
|
100,031 |
|
|
|
3,213,992 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
88,394,467 |
|
|
|
60,492,892 |
|
Non-current liabilities: |
|
|
|
|
|
|
|
|
Payroll and social security payable |
|
|
2,562,343 |
|
|
|
1,355,006 |
|
Loans payable and other financial liabilities |
|
|
188,846 |
|
|
|
|
|
Deferred tax liabilities |
|
|
5,167,699 |
|
|
|
5,170,799 |
|
Other liabilities |
|
|
1,651,398 |
|
|
|
1,402,715 |
|
|
|
|
|
|
|
|
Total non-current liabilities |
|
|
9,570,286 |
|
|
|
7,928,520 |
|
Total liabilities |
|
$ |
97,964,753 |
|
|
$ |
68,421,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 15) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity: |
|
|
|
|
|
|
|
|
Common stock, $0.001 par value, 110,000,000 shares authorized,
44,131,376 and 44,120,269 shares issued and outstanding at December 31,
2010 and December 31, 2009, respectively |
|
$ |
44,131 |
|
|
$ |
44,120 |
|
Additional paid-in capital |
|
|
120,391,622 |
|
|
|
120,257,998 |
|
Retained earnings |
|
|
73,681,556 |
|
|
|
17,656,537 |
|
Accumulated other comprehensive loss |
|
|
(22,399,039 |
) |
|
|
(23,765,418 |
) |
|
|
|
|
|
|
|
Total shareholders equity |
|
|
171,718,270 |
|
|
|
114,193,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
269,683,023 |
|
|
$ |
182,614,649 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-4
MercadoLibre Inc.
Consolidated Statement of Income
For the three years ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
216,715,713 |
|
|
$ |
172,843,621 |
|
|
$ |
137,022,620 |
|
Cost of net revenues |
|
|
(46,549,845 |
) |
|
|
(35,958,050 |
) |
|
|
(27,536,573 |
) |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
170,165,868 |
|
|
|
136,885,571 |
|
|
|
109,486,047 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Product and technology development |
|
|
(15,855,992 |
) |
|
|
(12,140,521 |
) |
|
|
(7,307,008 |
) |
Sales and marketing |
|
|
(48,883,167 |
) |
|
|
(42,861,735 |
) |
|
|
(39,975,307 |
) |
General and administrative |
|
|
(30,828,146 |
) |
|
|
(25,849,596 |
) |
|
|
(22,759,931 |
) |
Compensation cost related to acquisitions (Note 6) |
|
|
|
|
|
|
|
|
|
|
(1,919,870 |
) |
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
(95,567,305 |
) |
|
|
(80,851,852 |
) |
|
|
(71,962,116 |
) |
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
74,598,563 |
|
|
|
56,033,719 |
|
|
|
37,523,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income and other financial gains |
|
|
4,931,215 |
|
|
|
2,695,109 |
|
|
|
1,822,385 |
|
Interest expense and other financial charges |
|
|
(7,601,671 |
) |
|
|
(13,357,554 |
) |
|
|
(8,442,427 |
) |
Foreign currency loss |
|
|
(62,447 |
) |
|
|
(2,658,476 |
) |
|
|
(1,531,144 |
) |
Other income (expenses), net |
|
|
|
|
|
|
|
|
|
|
73,159 |
|
|
|
|
|
|
|
|
|
|
|
Net income before income / asset tax expense |
|
|
71,865,660 |
|
|
|
42,712,798 |
|
|
|
29,445,904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income / asset tax expense |
|
|
(15,840,641 |
) |
|
|
(9,504,005 |
) |
|
|
(10,634,243 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
56,025,019 |
|
|
$ |
33,208,793 |
|
|
$ |
18,811,661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS |
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per common share |
|
$ |
1.27 |
|
|
$ |
0.75 |
|
|
$ |
0.43 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares |
|
|
44,124,018 |
|
|
|
44,086,892 |
|
|
|
44,239,443 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share |
|
$ |
1.27 |
|
|
$ |
0.75 |
|
|
$ |
0.42 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares |
|
|
44,146,858 |
|
|
|
44,144,368 |
|
|
|
44,348,950 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-5
MercadoLibre Inc.
Consolidated Statement of Changes in Shareholders Equity
For the three years ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Accumulated |
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
deficit) / |
|
|
other |
|
|
|
|
|
|
Comprehensive |
|
|
Common stock |
|
|
paid-in |
|
|
Treasury |
|
|
Retained |
|
|
comprehensive |
|
|
|
|
|
|
income |
|
|
Shares |
|
|
Amount |
|
|
capital |
|
|
Stock |
|
|
Earnings |
|
|
income / (loss) |
|
|
Total |
|
Balance as of December 31, 2007 |
|
|
|
|
|
|
44,226,563 |
|
|
$ |
44,227 |
|
|
$ |
121,890,138 |
|
|
$ |
|
|
|
$ |
(34,363,917 |
) |
|
$ |
4,102,691 |
|
|
$ |
91,673,139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised and restricted shares issued |
|
|
|
|
|
|
93,504 |
|
|
|
94 |
|
|
|
82,995 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83,089 |
|
Stock-based compensation stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,719 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,719 |
|
Stock-based compensation restricted shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105,560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105,560 |
|
Stock-based compensation long term retention plan (LTRP) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
321,568 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
321,568 |
|
Repurchase of Treasury Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,598,223 |
) |
|
|
|
|
|
|
|
|
|
|
(2,598,223 |
) |
Retirement of Treasury Stock |
|
|
|
|
|
|
(249,700 |
) |
|
|
(250 |
) |
|
|
(2,597,973 |
) |
|
|
2,598,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
18,811,661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,811,661 |
|
|
|
|
|
|
|
18,811,661 |
|
Currency translation adjustment |
|
$ |
(14,923,284 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,923,284 |
) |
|
|
(14,923,284 |
) |
Unrealized net gains on investments |
|
$ |
3,642 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,642 |
|
|
|
3,642 |
|
Realized net gains on investments |
|
$ |
(57,890 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(57,890 |
) |
|
|
(57,890 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
3,834,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008 |
|
|
|
|
|
|
44,070,367 |
|
|
$ |
44,071 |
|
|
$ |
119,807,007 |
|
|
$ |
|
|
|
$ |
(15,552,256 |
) |
|
$ |
(10,874,841 |
) |
|
$ |
93,423,981 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised |
|
|
|
|
|
|
35,031 |
|
|
|
35 |
|
|
|
28,319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,354 |
|
Stock-based compensation stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,752 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,752 |
|
Stock-based compensation restricted shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74,382 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74,382 |
|
Stock-based compensation LTRP |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
175,453 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
175,453 |
|
Restricted shares issued |
|
|
|
|
|
|
10,655 |
|
|
|
10 |
|
|
|
171,089 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
171,099 |
|
LTRP shares issued |
|
|
|
|
|
|
3,600 |
|
|
|
3 |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued |
|
|
|
|
|
|
616 |
|
|
|
1 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
33,208,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,208,793 |
|
|
|
|
|
|
|
33,208,793 |
|
Currency translation adjustment |
|
$ |
(12,914,565 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,914,565 |
) |
|
|
(12,914,565 |
) |
Unrealized net gains on investments |
|
$ |
27,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,630 |
|
|
|
27,630 |
|
Realized net gains on investments |
|
$ |
(3,642 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,642 |
) |
|
|
(3,642 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
20,318,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2009 |
|
|
|
|
|
|
44,120,269 |
|
|
$ |
44,120 |
|
|
$ |
120,257,998 |
|
|
$ |
|
|
|
$ |
17,656,537 |
|
|
$ |
(23,765,418 |
) |
|
$ |
114,193,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-6
MercadoLibre Inc.
Consolidated Statement of Changes in Shareholders Equity
For the three years ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Accumulated |
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
deficit) / |
|
|
other |
|
|
|
|
|
|
Comprehensive |
|
|
Common stock |
|
|
paid-in |
|
|
Retained |
|
|
comprehensive |
|
|
|
|
|
|
income |
|
|
Shares |
|
|
Amount |
|
|
capital |
|
|
Earnings |
|
|
income / (loss) |
|
|
Total |
|
Balance as of December 31, 2009 |
|
|
|
|
|
|
44,120,269 |
|
|
$ |
44,120 |
|
|
$ |
120,257,998 |
|
|
$ |
17,656,537 |
|
|
$ |
(23,765,418 |
) |
|
$ |
114,193,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised |
|
|
|
|
|
|
7,126 |
|
|
|
7 |
|
|
|
18,192 |
|
|
|
|
|
|
|
|
|
|
|
18,199 |
|
Stock-based compensation stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
244 |
|
|
|
|
|
|
|
|
|
|
|
244 |
|
Stock-based compensation restricted shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,696 |
|
|
|
|
|
|
|
|
|
|
|
37,696 |
|
Stock-based compensation LTRP |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77,496 |
|
|
|
|
|
|
|
|
|
|
|
77,496 |
|
LTRP shares issued |
|
|
|
|
|
|
3,981 |
|
|
|
4 |
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
56,025,019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,025,019 |
|
|
|
|
|
|
|
56,025,019 |
|
Currency translation adjustment |
|
|
1,348,482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,348,482 |
|
|
|
1,348,482 |
|
Unrealized net gains on investments |
|
|
45,527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,527 |
|
|
|
45,527 |
|
Realized net gains on investments |
|
|
(27,630 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27,630 |
) |
|
|
(27,630 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
57,391,398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2010 |
|
|
|
|
|
|
44,131,376 |
|
|
$ |
44,131 |
|
|
$ |
120,391,622 |
|
|
$ |
73,681,556 |
|
|
$ |
(22,399,039 |
) |
|
$ |
171,718,270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-7
MercadoLibre Inc.
Consolidated Statement of Cash Flows
For the three years ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
56,025,019 |
|
|
$ |
33,208,793 |
|
|
$ |
18,811,661 |
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
4,921,650 |
|
|
|
3,893,752 |
|
|
|
3,335,673 |
|
Foreign currency gains |
|
|
|
|
|
|
|
|
|
|
(7,827,112 |
) |
Interest expense |
|
|
|
|
|
|
213,878 |
|
|
|
300,368 |
|
Accrued interest |
|
|
(504,874 |
) |
|
|
90,339 |
|
|
|
57,293 |
|
Stock-based compensation expense stock options |
|
|
244 |
|
|
|
1,752 |
|
|
|
4,719 |
|
<