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No. of Recommendations: 10
Here are my notes from the call and the press release. (Please note that the 10-K is not out yet. That document normally gives more insight into the currency effects, so my numbers below in this regard are either approximations or were taken from the conference call.)

4Q08 Conf. Call and Results (2/24/09)

Financials
Full year revenue up 61% to $137mm (+56% in local currencies); full year net income up 94.1% to $18.8mm. This is good, though fourth quarter did start to show some macro effects.

Q4 revenue up 24.4% yoy to $33.4mm; up 45% yoy in local currencies. Revenue, however, was down 17% sequentially, though roughly flat it appears in local currencies. The bad news is that sequential growth was nonexistent; the good news is that business is holding up in a very treacherous time for consumers.

Revenue came in light of my expectations ($140mm), but net income was slightly better thanks to higher than expected profit margins, and bother operating and net income were up sequentially despite the top line troubles. We're starting to see significant leverage in the model here, with most cost growth reduction coming out G&A rather than product development. Thus, we shouldn’t see revenue growth or competitiveness suffer as a result.

To provide some idea of just how impressive these margin improvements were, here are the FY2007 numbers, the FY08 numbers, the 4Q08 numbers, and my projections for next year.

Gross margin
FY07: 77.7%, FY08 79.9%, 4Q08: 80.7%, Tim’s 2009 Projection: 79.5%

EBIT Margin
FY07: 24.6%, FY08: 27.4%, 4Q08: 33.4%, Tim’s 2009 Projection: 29.5%

I mean, wow. If they can keep up those 4Q08 numbers or continue to improve on them, that could mean $6mm to $8mm in extra profits next year. So, I’ll be keeping my eye on that.

Countering the margin improvement, however, were some more tepid growth numbers.

8.8mm registered users added in 2008; 1.7mm added in Q4. That brings the total to 33.7mm. Growth rate here is slowing, but the company has added about 1.7mm users per quarter every quarter for the past two years net of the 3Q08 DeRemate integration that brought 2.2mm additional users. As they were fond of saying at the Roth Conference, “Flat is the new up.”

Disjecta
Company sold $32.6mm of MercadoPago receivables during the quarter to convert to cash; booked a $3mm one-time loss as a result, yet converted lots of fake cash to real cash, which I think is prudent move at this time. (We saw China Security and Surveillance doing the same thing to speed up its cash conversion cycle and give it more balance sheet flexibility.)

As a result of this move, the balance sheet has been restrengthened and now holds $49.1mm in cash and $9.2mm in long-term investments. Company started leveraging this cash and began a $20mm share repurchase program; in 4Q the company repurchased 250,000 shares for $2.6mm (paying a little more than $10/share) -- good deal!

MELI also sold puts that mature through March 21, 2009, with $10 strike. Earned $336,000 in commissions as a result. (That seems like a bullish signal, they seem to think they're undervalued now…sort of insignificant gains from the commissions, however…but it shows their mindset is quite different from the secondary they were planning at $50-plus.) As an aside, I don’t mind a company that sells equity when it’s expensive and buys it when it’s cheap. We should all be able to take advantage of the stock market like that.

Capex was also well below previously guided 5% of revenue, which also contributes to healthier FCF generation

Trouble with MercadoPago in the quarter: 4 down days, company had to issue rebates to customers; retracted financing in Brazil for 10 days and returned with higher financing fees given dynamic interest rate environment.

Company hoping for a return to normalcy going forward; let's confirm next quarter there are no more outages. I’m willing to give them a pass here, but we want to make sure that no competitive threats emerge to MercadoPago while the company is still working out the bugs.

Auto business scaling nicely; now hoping to do the same with real estate.

Beta launched MercadoClics, a text advertising system for bricks and mortar retailers to show their wares online. This is MercadoLibre leveraging its #1 traffic ranking to gain high margin ad dollars and gain wallet share from competitors while maintaining position as #1 hub for ecommerce in Latin America

All in all
A steady quarter. Business holding up reasonably well given macro situation, though growth is slowing. But time is on our side here and expansion of Internet in Latin America gives company a countercyclical element that's worth something despite slower growth.

Again, I think time is on our side here given the dominant positioning of MELI is Latin American ecommerce. Moreover, a down market makes it much harder for others to compete (particularly if they don't have lots of low-cost, cash financing -- and they don't) and should allow MELI to further increase market share thereby increasing upside as the economy improves.

Tim
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