Net Element, Inc.
Q1 2015 Earnings Call Transcript

Published: 18 May 2015

[Operator:]

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Net Element 2015 First Quarter 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 would 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 the results discussed today and therefore we refer you to more detailed discussion of these risks and uncertainties in the company's filing with the SEC. Any projections of the company's future performance represented by management include estimates today as of May 18, 2015 and the company no 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'd like to turn the call over to Oleg Firer, CEO. Please go ahead.

[Oleg Firer:]

Thank you and thanks to everyone who has joined our call today. We are here today to discuss the results from the first quarter of 2015 and then give an opportunity for those of you listening in to ask questions during the Q&A session. I'd like to begin today's conference call by acknowledging the highlights for the first quarter. Adjusted quarterly net loss reduced year-over-year from $0.11 per share to $0.04 per share we have closed the financing which resulted in $10.5 million available to the company and potential financing to be upwards of $24.5 million. Agreed to acquire online payments innovator PayOnline, PayOnline processes online payments for over 10 million active customers and thousands of merchants in Russian Federation Europe and Asia. We’ve surpassed 1 million the recurring mobile payment subscribers in Russia, TOT Money is monthly processed volume for January 2015 increase by 12% over the prior months and 49% over April 2014 which was when the new TOT money platform was launched. We have launched the UAE-based joint venture to exclusively deliver Net Element payment-as-a-service solutions to Gulf States and India markets. We have provided payment solutions for the 2015 College Football Playoff National Championship presented by AT&T. We have appointed industry veteran Eric Kirk as Aptito Executive Vice President. We have launched Sales Central version 1.2, a cloud-based, proprietary management portal for Net Element sales partners. We have upgraded Aptito mobile POS software to version 2.3 which is a powerful all-in-one hospitality solution. We're pleased with our Q1 performance which includes improved revenue and narrowed quarterly loss. In Russia, we continue to see significant mobile payment subscriber growth following our restructuring of Russian operations. We intend to close on the PayOnline transaction this quarter, which we expect to be accretive to earnings and to improve the competitiveness of our internal service offering. We are also looking forward to progress in our newly launched JV in United Arab Emirates as well as the U.S. marketing initiatives. 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. We continue to narrow our net loss on a non-GAAP basis $1.6 million versus $3.6 million same quarter a year ago. We’ve changed our non-GAAP measures slightly to go back to net income because we all have discontinued operations anymore this quarter the only adjustments we had to non-GAAP net income was non-cash compensation expense. The reasons for the improvement were a reduction in the margin. First of all, reduction in general and administration expenses, reduction in interest expense which we can expect going forward since we paid off the majority of our debt, reduction in amortization expense, which we can also expect going forward as our portfolios have run off once that amortized, we run through the amortization. Also reduction in our bad debt expense which Russia has done a great job of eliminating the risks over there and progressively taking down our loss provision each quarter over there for what we put up in 2014 and reduction in other extensions for $69,000. Gross margin was $926,000 versus $1.3 million. Reason for the decline is the lower mix, we have higher revenues that the mix has shifted right now more to the U.S. business as our Russian business continues to rebounding well. General and administrative expenses, excluding non-cash compensation were approximately $2 million as compared to $3 million primarily due to some expenses in 2014 that were one-time. Non-cash compensation expense for the quarter was $600,000 as compared to $52,000 for the same quarter last year, Non-cash compensation expense was driven primarily by the amortization of stock grants that were made in 2014 at investing throughout 2015 to the management. Depreciation and amortization as I indicated is down $439,000 as opposed to $591,000 at same quarter last year and that will continue as our purchased merchant portfolios reached full amortization during 2014. And as we mentioned also interest expense $118,000 as compared to $1 million, right now our debt is under $4 million as compared to almost $29 million of notes payable and short-term loans outstanding as of the same time last year. That’s a brief analysis of the financial results for the quarter and then I’ll turn it back over to Oleg.

[Oleg Firer:]

Well this concludes our formal remarks. And I’d like to ask the operator to open the call for questions.

[Operator:]

[Operator Instructions] Our next question comes from the line of Lisa Thompson from Zack Company. Your line is open.

[Lisa Thompson:]

Good afternoon, Oleg and Jon. How are you doing?

[Oleg Firer:]

You made it. Good for you.

[Lisa Thompson:]

I made it [indiscernible] and everything.

[Jonathan New:]

Hi, Lisa.

[Lisa Thompson:]

Hi, there. I’ve got a few questions about from PayOnline and also about results. So let’s first go to the first quarter, did you buy a credit card portfolio recently?

[Jonathan New:]

Recently last year.

[Lisa Thompson:]

Last in the fourth quarter?

[Jonathan New:]

Maybe second or third.

[Oleg Firer:]

Probably in the third quarter right, second or third quarter not in the fourth quarter.

[Lisa Thompson:]

Okay. So why were margins down so much this quarter?

[Jonathan New:]

What you have a mix you can see in our 10-Q where we present the standard mix analysis, but the short answer is more U.S. business which continues to have lower margins right now and versus the Russian business which we recorded Net anyway, so it’s kind of almost the top margins but for Net higher it obviously charge the Net total margin higher. That makes sense.

[Lisa Thompson:]

Right. So the Russian business is that including the currency translations or is that a gross number?

[Jonathan New:]

Those are translated into dollars we have foreign currency losses and gains, also it’s in the form of comprehensive income.

[Lisa Thompson:]

Okay, so this is because it all – it looks so lumpy you know in the mobile revenues?

[Jonathan New:]

They aren’t just growing I mean I don't know what do you mean by lumpy?

[Lisa Thompson:]

[053554] just kind oflumpy the [indiscernible]

[Oleg Firer:]

For the business, as you have seen with the global markets the currency was down…

[Lisa Thompson:]

Right, right…

[Oleg Firer:]

Currency compared to U.S. you know rubles went as low as 74, so definitely we felt the effect of it but you know even though it went 74 we continue to grow. So you know even if you see that its not growing as fast as we should be we are still growing because we have to exceed the currency risk, which was as low as – it was 74 and now its I think its back to 52. But as we compare it to last year, last year the same time it was probably 30. So there is still – we’re still subject to some currency risk but we were successfully rebounded and continue to grow even subject to the currency risk.

[Lisa Thompson:]

Okay that explains that. And could we talk about PayOnline when do you think that's going to close?

[Oleg Firer:]

Well, as I said in my opening remarks we’re going to close it this quarter. So we are positioning to close as we speak should be relatively short - in a short period of time.

[Lisa Thompson:]

All right and so all that revenue is going to go on to the mobile payments line, right?

[Oleg Firer:]

Now it's not mobile payments because PayOnline is mostly online payments. We are going to have to break that out, mobile payments is TOT money, PayOnline will be online payments.

[Lisa Thompson:]

Okay so it will have its own separate category.

[Oleg Firer:]

Yes.

[Lisa Thompson:]

Good. All right. And are you going to integrate that with your other Russian operations or is that going to be a standalone business.

[Oleg Firer:]

No it’s a plan to obviously integrate it to do further consolidation, obviously the acquisition of the company. We want to make sure that we make it integrated not only in technology side, but also on the human resource side, obviously you are going to pick the best of the best from both teams and you know run it those as one company.

[Lisa Thompson:]

Okay. If you go through the math its looks like you are going to be paying about $236,000 a quarter for interest for the money that you're borrowing is that supposed to the acquisition will still be accretive even having to pay that interest?

[Oleg Firer:]

We’re not paying interest, the latest raise that we did is a stock raise and many interest has paid in stock.

[Lisa Thompson:]

So that’s not paid in cash?

[Oleg Firer:]

No.

[Lisa Thompson:]

Okay.

[Oleg Firer:]

Outside of our traditional under $4 million debt we have not incurred any other debt that needs to be serviced in cash.

[Lisa Thompson:]

Okay, so the preferred gets paid in kind.

[Oleg Firer:]

Yes.

[Lisa Thompson:]

Okay. All right, so that won’t use any. And then you got a lot of cash for that which will go to partially to the acquisition right and then you have from October?

[Oleg Firer:]

Yes.

[Lisa Thompson:]

Okay. All right and that’s going to be used for working capital or do you have other acquisitions?

[Oleg Firer:]

Well, we have other plans, it’s going to be both working capital and to [safe line] our growth, we want to grow a little faster, so we’re going to put money into marketing, continue with operating capital and look at some more strategic opportunities for the company.

[Lisa Thompson:]

And PayOnline, what kind of gross margins do they have? Since you’re going to break them out of the third category.

[Jonathan New:]

Sorry Lisa. We’re looking right now at the accounting. So I don’t really want to give anything [indiscernible].

[Lisa Thompson:]

Okay.

[Jonathan New:]

We’re trying to follow-on this how we are going to do it.

[Lisa Thompson:]

All right. So it might be like the mobile side where you report the net number?

[Jonathan New:]

It seems to be more like the other side, it’s more like the credit card business. So that’s where we’re going through, but I don’t have a final answer yet.

[Lisa Thompson:]

Okay, all right.

[Jonathan New:]

Next week or so.

[Lisa Thompson:]

Do you know which – no matter which way you do it, it’s going to bring them up or down, is it going to be higher than credit card business or you don’t know yet?

[Jonathan New:]

I don’t know yet.

[Lisa Thompson:]

Okay.

[Jonathan New:]

So we’ll go ahead and break it out for you, so really have to look at everything broken out, the blended margin is going to be less useful as we add this business now to third line.

[Lisa Thompson:]

So are there any new products that you can come out with once you own PayOnline, is there something that you can do between the two businesses?

[Oleg Firer:]

For sure it will open up not only our geographically areas, but as I mentioned before we are going to integrate PayOnline into our platform, our payments as a service platform, allowing for global commerce and there is a lot of neat features that will be integrated into our platform making our platform available to our merchants in U.S. and internationally and we believe that some of the features will be not only exciting features on the feature side, but there will be revenue producing features for the company.

[Lisa Thompson:]

Now on two new joint ventures has anything happened with is there any activity going on any sales or anything trained…

[Oleg Firer:]

Yes, we are exploring several contracts as we speak in the UAE region, so I hope in the near future we can have some exciting news. We are very bullish about the region, we believe we have a great partner and we believe that we are going to start seeing some revenues out of the region.

[Lisa Thompson:]

Okay, what sort of things are you doing there? What kind of contracts you are going after?

[Oleg Firer:]

On the mobile payment side we are talking to mobile operators to do similar things that we are doing with TOT money in Russia. We are also exploring online payments opportunities through PayOnline venture and others in the transactional processing space. So we are talking to mobile operators, to municipalities, to banks for region bank programs. So it’s a mix of all venues that we are exploring through the local partner.

[Lisa Thompson:]

How was the market there? Are they using mobile payments or other intrinsic competitors, what’s a status of those countries?

[Oleg Firer:]

Well, they are for sure using mobile payments, mobile payments has been a leader in a region and over traditional payment processing and we believe that decent there are competitors we believe we have a platform, we have the creditability and we have the experience to deliver these services in a faster mode and more cost effective to the partners.

[Lisa Thompson:]

Great, all right. I’ll let somebody else to ask more questions. Thank you.

[Oleg Firer:]

Thank you.

[Operator:]

Thank you. [Operator Instructions] And our next question comes from [Curtis Walsh]. Your line is open.

[Unidentified Analyst:]

Hi, thanks for the information I’ve kind of just – a simple question, you’ve narrowed your margin, you cut your losses and you are getting closer to breakeven. Do you project that the company will be breakeven in 2015 or as just to hard to predict that.

[Jonathan New:]

So, we haven’t put out - hi, Curtis. We haven’t put out any projections. So I don’t really want to put any out. But obviously you could look at the trend, obviously each quarter, we are nearing our laws. And we do anticipate that we will continue that trend.

[Unidentified Analyst:]

Okay, but you don’t know will all these added on businesses or anything else, whether that. Whether you’re going to have to dump more money into marketing or something else it’s going to extend that or delay that?

[Jonathan New:]

We don’t expect any major changes from the acquisition of PayOnline. We are hoping it will be profitable from it and accretive from the get go. And we’re not anticipating any large expenses that would change the trajectory of the loss improvement towards profitability, elimination of the loss.

[Unidentified Analyst:]

Okay, that’s was the only question. I had.

[Jonathan New:]

Thank you.

[Oleg Firer:]

Thank you.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from Dina Lyaskovets from IBIS. Your line is open.

[Dina Lyaskovets:]

Hi, quick question. The stock price declined [significantly just in] couple of weeks so I was wondering if you could comment on that?

[Oleg Firer:]

Well, we don’t control the stock price, obviously there, anybody is free to buy and sell the shares. So we can shed any light on that I follow as much as anybody else does, we believe that by delivering under the results that we continue to deliver on and enhancing fundamentals of the company the stock should appreciate investor should be interested in our company and acquire this year, but we have no control over how people trade stock by ourselves, really can’t give any insight and outsight of the fact that we are bullish about the company and we continue to improve on a day-to-day basis.

[Dina Lyaskovets:]

Yes, it sounds like you made significant progress so it’s now just matter of getting in front of right people and probably increasing your institutional shareholder base, is that in the plan?

[Oleg Firer:]

Yes, for sure we are actually attending two investor conferences in a week or so in New York and we will continue to get in front of potential investors both institutional and private.

[Dina Lyaskovets:]

Well, thank you. That’s a right course of action.

[Oleg Firer:]

Thank you. End of Q&A

[Operator:]

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

[Oleg Firer:]

Well, thank you. Again I want to thank everyone for participating on our call today and wish everyone a great week. Thank you.

[Operator:]

Ladies and gentlemen thank you for participating in today’s conference. This does conclude the program and you may now disconnect. Everyone have a great day.