Net Element, Inc.
Q4 2016 Earnings Call Transcript

Published: 3 Apr 2017

[Operator:]

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Net Element 2016 Annual 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 open 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 the 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 include estimates today as of March 31, 2017 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, happy Monday. Thank you and thanks to everyone joining in our call to discuss 2016 operational and financial results as well as given opportunity for those of you listening in to ask questions during the Q&A session. I am pleased to say that 2016 was a successful year for Net Element. Our achievements provided growth and positioned us for continued success as we continue to expand our global transaction services in the United States and selected international markets. I'd like to begin today's conference call by acknowledging our accomplishments in 2016. We processed 2.450 billion transactions globally in 2016 and increased 40% compared to 1.75 billion in 2015. Transactions processed for 2016 exceeded 187 million, an increase of 16% compared to 161 million in 2015. Our net revenues have increased 35% to 54.3 million for 2016 compared to 40.2 million for 2015. $14 million increase in net revenues is primarily due to growth in the Company's three segments. North American transaction solutions segments continued organic growth of SMB merchants with emphasis on value-added offerings. Revenues for this segment were $42.1 million, a 54% increase over the prior year. Online Solutions segment, continued organic growth of international merchants in this segment with expansion to international growth markets. Revenues for this segment were 6.2 million, a 63% increase over the prior year. Mobile Solutions segment revenues for this segment were 6 million, a 34% decrease over the prior year. We continue to explore financing options for this business as well as expansion to markets that do not require us to advance capital to content providers prior to getting paid from mobile network operators. In 2016, Net Element was named one of the fastest technology companies in South Florida business journals 2016 Technology Awards. PayOnline was named the best processing gateway by Tagline as well as recognized for its payment services by Markswebb Rank & Report, and ranked as a Top 5 payment acceptance company in 2016. During 2016, we have extended our service offerings to several markets, which include continued expansion into Central Asia and launch of payment processing and mobile payments in Azerbaijan, a growing new market in South-Western Asia. As a result of our entry into these markets, we have signed new key partnerships as well as secured key clients to use our transaction services platform. In 2016, we forged new key partnerships with clearing banks which include Esquire Bank in the United States. This multiyear contract includes transaction clearing services and sponsorship to payment networks. Merrick Bank in United States on November 1, 2016, we moved all of our processing that utilized a BMO Harris Bank for clearing to Merrick Bank. Mashreq Bank in UAE, this new partnership expands Net Element's processing capabilities in the region. Round Bank in Russia, under this collaboration agreement, we integrated the first 70 online merchants to the PayOnline platform. 2016 was a busy year for key new client relationships. Dunkin' Donuts became a client in Russia; PayOnline enabled online ordering and payments acceptance for this growing chain. ExLine became a client in Kazakhstan; PayOnline enabled secure online payments for Kazakhstan's market-leading courier service. ESET NOD32, one of the world's leaders in the field of anti-virus software became a client of PayOnline in Kazakhstan. Digital Provider enabled mobile payments at Vnukovo Airport; full integration with the airport's infrastructure. Sony Brand Stores became a client of PayOnline in Russia. 2016 was also year of new product launches. During the year, we have launched a payment acceptance module for Telegram instant messenger application, launched proprietary gift card software application for Smart Payment Terminals. PayOnline payments module became available for popular e-commerce and CMS platforms. PayOnline introduced a new multi-channel payment interface based on the user experience of more than 10 million shoppers. Unified Payments launched Mobile Point of Sale for Apple's iOS, launched fully integrated omni-channel gift and loyalty platform, launched Aptito in Russia, aiming to lead in the underserved POS market, released Aptito POS solution for retail stores with inventory management and analytics, launched SalesCentral On-the-Go to expedite merchant approvals and boarding. During 2016, we were successful in raising capital utilizing debt exchange and equity financing instruments and have appointed Howard Ash as an International Business Development Professional to our Board of Directors and the Chairman of the Audit Committee. We are very pleased with our strong finish to the year with positive momentum across all channels. Our results are reflection of our ability to continue to deliver organic growth. In 2017, we already hit the ground running and are confident that we can deliver continued growth throughout the year. Now, I would like to introduce Jonathan New, Net Element's Chief Financial Officer, who will provide comments on our financials. Jon, please proceed.

[Jonathan New:]

Thank you, Oleg. Good morning everybody and thank you for attending our call today. We reported a net loss attributable to common stockholders of 13.5 million or $1.03 loss per share for the year ended December 31, 2016, as compared to last year where we lost 14.8 million or $2.32 per share for the year ended December 31, 2015. Adjusting for non-cash compensation and other non-recurring items, we have a non-GAAP adjusted net loss attributable to common shareholders of 7.9 million or $0.60 loss per share for the year ended December 31, 2016, as compared to a non-GAAP adjusted net loss per share attributable to common stock holders of 11.3 million or $1.77 loss per share for the year ended December 31, 2015. The net loss attributable to common stock holders for 2015 includes preferred stock dividends paid in the amount 1.6 million. In terms of margin, we had very big growth in North America, and in our online solutions group and as already explained, we are doing some work on our mobile group and we have a decrease there as we move our capital to the higher margin business and look to raise additional debt capital in mobile in Russia and also look to move to other geographies where we don’t have to advance payments. On the margin, we have 16% gross margin for the year and 16% last year. North America was flat and we had a slight increase in mobile and slight decrease in online, but overall our margin remained flat year-on-year and we are expecting increases in North America margin as we move forward with more value-added services and additional equipment, sticky relationships, higher margins, little more capital expenditure to go into that development. Transaction on the expense side, transaction gains and losses represent a change in the exchange rates between our functional currency and the foreign currency in which the transaction is denominated. If you exclude those transaction gains, our general and administrative expenses were relatively flat to that of prior year despite large increases in revenues. So, we're able to grow our business rapidly and at scale as well. Non-cash compensation expense was $3.5 million for the year ended December 31, 2016 as opposed to the $4.3 million for last year, and the majority of non-cash compensation was due to incentive stock and options granted to our employees. We recorded a provision for bad debts in the amount of $1.7 million for the year ended December 31, 2016, compared to $700,000 for 2015. This is primarily comprised with the 2016 charge of $1.7 million which was primarily comprised of $1.3 million in net ACH rejects, and that's attributable to the normal course of our North American business, and a $0.5 million loss provision which was to reserve for potential losses on accounts receivable from our Mobile Solutions business. For 2015, recorded loss provision of $800,000 which is primarily ACH rejects and Mobile had $100,000 recovery. Depreciation and amortization expense consist primarily the amortization of merchant portfolios, trademarks and domain names plus our depreciation on fixed assets, client acquisition costs, capitalized software and non-compete agreements. Depreciation and amortization was $3.5 million for the year ended December 31, 2016, as compared to $2.5 million for last year of December 31, 2015. The primary reason for the increase was the Online Solutions Group because we had a full year in 2016 that business was acquired in May of 2015. In addition, we had a $300,000 million increase in North American Transaction Solutions due to increased customer acquisition costs, offset by $100,000 amortization decrease in the same group as much of our merchant portfolios became fully amortized during 2015 and there were no charges resulting from that amortization in 2016. Interest expense was $1.5 million, as compared to $3.6 million for the year ended December 31, 2015, which represents a decrease of $2.5 million. Interest for 2016 was primarily attributed to our RBL Notes. $800,000 represented non-cash charges attributable to discounts from the market value of our common stock that was issued in exchange for debt. In addition, $0.5 million resulted from the payment of interest on the notes. Other interest consisted primarily of $100,000 due to a third party relating to payment installments on PayOnline stock price guarantee obligation, offset by some interest income earned and Mobile Solutions. For 2015 interest was primarily attributable to corporate which amounted to $3 million due to the accretion of interest on debt discount from our convertible notes that were extinguished during the fourth quarter of 2015. Additionally, $0.5 million of interest was attributable to our RBL Notes in 2015. So, in 2016 we've been able to finance our business in a better way interest is up on a cash basis but we don’t have any of the convertible preferred motes. During 2016, we recorded a $3.7 million loss from stock value guarantee and other charges from PayOnline acquisition, related to the Online Solutions segment. This includes a stock price guarantee of $2.2 million, plus accrued interest and we also have $1.4 are pursuant to an amendment where we have some additional liabilities and we also had other income at a $0.5 million from the transfer and settlement of merchant reserves. During 2015, we recorded a loss on the charge of the convertible notes; there was a gain and a loss, and it netted to $818,000 that was non-cash. That concludes my remarks on income statement. I'd like to turn it back over to Oleg.

[Oleg Firer:]

Well, I'd like to open up the call for questions.

[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 [Nero Rodriguez], Private Investor. Your line is open.

[Unidentified Analyst:]

My question is with regards to fourth quarter of 2015 versus '16, I know that you guys grew revenues in transacting value, extremely-extremely quickly, but it did not translate into revenue growth for fourth quarter, comparing numbers I see that 15.1 million was generated in '15 versus 15.3 million for '16. Can you guys explain why the revenue growth did not translate?

[Oleg Firer:]

As part of this press release, we didn't really get in the quarter-on-quarter revenues, so -- but I think our revenue should have been increased. We did have a decrease in mobile, but the rest of our businesses were generally up. So maybe we can take that offline and we can come back to you and have the further discussion on that post-close, if you want to send us an email.

[Unidentified Analyst:]

Do you guys give Q1 guidance?

[Oleg Firer:]

We're not giving any guidance, but you can look to Zacks and SeeThruEquity reports in terms of some guidance from them.

[Operator:]

Thank you. Our next question is from Lisa Thompson of Zacks Investment. Your line is open.

[Lisa Thompson:]

So, I guess the follow-up on the first question, your revenues were up slightly for the quarter but mobile payments fell off the cliff because it was 5.6 million last year and only 0.9. Can you explain what happened in that business and what to expect going forward?

[Jonathan New:]

Good morning, Lisa. Yes, Sure. The mobile payments segment in CIS which is Russian region, particularly we changed our business model as you could remember in 2015 where we shifted towards the branded content. And the reason why we did that was to have more predictable business; however, we were still required to advance funds to content providers on a weekly and bi-weekly basis whereby we get paid only from mobile operators 60 to 90 days after the content is generated and paid for by the consumer. And therefore, it requires us to tie up significant capital in that business. Historically, we had credit facilities in Russia to finance our business which worked very well and allowed us to scale the business. However, at this point, with the change of market conditions, we no longer have credit lines in Russia, therefore it requires us to put up equity capital and tie up that equity capital on the business. So, we decided that we should take a pause in that business and look for proper debt structures inside Russia and outside of Russia, which we're exploring right now. In addition we've expanded our business into other regions where it does not require us to advance content to providers on a weekly and biweekly basis and such regions include Poland, Turkey, and we're exploring some others where the business practice is such that we pay content providers when we get paid from mobile operators. And in that case scenario, the business works very well. Business also works very well if we have proper debt financing in place. The business is still growing. We still have money in the float of that business, which is our paid-in capital. We do not have any debt outstanding in Russia as of today, but we're exploring new facilities to replace the facilities that have expired in Russia and as they said we're looking to extend to markets where we're now required to advance content providers.

[Lisa Thompson:]

Okay and exactly what does that business do again?

[Jonathan New:]

It’s a direct carrier billing business where we bill mobile operators. Giving you an example, if you're a mobile user and you have prepaid value on your phone, for instance you have $100 on your phone, we allow you to use that value in cards. So, we allow you to use that value to purchase content, to purchase games and make other digital goods purchases. It's for predominantly online and smart television purchases and such, but that’s really allowing users of mobile devices to use their mobile volumes that’s going to be domestically.

[Lisa Thompson:]

Okay and one thing you said, you've said talked about, you said Aptito is moving into Russia and other countries, where would that revenue show up on your -- which group?

[Oleg Firer:]

We just launched it, so you would attribute to unified payments growth. We're not separating the segment yet, so any value added services such as Aptito licensing and such will attribute to unified payments growth. Because we have -- and when we go into other regions, it's predominantly going to be Software-as-a-Service. So, there is not going to be processing revenues as touched to Aptito, and we're making great strides with it domestically and internationally.

[Lisa Thompson:]

Okay that should be interesting.

[Oleg Firer:]

And that’s the reason why Jon mentioned that our markets will be improving because the fact that we will have more value added services as part of our business.

[Lisa Thompson:]

When do you think that that we'll see that, which quarter should it start taking up?

[Oleg Firer:]

Over the course of the year, it’s already -- we already starting seeing improvements, but you will see it through the course of the year that the margins will increase.

[Lisa Thompson:]

Okay, but Q1 is typically down right, so it's probably not going to be that quarter.

[Oleg Firer:]

Middle of the year, I would say.

[Lisa Thompson:]

Okay right, and I guess to update on PayOnline. What's going on there and what to expect from that?

[Oleg Firer:]

PayOnline is still a business that we were very bullish on. We're expanding PayOnline into other regions also outside of CIS market. We're growing in Europe. We're growing in Asia. So, we're actually expanding it and looking to bring and we're actually in the process of bringing it to United States. We're in the final stages of certification in United States. So, we believe that PayOnline will also be very successful in the domestic market as well.

[Lisa Thompson:]

And how will we see that in the U.S.? What sort of product is that going to be?

[Oleg Firer:]

It's going to be online and value added services, so it's going to be online in smart payment terminals. So it's going to be anything that’s online and IP-based terminals. We're not going to go into dial up terminals in such. But anything that’s IP driven, so we're going to -- instead of using third-party gateways for Aptito, we will be using PayOnline gateway instead of using third-party gateways for our smart payments terminals, we're going to be using PayOnline gateway.

[Lisa Thompson:]

Okay. So that should help margins too, right, if you bring that?

[Oleg Firer:]

Of course that depends, all of that combined will hopefully drive our margins up where we're not going to be using third-party gateways, and we're going to be developing more value to services on the centralized platform, so all that stuff will improve our margins down the road.

[Lisa Thompson:]

All right, I guess the main concern possibly and it could be -- I look at you, this last year you grew revenues 35%, but the share count went up 83%. So at what point are you going to get to be a little bit more self funding where you can invest in your business from your own profitability?

[Oleg Firer:]

Jon would answer that.

[Jonathan New:]

So, what we're working towards is balancing out the growth of the business and then need for additional capital. We have much more efficient equity financing in place now than we had previously, and we will continue to do that and grow the business quickly. We also have some additional debt financing in place, if you look at our subsequent events in our 10-K, we had another 0.5 million from RBL. But to answer your question directly, as we move towards the end of this year, our portfolio size is going to be expanding to the point that it will start to cover our overhead overheads. So, even with rapid growth as we approached end of this year, we hope to be coming some more of the self financing position.

[Operator:]

Thank you. Our next question is from [Christopher Gary] of The Element. Your line is open.

[Unidentified Analyst:]

I was wondering just to pick you back on the last question. Are you looking for any type of mergers or buyout so this can become financing?

[Jonathan New:]

Well, we are always exploring opportunities. We are very opportunistic and if any opportunity presents us, we will always take a look at it. And obviously, if we half of get to a finish line quicker and get the profitability quicker and have scaled faster, obviously our business is such where if we are to merge or to acquire or to do a transaction with a company that’s in the same business. As ours, we don’t need to expand our G&A. We could pick it back and centralize operations, so it allows us for profitability much quicker. We will obviously explore the adoptions.

[Unidentified Analyst:]

And then I guess my last question is just a general question for this stock market price. What you contribute to the continuing downwards part role of the stock?

[Oleg Firer:]

Well, your guess is as good as mine. I am a believer. I have acquired shares overtime. I have not sold a single share. Senior executive managements have not sold any shares. So, it's really speculative that's coming in out of the stock. We have a lot of retail shareholders so I guess the next phase of our evolution would be to attract institutional investors that could hold on to stock longer. Otherwise, it's just they trade off coming in out of the market without looking at the fundamentals and understanding the Company.

[Operator:]

[Operator Instructions] And I am showing no further questions at this time. I now would like to turn the call back over to management for closing remarks.

[Oleg Firer:]

Again, I would like to thank everyone for participating in our call this morning. Please do not hesitate to contact myself or Jon with any questions that you might have. We are always available to answer your any question that you might have. Thank you.

[Operator:]

Ladies and gentlemen, that does conclude the Net Element 2016 financial results conference call. Thank you for your participation. You may now disconnect.