Net Element, Inc.
Q3 2017 Earnings Call Transcript

Published: 15 Nov 2017

[Operator:]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Net Element 2017 Third Quarter 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 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 November 15, 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 and thank you for joining our call this morning to discuss third quarter 2017 operational and financial results as well as give an opportunity for those of you listening to ask questions during our Q&A session. I'd like to begin today's call by highlighting our accomplishments during the third quarter of 2017. For three months ended September 30, 2017, net revenues increased by 6.4% to $14.9 million that's compared to $14 million in the prior year. The $900,000 increase in net revenues is primarily due to organic growth in our North America Transaction Solutions segment, which demonstrated net revenues increase of $1.9 million or 17.3% as compared to the prior year. US accounted for 88% of total revenues, while international revenues were 12% for the period. During the third quarter of 2017, we have launched the web-based integrated same-day ACH payment processing, launched payment acceptance for Azimuth Airlines, supported Florida's small to medium size merchants affected by Hurricane Irma with a free mobile POS card readers, launched free fee processing program for SMB merchant in the United States giving the merchants flexibility to pass through credit card processing costs for their customers. We launched payment acceptance module for popular instant messengers which include Telegram, Viber, Facebook and VK. We launched PayOnline Electronic e-commerce portfolio in United States as a fully integrated offerings that allows merchants to expand their business without limiting the way the customers can pay; added support for iDEAL, the most popular payment system in Netherlands, expanded PayOnline payments module to include in sales for popular omni-channel commerce platform. Third quarter was an important period for the company. As internationally, we completed operational centralization in PayOnline and streamlined operations to build more profitable and less capital intensive mobile and online solutions business. In the United States, we continued to grow organically with a focus on value-added solutions. Additionally, we have regained compliance with the NASDAQ Capital Market continued list. Now I'd 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. Let's walk through the financial results for the third quarter. In a good quarter, I hope that we can continue to provide you with these type of results. On the revenue side, we were held back a little with the storms, but we still produced double-digit growth quarter on quarter. On a net loss basis, we're down to 1.7 million versus the same quarter last year of 3.5 million. So that's due to increased revenues, a decrease in non-compensation expense and interest expense, partially offset by an increase in other expenses. Additionally, we did not have the stock value guarantee charge of 1.5 million that we had in 2016 third quarter. On a non-GAAP basis, eliminating non-cash compensation and the stock value guarantee, we reported adjusted non-GAAP loss of 1.6 million as compared to 2.7 million of non-GAAP loss for the three months ended September 30, 2016. So, we have substantial improvement on our bottom line results. Gross margin was 2.1 million as compared to 2.3 million, so we have a slight decrease as we talked about - we have a North America, even though it produced a great return of 17%, it was still down a little bit from the storms, also we have seasonality. We do expect a really good fourth quarter. But the other things that affected the gross margin dollars in the quarter were the mobile solutions margin as we ceased to originate new business as we reformat that business and look for other ways to do that business with less capital. Additionally, online solutions decreased slightly and that was offset by an increase in North America. Total operating expenses were $3.4 million which consisted of G&A of 2.3 million, non-cash comp of 1.11 million, depreciation and amortization 630,000, provision for bad debts is 320,000 as compared to 4.1 million, so 3.4 to 4.1 million for the same quarter last year. So, we've done a good job of scaling the business, keeping the expenses in line and we had good results as a result. In terms of the things that went up in expenses, our salaries went up in North America as we continue to grow that business. Our online solution was higher primarily due to higher costs in the ruble exchange rate. And there was a decrease in the mobile business as we reduced headcount and assigned current workload to existing employees. Non-cash comp was 111,000 as opposed to 732,000 for the three months ended September 30, 2016. A majority of these expenses were for employee and consultant equity incentives for both periods. Interest expense was also down quarter on quarter at 302,000 versus 608,000, it's due to lower debt balances carried. Additionally, in 2016, we were converting debt to equity with Crede and that created some non-cash interest expenses and that's also a big part of why interest expense is down. On a nine-month basis, we have a net loss of 5.8 million versus 10.7 million for the nine months ended September 30, 2016. We have almost a $5 million increase in our results due to an increase in revenues, a decrease of the loss from stock value guarantee, a decrease in non-cash crop and a decrease in other income offset by some general increases in G&A like we talked about for the quarter. On a non-GAAP basis, if you strip out non-cash comp and stock value guarantee, we have an adjusted non-GAAP net loss to stockholders of just under 5 million as compared to 5.4 million for the same period, so again an improvement, both on the quarter and on the year-to-date basis. On a bottom line basis, even with the topline not coming on - firing on all cylinders, but still doing well. Net revenues consists primarily of payment processing fees and they were 45 - almost 45 million, 44.6 million for the nine months ended September 30 as compared to just under thirty 39 for the same period last year. And again, it's North America organic growth driving that increase and online solutions providing 22% increase or $1 million of it from 4.5 to 5.5 on a nine-month basis, primarily to on-boarding additional merchants there. The mobile business as we discussed, it's off 3.6 million on a year-to-date basis, but we've also reduced staff and assigned those responsibilities to other members at PayOnline and TOT Group Russia. Our gross margin was 7 million as compared to 6.4 million. And again, you have processing and business mix in North America offset by decrease of 500,000 in mobile. On the operating - on the expense side, total operating expenses were just under 12 million and they were - almost they were 12.7 million for the same period last year. So, increase in salaries this year, primarily due to bonuses, but yet all costs were really held in line very nicely. We have somewhat of an increase also in professional fees and that was another thing that went up, but everything else pretty much went down or stayed the same. Non-cash compensation expense from shared based compensation was 836,000 compared to 3.1 million for the nine months that was all consultant and employee incentives. Bad debt expenses were 1.5 million for the nine months as compared to 678,000 last year. You've got a growing US business and you also have some additional charges in Russia as we clear up everything there and switch everything over and integrate. Depreciation and amortization was 1.9 million as compared to 2.5 million, primarily resulting from a decrease in amortization of acquired portfolios as they are now fully amortized. Interest expense was 894,000 as compared to 1.2 million, $300,000 decrease in interest again for the same reasons as in the quarter, you have slightly lower balances and you have more efficient financing and that we weren't during creed debt exchanges where we had these non-cash interest charges. And that pretty much wraps it up. This concludes our formal remarks and I'd like to ask the operator to open the call for questions at this time.

[Operator:]

[Operator Instructions] Our first question comes from Lisa Thompson from Zacks Investment Research.

[Lisa Thompson:]

So, I have a few questions about the quarter. Let's talk about Russia first. Was this quarter representative going forward or does things happen in the middle of a quarter? So, this isn't exactly how it's going to look steady state.

[Jonathan New:]

It's not representative. Go ahead, Oleg.

[Oleg Firer:]

It's not representative. It's going to change. This quarter, as we promised in the previous quarter, we would centralize and optimize the business. We have completed that. So, on a go forward basis, we are forecasting an improved result, because of the fact that we have mostly completed all of our reorganization in international business as a whole.

[Lisa Thompson:]

Do you have any one-time expenses in this quarter from that?

[Jonathan New:]

Yes. There are some one-time expenses in there Lisa. As we terminate people, we have to pay salaries for a number of months in accordance with Russian law and some other expenses. So, there are some one-time expenses in there, but it's not really a normal quarter and fourth quarter you also see some things going through there. So, I think you'll see improved results, but some anomalies in the expenses and maybe in the revenues and margins in the short term.

[Lisa Thompson:]

Okay. Because I see like PayOnline, the gross margin was like half of that 30% last quarter. So, does that go back up?

[Jonathan New:]

Yes. That should go back up, but the -

[Oleg Firer:]

It should normalize in the short order. Yes.

[Lisa Thompson:]

And then mobile payments, should we just assume that that's going to be zero until you figure something out or are you still - are you just not in that --?

[Oleg Firer:]

We do have some initiatives. We have a pipeline of investors that we're working on. Any initiative that we undertake in our business is not going to be with advancing funds like we did before. So, we're not in a position today to prepay any content or buy any content or advanced agents. So, we're going to monetize our gateways, our infrastructure and our contracts on a gateway basis rather than prefunding any initiatives. So, we have quite a bit in the pipeline and we hope it's going to materialize, but it's not going to be like we had historically where the business was very capital intensive.

[Lisa Thompson:]

And so is Russia now at breakeven or if not, what revenue level does it have to be at to breakeven.

[Jonathan New:]

I think the thing to do with Russia also is to look at it on an EBITDA basis and PayOnline has been profitable on an EBITDA basis for some time in general and I think that's a way to look at it. So really what's left is PayOnline and a much smaller corporate staff consisting of a CEO type person, an accountant, and a lawyer and a few support people versus what we had before so that's what will go forward in Russia.

[Lisa Thompson:]

And a question about Unified Payment. You said you went to same day ACH, is that for all transactions or just whatever is done on the web?

[Oleg Firer:]

No. It's an ACH processing business. Historically, ACH has been two, three days delayed. So, for the processing business, we do same dates. It's an additional service to what we have offered before. So, it's typically, we'd give merchants another payment method such as ACH and it's not on all the transactions that some - mostly on the new business that the merchants - where merchants acquire ACH processes. So, you just look at it as just another payment method that we had it fold.

[Lisa Thompson:]

Is that going to help reduce rejections or is it not big enough.

[Oleg Firer:]

It's not because it's not. We're not changing our current settlement process. All are awaiting same ACH for merchants to accept ACH from their clients. With the settlement, we're still doing, we haven't changed the process. Our merchants get the next day funding. So, we're not offering merchants same day funding on the settlement. We are however offering them an ability to add same day ACH to their payments acceptance.

[Lisa Thompson:]

And just one last question about when you said you were held back by the storms, can you clarify that a little more about what exactly happened?

[Jonathan New:]

Yeah. Sure. Yes. So, with the hurricane effecting South Florida and Texas, having their issues there, we've experienced held back with processing in those areas. Some of the merchants obviously unfortunately were affected and if you're looking geographically, we had declines in those geographic areas, which reduced our increases on a quarter-over-quarter and a year-over-year basis and we only showed what we showed an increase on for North American transactional services, we only showed I believe a 17.3% which is still double digits but it's less than we were expecting to show an increase.

[Lisa Thompson:]

So, you expect that to come back in the fourth quarter gross?

[Oleg Firer:]

We expected to come back, yes, because obviously, yeah, so we expect to go back to the level that we were since we're not - obviously there's an act of God, but outside of act of God, we expect to go back to the levels where we were.

[Jonathan New:]

Fourth quarter is more seasonally strong as well of course. So -

[Oleg Firer:]

Year on year, we expect to go back to the same level.

[Lisa Thompson:]

You mean into the 30% growth for North America.

[Jonathan New:]

As I said, there is no surprises that are outside of our control we hope to go back to those lows

[Operator:]

[Operator Instructions] And I am showing no further questions from our phone lines. I would now like to turn the conference back over to management for any 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 questions.

[Operator:]

Ladies and gentlemen, that does conclude the Net element 2017 third quarter financial results conference call. Thank you for your participation. You may now disconnect.