Net Element, Inc.
Q1 2019 Earnings Call Transcript

Published: 16 May 2019

[Operator:]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Net Element First Quarter 2019 Financial Results and Business Update Conference Call. [Operator Instructions] I'd like to remind listeners that during the call, management's prepared remarks may contain forward-looking statements, which are subject to risks and uncertainties. Management may make additional forward-looking statements in response to your questions today. Therefore, the company claims protection under safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from results discussed today. And therefore, we refer you to a more detailed discussion of the risks and uncertainties in the company's filings with the SEC. Any projections as to the company's future performance represented by management include estimates today as of May 16, 2019, and the company assumes no obligation to update these projections in the future as market conditions change. The recording and certain financial information provided during the call is available at www.netelement.com on the Investor Relations page. At this time, I would turn the call over to Oleg Firer, CEO. Oleg, please go ahead.

[Oleg Firer:]

Good morning, everyone. Thanks to everyone for joining our call this morning to discuss the results for the first quarter of 2019. During the first quarter of 2019, we are focused on maintaining an increased margin as we continue to mature in our value-added service offerings to the merchants. Our consolidated gross margin has increased to 18.5%, representing an increase of 16.7% as compared to gross margin of 14.8% for the first quarter of 2018. Our North American Transaction Solutions segments margin has increased to 18.1%, representing an increase of 33% over the same comparable periods. While International Transaction Solutions segments margin has increased to 28.1%, representing a 23% increase over the first quarter of 2018. Our net revenues for the first quarter have slightly decreased by 5.9% to approximately $15 million compared to approximately $16 million for the first quarter of 2018. The decrease in net revenues for the comparable period was primarily related to our International Transaction Solutions segment, which experience continued competition and economic challenges in the selected markets. Our North American Transaction Solutions segment experienced a 4% growth in net revenue to approximately $14.4 million compared to approximately $13.9 million for the first quarter of 2018. Total transaction processing volume for the first quarter increased to approximately $787 million, an increase of 6.5% compared to $739 million for the same comparable period. Our North American Transaction Solutions segment has shown positive trends on the business development side as we continue to add best-in-class integration solutions and value-added applications to Netevia our future ready platform. We're pleased with our first quarter results and ongoing progress our team has made to improve gross margins through use of scalable infrastructure and integration of value-added technologies. We remain focused on reaching profitability as we continue to scale our business in the selected markets. Now I'd like to introduce Jeffrey Ginsberg, Net Element's Chief Financial Officer to review our financial results in more detail. Jeff, please proceed.

[Jeffrey Ginsberg:]

Thank you, Oleg, and good morning, everyone. We reported a loss attributable to common stockholders of approximately $1.1 million or $0.29 per share for the three months ended March 31, 2019, as compared to a net loss of approximately $1.6 million or $0.42 per share loss for the three months ended March 31, 2018. The decrease in net loss attributable to stockholders of approximately $0.5 million was primarily due to an increase in the gross margin for our North American Transaction Solutions segment, and a decrease in other expenses of approximately $264,000 during the three months ended March 31, 2019, as compared to the three months ended March 31, 2018. Net revenues consists primarily of service fees from transaction processing. Net revenues was approximately $15 million for the three months ended March 31, 2019, as compared to approximately $16 million for three months ended March 31, 2018. The decrease in net revenues for the comparable period was primarily related to our International Transaction Solutions segment, which experience continued competition and economic challenges. Cost of revenues represent direct costs of generating revenues including commissions, mobile operator fees, interchange expense, processing and non-processing fees. Costs of revenues for the three months ended March 31, 2019 were approximately $12.3 million as compared to approximately $13.6 million for the three months ended March 31, 2018. The decrease in cost of revenues for comparable three months ended of $1.3 million was primarily driven by the reorganization of assignments from our International Transaction Solutions segment due to economic challenges. The gross margin for the three months ended March 31, 2019 was approximately $2.8 million or 18.5% of net revenue as compared to approximately $2.4 million or 14.8% of net revenue for the three months ended March 31, 2018. The primary reason for the increase in gross margin percentage was the result of North American Transaction Solutions processing of transactions utilizing our self-designated BIN or ICA, recurring profitable cash flows from portfolios acquired in the prior year and further acceptance of value-added services by our merchants. Operating expenses were approximately $3.6 million for the three months ended March 31, 2019 as compared to $3.4 million for the three months ended March 31, 2018. Operating expenses for the three months ended March 31, 2019 primarily consist of selling, general and administrative expenses of approximately $2.4 million, bad debt expense of approximately $0.3 million and depreciation and amortization of approximately $0.9 million. Operating expenses for the three months ended March 31, 2018, primarily consisted of selling, general and administrative expenses of approximately $2.4 million, bad debt expense of $0.1 million, and depreciation and amortization expense of approximately $0.7 million. We had a good first quarter and we encourage you to review our 10-K and 10-Q on our website or sec.gov for further detail. With that, we conclude our formal comments for today. Operator, we are now ready to open the call for questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Lisa Thompson with Zacks Investment Research. Your line is now open.

[Lisa Thompson:]

Good morning, Oleg and Jeff. So I have a few questions on the quarter. I guess, the first thing is to ask about international. Because last quarter you said that, you thought it would be up sequentially and that didn't happen. So I'd like to know what you're thinking on that businesses now going forward.

[Oleg Firer:]

Right. So we have for the quarter, I will explain what – on the earning calls for the 2018 call. We lost several clients and that the reason why we lost them is because of economical challenges. Some of them went bankrupt and such that we have replaced those clients, but it takes a bit time for the clients to start producing revenues as you know. We anticipated it would start kicking right away, but it takes a little bit more time for them to ramp up. We are going to see some improvements over the next few quarters, but it wasn't as immediate as we thought it would be.

[Lisa Thompson:]

Okay. So do you think it will be up sequentially this quarter?

[Oleg Firer:]

We believe so.

[Lisa Thompson:]

Okay. All right. Good. And gross margin obviously improved significantly up there at 18%. Do you think you can go higher from here?

[Oleg Firer:]

We believe it might. As we continue with our value-added services and we scale utilizing our own proprietary processing platforms, our costs have becomes cheaper. Our cost to process transaction becomes cheaper. So we believe we still have room to grow on the margin side. And we're doing our best and we hope that it's going to improve. We – I can't forecast how much as of yet, but we believe it will.

[Lisa Thompson:]

Okay. So let me ask you about this. I think this is the first time you've ever had down revenues. Is that right?

[Oleg Firer:]

Right. Well, the reason for it as you saw international has been behind and hence that's the reason for the down revenue. North American had enough up revenue quarter. It just the one that international we've slowdown.

[Lisa Thompson:]

No. Well, revenues, it all affected by you buying those cash flow assets or did that not change that?

[Oleg Firer:]

No, it doesn't change at all.

[Lisa Thompson:]

Okay. And just to go back – also to go back is there anything happened with the joint venture with Sputnik bank?

[Oleg Firer:]

We have made an announcement in our last K that Sputnik was not approved by the regulators. We have however replaced it with a different relationship and we're in the process of getting certified with Visa and MasterCard. The process takes about three months. So we project that it should be finishing anytime soon and then we could continue with the ventures plan. However there will be different partners in play, as Sputnik was not approved by regulators.

[Lisa Thompson:]

Okay. Are you going to have the same arrangement as you would have had?

[Oleg Firer:]

Similar. Similar or even better because we have signed a good agreement with VTB Bank, as our settlement bank, which give us a very preferential treatment on pricing, so we believe the economics could even get better.

[Lisa Thompson:]

Great. Okay. That sounds good. Jeff, just a couple here – just one question here – I read in the 10-Q that you're paying out some stock-based compensation in this quarter and it looked like $1.5 million. Is that that's going to hit this quarter, right?

[Jeffrey Ginsberg:]

That's could have hit in the second quarter, yes.

[Lisa Thompson:]

Okay. So that'll make it a little tough sequentially. And then just my last question is just overall, you said that in the 10-K that you had enough debt capacity to make it to the next 12 months and it was $3.3 million in cash. Is there any change to that number or what you think you're going to need?

[Jeffrey Ginsberg:]

No, I think it's still going to be the same.

[Lisa Thompson:]

Okay. And what was the cash burn this quarter?

[Jeffrey Ginsberg:]

Cash burn still runs about $250,000 a month.

[Lisa Thompson:]

Okay. All right, great. Thank you. That's all my questions.

[Oleg Firer:]

Thank you, Lisa.

[Operator:]

[Operator Instructions] And I'm showing no further questions at this time. I'd like to turn the call back over to management for any closing remarks.

[Oleg Firer:]

Thank you to everyone for being on the call this morning. Please do not hesitate to contact us with any follow-up question. Have a great day.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone have a great day.