Net Element, Inc.
Q2 2018 Earnings Call Transcript

Published: 15 Aug 2018

[Operator:]

Good morning, ladies and gentlemen. Thank you for standing-by. Welcome to the Net Element 2018 Second Quarter and First Half 2018 Financial Results and Business Update Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. [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 these risks and uncertainties in the Company's filings with the SEC. Any projections as to the Company's future performance represented by management may include estimates today, as of August 15, 2018, 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 like to turn the call over to Oleg Firer, CEO. Oleg, please go ahead

[Oleg Firer:]

Good morning, everyone. Thanks to everyone for joining our call today, to discuss the results from the second quarter and first half of 2018. Net revenues for the second quarter increased to $16.46 million, an increase of 2% compared to the second quarter of 2017. The increase in net revenues is primarily due to organic growth in our North American Transaction Solutions segment, which experienced growth of 6% over the prior year. International Transaction Solutions segment experienced an expected decline of 19% due to elimination of branded content business, which accounted for $684,000 of net revenues in 2017. Normalizing elimination of branded content business resulted in 11% growth in the International Transaction Solutions segment and 6.5% across all segments over the same period of the prior year. Net revenues for the first half of 2018 increased to $32.45 million, an increase of 9% over the prior year. The increase in net revenues is primarily due to organic growth in the North American Transactions Solutions segment, which experienced 15% growth over the prior year. International Transaction Solutions segment experienced an expected decline of 21% due to elimination of branded content business, which accounted for $1.34 million of net revenues in 2017. Normalizing elimination of branded content business resulted in growth of 7.3% in the International Transaction Solutions segment and 14.4% across all segments over the same period of the prior year. Geographically, the United States accounted for 88% of total revenues for the second quarter and 87% for the first half of 2018, while international revenues were 12% for the second quarter and 14% for the first half of 2018. Total dollars processed for the first half of 2018 increased 37% to $1.62 billion, led by robust growth from our subsidiary Unified Payments, the North American Transaction Solutions segment saw the largest increase of 40% to $1.4 billion. While, International Transaction Solutions increased 20% to $211 million. Total transactions processed during the first half of 2018 increased 41% to 50.2 million. The increase in transactions processed came primarily from North American Transaction Solutions segment, which saw an increase of 41% to 28.1 million. While International Transaction Solutions segment saw an increase of 40% to 21 million. These results include the reorganization of the mobile payments segment into International Transactions Solutions segment. On the operational side, we implemented stronger internal controls and procedures and have also established this quarter commitment. We believe this enhanced our corporate governance, and this enhanced corporate governance will be a very important step going forward. With respect to our product development, our R&D team continues to work and deliver value-added products that set out to differentiate our offerings to small-and medium-sized businesses. During the second quarter 2018, we launched Netevia Smart Vendor Payment Solutions, to enter a multi-trillion dollars global B2B payments market. We continue to work in Netevia, our future-ready omni-channel payments platform that was launched early this year. And we're on track to launch services we set out to do this year, including blockchain technology solutions and value-added services. We launched an intelligent multi-channel processing solution for the multibillion-dollar meetings and events industry. I'm also very happy to report that on July 31, 2018, we acquired the recurring cash flow portfolio that is projected to have over $5 million in gross profits over the next four years. And on August 9, 2018, we launched subscription-based payment processing for small businesses, which immediately gained traction through a partnership agreement with Payment Club, which is projected to add over $1.5 million in gross profit over the next four years. Combined, these strategic initiatives are expected to add over $6.5 million in gross profit over the next four years. We're on track to deliver another year of growth and financial improvement, and are pleased with our results as we continue to focus on long-term growth plans. We are comfortable in our strategic initiatives and continue to invest in commerce-enabled technologies are creating significant value for our shareholders. Now I'd like to introduce Jeffrey Ginsburg, Net Element's Chief Financial Officer, to review our financial results in more detail. Jeff has been with us since inception, and recently assumed the role of Chief Financial Officer. Jeff, please proceed. Jeff?

[Jeff Ginsburg:]

Thank you, Oleg. And good morning everyone. We reported a net loss attributable to common stockholders of $903,731 or $0.23 per share for the second quarter of 2018 as compared to a net loss of $1,640,340, or $0.93 per share, for the second quarter of 2017. This resulted in a decrease in net loss attributable to stockholders of $736,609 primarily due to an increase in revenues and other income, as well as decreases in general and administrative and non-cash compensation expenses, which were offset by increases in depreciation and amortization expenses. Net loss for the first half of 2018 was $2,514,577, or $0.65 per share, for the six months ended June 30, 2018, as compared to a net loss attributable to stockholders of $4,127,837, or $2.41 per share, for the first half of 2017. This resulted in a decrease in net loss attributable to stockholders of $1,613,260 primarily due to an increase in revenues and other income, as well as decreases in general and administrative expenses, and non-cash compensation which were offset by increases in depreciation and amortization. Adjusting for non-cash compensation, we have a non-GAAP adjusted net loss attributable to common stockholders of $881,231, or $0.22 loss per share, for the second quarter of 2018, as compared to a non-GAAP adjusted net loss attributable to common stockholders of $1,511,803, or $0.84 loss per share, for the second quarter of 2017. Non-GAAP adjusted net loss for the first half of 2018 was $2,410,066, or $0.62 loss per share, as compared to a non-GAAP adjusted net loss of $3,402,896, or $1.99 loss per share, for the first half of 2017. Net revenues for the second quarter of 2018 were $16,464,717, as compared to $16,141,041 for the second quarter of 2017. The increase was driven by an increase of $806,347 or 6% in net revenues from our North American Transaction Solutions segment due to organic growth, which was partially offset by a decrease of $482,671 or a minus 19% in net revenues from our International Transaction Solutions segment as we reorganized our international business and consolidated our mobile payments operations with PayOnline. For the second quarter of 2018, there was no branded content revenue from our mobile payment operations as compared to $684,731 of branded content revenue in the second quarter of 2017. Net revenues for the first half of 2018 were $32,447,111, as compared to $29,702,982 for the first half of 2017. The increase in net revenue is primarily due to organic growth of merchants in our North American Transaction Solutions segment, which resulted in an increase in North American Transaction Solutions segment revenue of $3,808,045 for the first half of 2018. This was partially offset by a decrease of $1,063,916 in net revenues from our International Transaction Solutions segment as we reorganized our international business and consolidated our mobile payments operations with PayOnline. For the first half of 2018, there was no branded content revenue from our mobile payment operations as compared to $1,340,896 of branded content revenue in the first half of 2017. We continue to explore partnership opportunities that can monetize our relationships and contracts with mobile operators but have not yet identified an acceptable joint-venture partner or other arrangement. Gross Margin for the second quarter of 2018, was $2,650,709, or 16.1% of net revenue, as compared to $2,822,649, or 17.5% of net revenue, for the second quarter of 2017. Gross Margin for the first half of 2018, was $5,014,769, or 15.5% of net revenue, as compared to $4,924,598, or 16.6% of net revenue, for the first half of 2017. The primary reason the gross margin percentage decreased was because of increases in North American Transaction Solutions segment’s fixed costs as we began processing transactions utilizing our self-designated BIN/ICA. We estimated that this margin will normalize as we meet volume and transaction requirements on this new structure. Gross margin was lower also due to a decrease in our mobile payments business in our International Transaction Solutions segment that have had typically higher margins than our North American Transaction Solutions Segment. General and administrative expenses for the second quarter of 2018, were $2,499,496 as compared to $2,599,178 for the second quarter of 2017. The reduction of $99,682 in general and administrative expenses was primarily due to decreases in salaries and benefits of $76,347, professional fees of $51,954 and rent of $66,033 offset by increases in offices expenses of $32,961 and communications expenses of $39,549. General and administrative expenses for the first half of 2018, were $4,945,977 as compared to $5,430,338 for the first half of 2017. The $484,361 reduction in general and administrative expenses was primarily due to decreases in salaries and benefits of $415,134, professional fees of $158,537 and rent of $138,045, offset by increases in transaction gain and losses of $32,429 and other general and administrative expenses of $95,00. The general and administrative variances increase – or decrease for the second quarter of first half of 2018 compared to the second quarter of first half of 2017 included

[Operator:]

Thank you. Ladies and gentlemen, we’ll now begin the question-and-answer session. [Operator Instructions] Our first question is from the line of Lisa Thompson with Zacks Investment. Your line is open.

[Lisa Thompson:]

Good morning, Oleg and Jeff.

[Oleg Firer:]

Good morning, Lisa. How are you?

[Lisa Thompson:]

Good. So I have a couple of question about things that happened since the quarter ended, what seems to be more interesting than the quarter was. Oleg, could you talk a little bit about this broader portfolio, and also, the deal with Payment Club? But first, on the portfolio, cryptically, you said that it was – go ahead.

[Oleg Firer:]

No, no. Go ahead, go ahead.

[Lisa Thompson:]

No. I said, cryptically, it said you bought something that would generate $5 million in gross profits over this next four years. So how does that translate into revenue?

[Oleg Firer:]

Right. So we have acquired a portfolio from a partner of ours that has been submitting business. As you know, the way our business works, we pay portion of our revenues to our agents and the partner that source the business on a residual recurring basis. So we bought that back, which means that we are now reducing a payout to that partner by this amount. And when we say gross profit, it's really going to drop to the bottom line. We have not bought the new money against it. We have not issued any stock against it. Instead of paying our partner his commission, the commission will be going to us. And the way we restructured the deal, is we have an attrition guarantee for a certain period of time, which results in what we're projecting, which is $5 million in gross profit because we have some guarantees in the production and then – and enhanced revenues over the period. So it's a – it's at least going to be $5 million. But we're projecting it's going to be more.

[Lisa Thompson:]

So how does that work? Do you get revenues from this? And then you get…

[Oleg Firer:]

Right.

[Lisa Thompson:]

Like, the 15% margin? That's how you book it? Or is it just your margin's going to increase because now you own it?

[Oleg Firer:]

Our margin is going to increase because the way it's done now, we have – as you know, we have our revenues – that comes in and then we pay out our referral partners. This is one of our referral partners. So instead of paying out a – making a payout to our referral partners, we're repaying those cash flows, which means that our margins will increase. The revenues will not increase because we already have this in our revenue line, just that our margin will increase.

[Jeff Ginsburg:]

Our cost of sales will decrease.

[Lisa Thompson:]

Okay. So that – and that's all in North America, right?

[Jeff Ginsburg:]

Yes.

[Oleg Firer:]

Yes. Like Jeff said, our cost of sales will decrease.

[Lisa Thompson:]

Okay, good. I was just trying to understand that. And then, can you talk about this deal with Payment Club? Who are they? What do they do? And are you like a reseller for them now?

[Oleg Firer:]

Right. The Payment Club is a new brand that's one of our valued resellers have launched. And it's a brand, which is launched for the purpose of having subscription-based payment processes. Instead of charging margins on top of the rates such as interchange, this valued reseller will be offering flat rates to their merchants, and plan the merchants to subscribe to, to get transparent bill. We have signed a long-term agreement with Payment Club, which has a commitment and penalty set forth if they don't meet this commitment over a certain period of time, which translates in gross profit, like we said in our release. This will result in new revenue. This is not something that we bought that's existing already on our platform. So this will also result in additional revenues and gross profits. However, when we did the press release, we have only reported the gross profit portion of the deal. This is what holds the guarantee, the revenues come with gross profits. But will increase – this deal will increase both the revenue side and the gross profit side.

[Lisa Thompson:]

And is it at the same margins, like 15%? Or is it higher or lower?

[Oleg Firer:]

No. This deal will – when we talk about the revenues, the margin will be more or less the same. It's not going to be bigger. However, the gross profits will be as stated, but the margin, that will be probably around 60%.

[Lisa Thompson:]

Okay. All right. And then, I have one question for Jeff. So the only strange thing in the second quarter report is other income, which was $674,000. Can you talk a little bit about what's in there? I assume that's a one-time thing, right?

[Jeff Ginsburg:]

Yes. This is non-reoccurring income, so there were two primary factors that contributed it to this other income. One was we wrote off the stock guarantee accrual for SDV, and that was in the amount of $312,000. And then we also wrote off certain legacy payables that have been on our books for quite some time because we accrue them due to possible contractual obligations. But after three years, we decided to – that no claim or anything was made against them and we decided to write them off. That was around $600,000. And then, netting against that was – there was that Bunker Capital $200,000 decrease. It all – all in all, it wound up – a decrease in prepaids, sorry, because we wrote that off. So all in all, it netted to the $674,000 other income that you see in our statement of operations and comprehensive loss.

[Lisa Thompson:]

Didn't I see something about PayOnline in there though?

[Jeff Ginsburg:]

PayOnline, yes, the stock guarantee was related to the PayOnline acquisition. So when we bought it from PayOnline, we issued a stock price guarantee, and there was a look-back period. After that look-back period, there was no longer a claim so there was no liability, and we wrote that liability off. But because of GAAP and the obligation that was upon us, so that yes, we had to accrue it.

[Lisa Thompson:]

Okay, good. That explains that. All right, great. That’s all my questions for now.

[Oleg Firer:]

Thank you, Lisa.

[Jeff Ginsburg:]

Thank you, Lisa.

[Operator:]

[Operator Instructions] And I'm showing no further questions at this time. I'd now like to turn the call back over to management for 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 questions. Have a good day. Thank you.

[Jeff Ginsburg:]

Thank you.

[Operator:]

Thank you. Operator Ladies and gentlemen, that does conclude the Net Element Second Quarter and First Half 2018 Financial Results and Business Update Conference Call. Thank you for your participation. You may now disconnect.