Mercado Libre Q2 Earnings Review

Mercado Libre reported quarterly results last Thursday after the market closed. In this article, I’ll go over the company’s financials and management’s commentary (they don’t provide guidance). At the end, I’ll share my thoughts on the quarter and what I’m doing portfolio-wise.

During the past quarter, sales exceeded 5 billion dollars, growing 41% on a yearly basis. It is to be observed that an update was made as to how the logistics business is reported. This change contributed 14pps to growth in revenues.

“The final update relates to Mercado Envios, where a change to our terms & conditions shifts our role to "Principal" in a majority of shipping transactions. Shipping revenues in such transactions are booked on a gross basis, with associated expenses booked in cost of revenue (rather than netted against revenue when acting as "Agent"). This had a positive impact of $293mn on net revenue and a negative impact of $308mn on cost of revenue” Extract from the first quarter’s letter to shareholders.” Q1 2024

Mercado Libre had gross profit of 2.36 billion dollars, with margin of 46.6%, flat sequentially. Operating income came in at 726M, implying a margin of 14.3%, declining from 18.7% last year, but up 210bps QoQ. The change in shipping revenues had a 1.5pp impact on the operating margin. Lastly, Meli generated 531M in profit, with a net profit margin of 10.5%, up 320bps YoY.

Operating cash flow during the quarter was 1.88 billion dollars, up 33% YoY, although a large part of it is due to a 1.3bn increase in funds payable to customers. This puts TTM cash from operations at 6.26 billion. On the other hand, the company had 183M in CapEx.

Mercado Libre’s commerce business, consistent of the marketplace, generated revenues of 2.97 billion dollars. Although sales increased by 53% YoY, a large portion is due to the update on shipping income. Notwithstanding this, growth has continuously accelerated since 2022.

Gross merchandise value increased 20% yearly to 12.6 billion dollars. The commerce take rate expanded by 510bps YoY, though the shipping update represented 4.1pp of the total, with half of the remainder coming from ads revenue.

During the quarter, items sold through the platform were a record 421 million. This represented a 30% yearly increase and over 10% sequentially. Of the total, same and next day shipments were also a record 127.3M, increasing 15% YoY. In addition to this, unique active buyers reached a record high of 56.6 million, growing 19% YoY.

Mercado Libre’s fintech business grew its topline by 28% on a yearly basis to 2.1 billion dollars. 1.21 billion were generated by financial services and income, which grew 16% YoY. Meli’s credit business, on the other hand, generated 875M in sales, up 46% YoY.

Mercado Pago had 46.3 billion dollars in total payment volume, the vast majority of which occurred off platform. TPV increased 35% YoY and 13% sequentially. On the first quarter, the company updated how TPV is reported, which severely impacted reported TPV. Q1 and Q2 of 2023 have been recasted accordingly, and so have 2024’s. The second half of last year has not been recasted yet.

Fintech MAUs increased 36.8% yearly to 52 million. Total payment transactions increased 54% YoY to 2.67 billion. Furthermore, assets under management almost doubled yearly to 6.6 billion at the end of this past quarter. Mercado Libre’s credit portfolio also materially increased, now being at 4.9 billion dollars. Credit originated through credit cards increased 145% YoY, mostly driving the credit portfolio upward by itself.

Management Commentary and Outlook

Management opened the call with a great tone of optimism, for, on Friday, Mercado Libre would celebrate its 25^th anniversary. A quarter of a century. The company’s focus and investments in Latin America for over two decades really started paying off in the last 5-8 years. Coincidentally, and naturally as well, it is after a big shift occurred in how Marcos sees things. Logistics and a seamless ecosystem started being priorities. Most cash flow was heavily reinvested and the company 10x in size. Now Mercado Libre serves tens of millions of customers and is in an undebatable position of strength.

Meli’s commerce business accelerated sequentially and is performing fantastically. The company is gaining share in all countries wherein it operates. The team was even surprised by their continuous performance in Brazil. Mercado Libre is at a very large scale and is still outgrowing the market.

Fintech services have also done phenomenally, with MAUs surpassing 50 million for the first time, while user engagement metrics on Mercado Pago show encouraging signs. Credit has taken a larger share of this business and management seems to be pleased by it, for it boosts the whole ecosystem and has great synergies with the e-commerce side.  At the same time, 1.6 million credit cards were issued during the quarter, with TPV growing 3x from this source.

The team extensively spoke about how they are scaling Mercado Libre’s logistics network in a cost efficient manner. In fact, penetration keeps rising, same and next day deliveries increased, and free shipping as well. All this is achieved with expanding margins, which is starting to show the power of economies of scale. Furthermore, Meli is heavily reinvesting in this part of the business, which has become its core competitive advantage. As an example, they are beginning to utilize robots to collaborate with human workforce, optimizing processing time by 20% on occasions. Total storage capacity is estimated to potentially increase by almost 15% per square meter as the usage of robots is scaled. Robots save a lot of time and resources.

Finally, management transmitted their ongoing mission of giving back as much as they can to customers. Meli+ is presumably gaining lots of traction and driving engagement. Moreover, Mercado Libre’s first party business is helping with customer satisfaction, about which Meli’s Commerce President mentioned:

“we are getting more and more obsessed with our price competitiveness”

My Take

Mercado Libre’s quarter was fantastic, as it has been for the past couple of years. Very high growth at scale, operating leverage, market share gains across markets, and an ecosystem that gets increasingly more settled in people’s lives. They are utilizing a proven playbook, with some unique twists, and are sharing their efficiency gains with customers in numerous ways.

I came back to Argentina two months ago and I’m impressed with Mercado Libre’s progress, in all fronts. I believe it’ll be useful for me to share my personal experience with the company. It really helped me and hope it does the same for you.

On the commerce side, I started a business with a relative, selling golf items, some of which are made by this person. Although it is on a small scale at the moment, I suspect it is a good bet and should get larger as years go by. Anyhow, Meli’s experience as a seller is fantastic. They have a pretty high take rate, but it ends up being worth it since they solve everything. I tried Ads as well, fantastic results. On the other hand, as a buyer, it’s a great experience. Items arrive in 24-48 hours.

On the fintech side, Mercado Pago is absolutely everywhere, or at least here in Buenos Aires, the capital. You’ll find Meli’s PoS hardware in the most remote parts of the city. Furthermore, I ordered Mercado Pago’s debit card. Simple and free process. I received it in only a few days. Additionally, I noticed how they are cross-selling multiple services, like insurance. The team has commented that Meli’s insuretech business is growing rapidly, with active policies doubling YoY, probably in the mid to high couple of millions already.

Mercado Libre has been in the portfolio since inception and I don’t suspect I’ll be making any changes anytime soon. It currently holds a 10.2% position. The last time I added was on April of this year, which I communicated in the previous earnings review.

Disclaimer: This is not financial advice.