Net Element, Inc.
Q4 2017 Earnings Call Transcript

Published: 3 Apr 2018

[Operator:]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Net Element 2017 Annual Financial Report 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 the 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 April 3, 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. Thank you everyone for joining our call this morning to discuss 2017 annual operational and financial results as well as give an opportunity for those of you listening in to ask questions during the Q&A session. I’d like to begin today’s call by highlighting our accomplishments during the fiscal year ended December 31, 2017. Net revenues for the 2017 increased 11% to $60.1 million as compared to $54.3 million in the prior year. The $5.8 million increase in net revenues is primarily due to organic growth in our North American Transaction Solutions segment, which demonstrated net revenues increase of 21% as compared to the prior year. North American Transaction Solutions segment continued organic growth of small and medium-sized business merchants with emphasis on value-added offerings. Revenues for this segment were $51.1 million, an increase of 21% over the prior year. As a result of the consolidation of Online Solutions and Mobile Solutions segments during 2017, revenues for the International Transaction Solutions segment were $8.9 million, a decrease of 27% over the prior year. During 2017, we have received $7.55 million institutional investment to support continued organic growth and blockchain-focused developments; ensured continued compliance with NASDAQ listing requirements; ranked as one of the fastest growing companies in North America on Deloitte’s 2017 Technology Fast 500 list; Supported Florida’s small and medium-sized business merchants affected by Hurricane Irma with free mobile point-of-sale credit card readers. We have completed several key partnerships to expand our payment acceptance both [ph] in the United States and internationally, continued to launch value-added products and services that separate us from our competition. Going in 2018, our strategy is to ensure that our business remains successful in the rapidly changing market, creating sustainable value for all stakeholders, including our clients, distribution partners and shareholders. We aim to achieve superior results for our clients by having a deep understanding of their payment acceptance needs, extensive market research, strong product development and technology enablement. In 2018, we continue to focus on growth in all key segments, client retention, cross sales of additional products that create greater stickiness and potential for improvement in margin, expansion of our client base in selected markets, value-added products that increase efficiency and payment acceptance for our clients, continued development of the Netevia, our next generation payments platform, enabling intelligent routing of payment for the application development community, launch of new tools to reach our clients such as digital channels and deepening partner relations. We believe that the new and disruptive technologies will provide us the opportunity to differentiate ourselves from competition and continue developing and delivering innovative payment solutions in 2018 and beyond. We will continue to scale and enhance new product launches that will add value to our clients, extend our capabilities in the next-generation point-of-sale hardware and software, and deepening our partner proposition, commence trials of advanced technologies around business intelligence and mobile-based payment acceptance, continue developments in the future emerging payment technologies which includes development in blockchain technologies, payment enablement for Internet of Things and biometrics payment acceptance. During 2018, we also plan to realize the full potential of our business model by delivering stronger organic growth and delivering additional payments network relationships to integrate with our technologies. During 2018, we’ll also keep acquisition or investment opportunities to deepen our technological and distribution capabilities. Now, I’d like to introduce Jonathan New, Net Element’s Chief Financial Officer, who will provide comments on our financials. Jonathan, proceed.

[Jonathan New:]

Thank you, Oleg. Let’s walk through the financial results for the first quarter. First, I’d like to say we’re pleased to have a very strong balance sheet position at year-end and to have a clean audit opinion with our going concern opinion removed. We reported a net loss to Net Element of $9.9 million or $5.04 per share for December 31, 2017 as compared to $13.5 million or $10.33 per share last year December 31, 2016. The resultant decrease and the loss of $3.6 million, primarily due to an increase in revenues, a decrease in depreciation, amortization and interest expense, partially offset by an increase in G&A. Eliminating the effects of non-cash compensation and the 2016 PayOnline stock value guarantee, we reported an adjusted non-GAAP net loss attributable to Net Element, Inc. stockholders of $7 million or $3.54 per share this year compared to an adjusted non-GAAP net loss attributable to stockholders of $7.9 million or $6.02 per share for the year-ended December 31, 2016. So, again, an increase on a GAAP and non-GAAP basis and the decrease in the reduction of the loss. Net revenues were $60.1 million for the year-ended December 31, 2017, as opposed to $54.3 million for the year-ended December 31, 2016, primarily due to organic growth in North America with emphasis on value-added offerings that was partially offset by a $3.2 million decrease from International Transaction Solutions as we reorganized that group successfully. During the third and fourth quarter of ‘17, we consolidated our Online and Mobile Payment businesses into one unit and changed a lot of the management there. So, they’re running a much leaner and stronger operation internationally. Gross margin for the year ended December 31, 2017 was $8.8 million or 14.7% of net revenue as compared to $8.6 million or 15.8% of net revenue for the year ended December 31, 2016. So, we have a shift in gross margin; it’s primarily due to a shift in our mix as we reorganized our international business group and our North American business continues to grow at full speed ahead. North America had a slight decrease in margin, 30 basis points and we’re looking to improve margins forward through value-added services, same day funding, proprietary POS and other value-added services. Total operating expenses were flat at $17.4 million in December 2017 and 2016. For 2017, G&A expenses were $10.6 million versus $8.8 million for 2016, the $1.8 million increase is primarily due to salaries of $1 million and the absence of one-time currency transaction gains $700,000 that existed in ‘16 but did not exist in ‘17. Offsetting increased general and administrative costs were decreases in non-cash compensation, depreciation and amortization, bad debt and interest expense. Salaries, benefits and contractor payments were $5.7 million as compared to $4.8 million last year. Again that’s an increase of $1 million and that’s primarily due to corporate salaries, CEO bonus and to a lesser extent increases in executive salaries. The North America Transaction Solutions segment increased $300,000 in compensation, primarily due to headcount and sales incentives. Non-cash compensation expense was $2.9 million as opposed to $3.5 million last year, primarily due to lower cost and employee stock -- and option grants during 2017 versus ‘16. Our bad debt provision was $1.3 million this year compared to $1.7 million last year. That was an improvement due to lower international charge-offs. Depreciation and amortization was $2.5 million this year, $3.5 million last year. We have fully amortized certain of our acquisition costs for PayOnline and some of our merchant portfolios that we purchased and fully amortized as well during 2017. So, we will continue to see lower depreciation and amortization until we buy additional portfolio or some other capital expense occurs. Interest expense was $1.2 million for the year ended December 31, 2017 and that’s a decrease from $1.5 million last year. We had lower financing costs this year, basically just better deals, stronger position. This concludes our formal remarks. I would now like to ask the operator to open the call for questions.

[Operator:]

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

[Lisa Thompson:]

Hi, there. So, as you’re starting this year you’re in great position, you have a lot of cash. You’re set probably at least for the next 12 months. And I was wondering what you might be doing differently this year as far as the strategy. It seems like some of your portfolios are aging and you haven’t bought any in the long time. What’s the plan this year?

[Oleg Firer:]

Hi. So, it’s a great question. So, the plan this year is we’re starting off the year with cash; we’re looking at to resume portfolio acquisitions that we did before. If you remember, we launched Unified Portfolios acquisition when we had an ability to acquire these portfolios from our agents. We’re in the process of negotiating new deal with the agents that’ll not only give us a boost in cash flow to portfolio acquisitions, increase margins, but also sign up those agents for increased production on a go forward basis. Now that we can afford it, we’ve resumed those conversations and we’re in the process of lining that up. In addition to that plan, for the sales agents to resume the program which was -- as you remember, which was extremely profitable for us, we’re going to be focusing on value-added sales into our existing client base, which will hopefully increase retention and increase margin at the same time. So, we have -- we believe we have a good line up of value-added services that we created. Now that we have an ability financially to market it, we’re going to be marketing to the existing client base. We’ll hopefully increase retention and margins at the same time as well as selling those products to new potential merchants. There are cheaper products that we have which is the POS system, has been launched before and has been very good for us in terms of margins and adaptation. So, we look to -- we have to do max rollout of the system through independent sales channels and direct sales channels.

[Lisa Thompson:]

And could you talk about international operations? Where are you now? And what are the plans over there? I know you’ve consolidated; I assume that’s all completed. So, what’s the strategy going forward?

[Oleg Firer:]

Right. So, we have consolidated both the mobile business and an online business. So, Mobile Solutions is now payments method to the online product offering. We have shut down the capital advances that we did for the content providers. The business is no longer capital intensive. We have one centralized focused sales team. And the plan for us is to scale the business. We are in the process of talking to larger merchants and agents and the integration partners internationally to scale that business. It’s going to be -- we believe over the next 12 to 24 months, we will see significant improvements in growth in international business.

[Jonathan New:]

We also have significant headcount reduction, Lisa, there. So, part of that story is a big decrease in expenses and footprint. And movement of the office to cut office rent by 50%, scale-back of probably 50% of the headcount, new management team and the real focus on expense control.

[Oleg Firer:]

Right. So, exactly what we promised that we’d do. We consolidated the shops, made it a focused team, a single unit rather than having multiple presences.

[Lisa Thompson:]

All right, great. So, you expect margins to trend upwards over there?

[Oleg Firer:]

Right. And it’s a twofold system on how the margins are going to trend up. First, as we sign up merchants, merchants need to mature to realize the margin gain. That’s one of the ways to do it. Another is, we believe that we have the infrastructure that could take in significantly more volume than we have right now which without any significant headcount which will also contribute to margin improvement.

[Jonathan New:]

So, we have strong margins internationally. So, what we are really focused on is the growth driver in the U.S. and rolling up those margins slightly. So that’s the real focus of that comment.

[Lisa Thompson:]

Okay, good. And here is a question I am sure everybody is fascinated with. I know you’ve gotten involved in blockchain technology. Can you talk about actually the practical use of that and how does that integrate into your product and what do you physically have to do to use that? I know a lot of payment people have been looking at it, but I really haven’t seen it implemented. Could you talk about that?

[Oleg Firer:]

Right. So, that is -- we’re in the development phase. The product has not been commercially launched yet. What we launched in the beginning of the year was a platform called Netevia as a framework that developers and application providers to start integrating to our platform. Netevia would merge itself into decentralized payments ecosystem. They will offer an ecosystem for all these decentralized applications that have been developed by various developers. They will be able to integrate into our centralized ecosystem. So, in simple terms, we will be more like an operating system, we will serve as an operating system for application developers to develop and integrate our applications into. The reason why application developers and innovators would want to integrate their decentralized applications into our ecosystem is because our ecosystem will give them access to merchants, consumers but will ultimately process transaction through our ecosystem. And as any other blockchain company, the blockchain system even though has been around for a while is something new on everybody’s radars and most of the companies are in development stage including those decentralized application providers that I mentioned. So as such, we are diligently working on getting the systems on track to be completed this year. And as I mentioned in my opening statement, we’re not just going to limit our technological innovations and support the systems to blockchain, we are going to look at all other dynamic and innovative solutions and enable processing for Internet of Things and biometrics and so on and so forth. But blockchain is definitely -- we believe is definitely something that’s a change to way the transactions are done. And it’s a completely decentralized ledger, which is faster than a traditional one and more secure. So, we are definitely expanding resources on adding the functionality to Netevia platform which we launched early this year. And we believe that once it’s complete, it is going to be a very disruptive product in the marketplace.

[Lisa Thompson:]

So, is the benefit to the customer just security or is there any cost savings, how does this work?

[Oleg Firer:]

Well, both, security and cost savings to the consumer. When we talk about -- we’re not just targeting consumers, we’re targeting merchants. We get to consumers through merchants. The first and foremost once this implemented, merchants will gain access to much more value-added products that are available to them today. So, we’ll have a centralized marketplace for the merchants to gain access to decentralized applications that could change the way they view transactions and streamline their processes and increase their efficiencies at the point of sale and beyond with loyalty applications, rewards applications and other innovative applications that are getting the marketplace. For the consumers, consumers will be able to transact the merchant using the blockchain technologies faster and cheaper. And at the same token, for the merchants themselves, merchants that will participate in the blockchain ecosystem will be able to transact cheaper than they are today, because it’s obviously removing a lot of layers that exist in the traditional payment ecosystem today like the issuing banks and such. So, ultimately, when it’s all said and done, a year down from now, it could get very cheap for merchants to move transactions using blockchain.

[Operator:]

Our next question comes from David Daverden [ph] who is private investor.

[Unidentified Analyst:]

Hi, guys, thank you for that update. I had a couple of questions. One of the things we’re looking at is profitability. And we’re sort of expecting at this point, I was expecting that we would be profitable. It doesn’t seem that we are close to that. I’m just trying to get a better feel for when that is and why we’re not at profitability. The second quarter I had was about bonuses. It seems like we’re giving pretty big bonuses, again, for a company that is not profitable yet. And I know that you need to be motivated to do your work and do a great job. And I appreciate all of that. At the same time, as stockholders, we’ve been in the stocks for a long time, some people. And it is just -- it’s been a long ride and it’s not been a ride that’s being going up. So, I’d like to understand a little bit about would we talk about doing cost control, laying off people internationally. So, I’d like to understand a little bit better about for the management, what are you guys doing to -- with your own salaries, bonuses and stuff to help with that cause. Thank you.

[Jonathan New:]

Thank you, David for those questions. So, on the profitability side, and then Oleg can step in too, you don’t go from a net loss to a net profit. So, what we’re doing is actively whittling down our net loss every quarter. And we’ve been successful at that. So we’re going to continue to do that and approach breakeven and then move into profitability. But given the size of the losses that the Company has sustained in the past and the cost of being on NASDAQ and other things, we’re just moving in a sequence towards that. In terms of bonuses, there is a discretionary at the Board and compensation committee level. So, there has been no real dramatic increases in our fixed cost side of things, and that’s where we are on salaries for executives today.

[Oleg Firer:]

But I’d like to add to both points actually. Our revenues are -- all of our revenues are recurring in nature. So, as an enterprise that’s growing, we -- the minute that we decide that we don’t want to build this anymore, the fundamentals and the revenue package that we have is recurring in nature and it will be continue to be recurring. So, any new business that we sign up, which we have an infrastructure to support that business and the cash now to support the growth will be accretive to what we have today. And as Jon mentioned, the losses will narrow down and ultimately will reach breakeven and profitability. As it relates to the compensation, and I’ll speak on behalf of entire management team, we have not increased compensation for any member of the management team. On contrary, I’ll speak to myself personally, I have been taking a portion of my compensation which has been agreed to, when I joined the Company, and I continue to do so. I have taken stock in lieu of compensation in the past and I have acquired stock. So, I am definitely a believer in the Company long-term and I do put my money where my mouth is.

[Unidentified Analyst:]

Yes. No, I do understand that. And I have follow-up. Lisa was mentioning about -- she thinks that you might have another let’s say for the next year -- you’re financed that you should be offset. Is that -- based on your forward-looking, do you feel like your financing is pretty good for one year or do you feel like you need more financing before that or after that, what do you think about that?

[Jonathan New:]

At the current state, at the current run rate, we are good for over a year, but if opportunities present themselves for acquisitions or other opportunities, better financing or whatever, we will certainly take a look at those.

[Oleg Firer:]

But to the point of your question, we are not looking for capital at this point, we believe we’re set. And like in my conversation with Lisa, we mentioned that in the past what’s worked for us is when we acquired some of the revenue streams and we will look to do so this year. It’s definitely something that’s worked for us in the past and we will continue the policy.

[Unidentified Analyst:]

Okay, okay. So, I guess, I’d also take from your revenues and your statements that you really are focusing in the United States at this point with majority of your growth?

[Jonathan New:]

It always has been.

[Oleg Firer:]

Yes. Majority of the growth in the U.S.; internationally, we are very opportunistic and we are really not spending any money internationally, where in United States we are actively funding acquisition costs to bring in merchants on a day-to-day basis. We have not done so internationally. So, anything internationally that we’re doing has been through organic cash generation. We have not put any capital internationally for a long time.

[Operator:]

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

[Oleg Firer:]

Again, I want to thank everyone for participating on our call today. Please do not hesitate to contact myself or Jon with any follow-up questions. Thank you everyone.

[Operator:]

Ladies and gentlemen, that does conclude the Net Element 2017 Annual Financial Results and Business Update Conference Call. Thank you for your participation. You may now disconnect.