U.S. Markets open in 4 hrs 7 mins

Edited Transcript of NETE earnings conference call or presentation 16-May-19 12:30pm GMT

Q1 2019 Net Element Inc Earnings Call

MIAMI May 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Net Element Inc earnings conference call or presentation Thursday, May 16, 2019 at 12:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Jeffrey Ginsberg

Net Element, Inc. - CFO, VP of Finance & Controller

* Oleg Firer

Net Element, Inc. - Executive Chairman & CEO

================================================================================

Conference Call Participants

================================================================================

* Lisa R. Thompson

Zacks Investment Research, Inc. - Senior Technology Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Net Element First Quarter 2019 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 the 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 May 16, 2019, 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 will turn the call over to Oleg Firer, CEO. Oleg, please go ahead.

--------------------------------------------------------------------------------

Oleg Firer, Net Element, Inc. - Executive Chairman & CEO [2]

--------------------------------------------------------------------------------

Good morning, everyone. Thanks to everyone for joining our call this morning to discuss the results from the first quarter of 2019. During the first quarter of 2019, we have focused on maintaining an increased margin as we continue to mature in our value-added service offering to the merchants.

Our consolidated gross margin has increased to 18.5%, representing an increase of 16.7% as compared to a gross margin of 14.8% for the first quarter of 2018. Our North American Transaction Solutions segment's margin has increased to 18.1%, representing an increase of 33% over the same comparable period, while International Transaction Solutions segment's margin has increased to 28.1%, representing a 23% increase over the first quarter of 2018.

Our net revenues for the first quarter have slightly decreased by 5.9% to approximately $15 million compared to approximately $16 million for the first quarter of 2018. The decrease in net revenues for the comparable period was primarily related to our International Transaction Solutions segment, which experienced continued competition and economic challenges in the selected markets. Our North American Transaction Solutions segment experienced a 4% growth in net revenues to approximately $14.4 million compared to approximately $13.9 million for the first quarter of 2018.

Total transaction processing volume for the first quarter increased to approximately $787 million, an increase of 6.5% compared to $739 million for the same comparable period.

Our North American Transaction Solutions segment has shown positive trends on the business development side as we continue to add best-in-class integration solutions and value-added applications to Netevia, our future-ready platform. We are pleased with our first quarter results and ongoing progress our teams has made to improve gross margin through use of scalable infrastructure and integration of value-add technologies. We remain focused on reaching profitability as we continue to scale our business in the selected markets.

Now I'd like to introduce Jeffrey Ginsberg, Net Element's Chief Financial Officer, to review our financial results in more detail. Jeff, please proceed.

--------------------------------------------------------------------------------

Jeffrey Ginsberg, Net Element, Inc. - CFO, VP of Finance & Controller [3]

--------------------------------------------------------------------------------

Thank you, Oleg, and good morning, everyone. We reported a net loss attributable to common stockholders of approximately $1.1 million or $0.29 per share for the 3 months ended March 31, 2019, as compared to a net loss of approximately $1.6 million or $0.42 per share loss for the 3 months ended March 31, 2018. The decrease in net loss attributable to stockholders of approximately $0.5 million was primarily due to an increase in the gross margin for our North American Transaction Solutions segment and a decrease in other expenses of approximately $264,000 during the 3 months ended March 31, 2019 as compared to the 3 months ended March 31, 2018.

Net revenues consist primarily of service fees from transaction processing. Net revenues was approximately $15 million for the 3 months ended March 31, 2019, as compared to approximately $16 million for 3 months ended March 31, 2018. The decrease in net revenues for the comparable period was primarily related to our International Transaction Solutions segment, which experienced continued competition and economic challenges.

Costs of revenues represent direct costs of generating revenues, including commissions, mobile operator fees, interchange expense, processing and nonprocessing fees. Costs of revenues for the 3 months ended March 31, 2019, were approximately $12.3 million as compared to approximately $13.6 million for the 3 months ended March 31, 2018. The decrease in costs of revenues for comparable 3-month ended of $1.3 million was primarily driven by the reorganization of assignments from our International Transaction Solutions segment due to economic challenges.

The gross margin for the 3 months ended March 31, 2019, was approximately $2.8 million or 18.5% of net revenue as compared to approximately $2.4 million or 14.8% of net revenue for the 3 months ended March 31, 2018. The primary reason for the increase in gross margin percentage was the result of North American Transaction Solution processing of transactions utilizing our self-designated BIN or ICA, recurring profitable cash flows from portfolios acquired in the prior year and further acceptance of value-added services by our merchants.

Operating expenses were approximately $3.6 million for the 3 months ended March 31, 2019 as compared to $3.4 million for the 3 months ended March 31, 2018. Operating expenses for the 3 months ended March 31, 2019 primarily consist of selling and general administrative expenses of approximately $2.4 million, bad debt expense of approximately $0.3 million, and depreciation and amortization of approximately $0.9 million. Operating expenses for the 3 months ended March 31, 2018 primarily consisted of selling and general administrative expenses of approximately $2.4 million, bad debt expense of $0.1 million and depreciation and amortization expense of approximately $0.7 million.

We had a good first quarter, and we encourage you to review our 10-K and 10-Q on our website or sec.gov for further details.

With that, we conclude our formal comments for today. Operator, we are now ready to open the call for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from Lisa Thompson with Zacks Investment Research.

--------------------------------------------------------------------------------

Lisa R. Thompson, Zacks Investment Research, Inc. - Senior Technology Analyst [2]

--------------------------------------------------------------------------------

So I have a few questions on the quarter. I guess the first thing is to ask about international, because last quarter, you said that you thought it would be up sequentially, and that didn't happen. So I'd like to know what you're thinking on that businesses now going forward.

--------------------------------------------------------------------------------

Oleg Firer, Net Element, Inc. - Executive Chairman & CEO [3]

--------------------------------------------------------------------------------

Right. So we have sort of lost -- as I explained last -- on the earnings call for the 2018 call, we lost several clients. And the reason why we lost them is because of economical challenges. Some of them went bankrupt and such. So we have replaced those clients, but it takes a bit time for the clients to start producing revenues, as you know. So we anticipated it would start kicking in right away, but it takes a little bit more time for them to ramp up. We are going to see some improvements over the next few quarters, but it wasn't as immediate as we thought it would be.

--------------------------------------------------------------------------------

Lisa R. Thompson, Zacks Investment Research, Inc. - Senior Technology Analyst [4]

--------------------------------------------------------------------------------

Okay. So do you think it will be up sequentially this quarter?

--------------------------------------------------------------------------------

Oleg Firer, Net Element, Inc. - Executive Chairman & CEO [5]

--------------------------------------------------------------------------------

We believe so.

--------------------------------------------------------------------------------

Lisa R. Thompson, Zacks Investment Research, Inc. - Senior Technology Analyst [6]

--------------------------------------------------------------------------------

Okay. All right. Good. And gross margin obviously improved significantly, up there at 18%. Do you think it can go higher from here?

--------------------------------------------------------------------------------

Oleg Firer, Net Element, Inc. - Executive Chairman & CEO [7]

--------------------------------------------------------------------------------

We believe it might. As we continue with our value-added services and we scale utilizing our own proprietary processing platforms, our cost becomes cheaper. Our cost to process transaction becomes cheaper. So we believe we still have room to grow on the margin side, and we're doing our best. And we hope that's going to improve. We -- I can't forecast how much as of yet, but we believe it will.

--------------------------------------------------------------------------------

Lisa R. Thompson, Zacks Investment Research, Inc. - Senior Technology Analyst [8]

--------------------------------------------------------------------------------

Okay. So let me ask you about -- I think this is the first time you've ever had down revenues. Is that right?

--------------------------------------------------------------------------------

Oleg Firer, Net Element, Inc. - Executive Chairman & CEO [9]

--------------------------------------------------------------------------------

Right. Well, the reason for it is, as you saw, International has been behind and, hence, the reason for the down revenue. North American had enough for up revenue quarter. It's just the one that -- international, we've slowed down.

--------------------------------------------------------------------------------

Lisa R. Thompson, Zacks Investment Research, Inc. - Senior Technology Analyst [10]

--------------------------------------------------------------------------------

Were revenues at all affected by you buying those cash flow assets? Or did that not change?

--------------------------------------------------------------------------------

Oleg Firer, Net Element, Inc. - Executive Chairman & CEO [11]

--------------------------------------------------------------------------------

No, it doesn't change at all.

--------------------------------------------------------------------------------

Lisa R. Thompson, Zacks Investment Research, Inc. - Senior Technology Analyst [12]

--------------------------------------------------------------------------------

Okay. And just to go back -- also to go back, has anything happened with the joint venture with Sputnik Bank?

--------------------------------------------------------------------------------

Oleg Firer, Net Element, Inc. - Executive Chairman & CEO [13]

--------------------------------------------------------------------------------

We have made an announcement in our last K that Sputnik was not approved by the regulators. We have, however, replaced it with a different relationship, and we're in the process of getting certified with Visa and MasterCard. The process takes about 3 months. So we project that this should be finishing anytime soon, and then we could continue with the venture as planned. However, there will be different partners in play, as Sputnik was not approved by regulators.

--------------------------------------------------------------------------------

Lisa R. Thompson, Zacks Investment Research, Inc. - Senior Technology Analyst [14]

--------------------------------------------------------------------------------

Okay. And are you going to have the same arrangement as you would have had [previously?]

--------------------------------------------------------------------------------

Oleg Firer, Net Element, Inc. - Executive Chairman & CEO [15]

--------------------------------------------------------------------------------

Similar. Similar or even better because we have signed a good agreement with VTB Bank as our settlement bank, which gives us a very, very preferential treatment and pricing. So we believe the economics could even get better.

--------------------------------------------------------------------------------

Lisa R. Thompson, Zacks Investment Research, Inc. - Senior Technology Analyst [16]

--------------------------------------------------------------------------------

Great. Okay. That sounds good. Jeff, just a couple here. Just one question here. I read on the 10-Q that you're paying out some stock-based compensation in this quarter, and it looked like $1.5 million. Is that -- that's going to hit this quarter, right?

--------------------------------------------------------------------------------

Jeffrey Ginsberg, Net Element, Inc. - CFO, VP of Finance & Controller [17]

--------------------------------------------------------------------------------

That's going to hit in the second quarter, yes.

--------------------------------------------------------------------------------

Lisa R. Thompson, Zacks Investment Research, Inc. - Senior Technology Analyst [18]

--------------------------------------------------------------------------------

Okay. So that will make it a little tough sequentially. And then just my last question is, just overall, you said that -- in the 10-K, that you had enough debt capacity to make it through the next 12 months, and it was $3.3 million in cash. Is there any change to that number or what you think you're going to need?

--------------------------------------------------------------------------------

Jeffrey Ginsberg, Net Element, Inc. - CFO, VP of Finance & Controller [19]

--------------------------------------------------------------------------------

No. I think it's still going to be the same.

--------------------------------------------------------------------------------

Lisa R. Thompson, Zacks Investment Research, Inc. - Senior Technology Analyst [20]

--------------------------------------------------------------------------------

Okay. And what was the cash burn this quarter?

--------------------------------------------------------------------------------

Jeffrey Ginsberg, Net Element, Inc. - CFO, VP of Finance & Controller [21]

--------------------------------------------------------------------------------

The cash burn still runs about $250,000 a month.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

(Operator Instructions) And I'm showing no further questions at this time. I'd like to turn the call back over to management for any closing remarks.

--------------------------------------------------------------------------------

Oleg Firer, Net Element, Inc. - Executive Chairman & CEO [23]

--------------------------------------------------------------------------------

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 great day.

--------------------------------------------------------------------------------

Operator [24]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.