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Edited Transcript of NETE earnings conference call or presentation 15-Aug-18 12:30pm GMT

Q2 2018 Net Element Inc Earnings Call

MIAMI Sep 1, 2018 (Thomson StreetEvents) -- Edited Transcript of Net Element Inc earnings conference call or presentation Wednesday, August 15, 2018 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jeffrey Ginsberg

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

* Oleg Firer

Net Element, Inc. - CEO & Director

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Conference Call Participants

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* Lisa R. Thompson

Zacks Investment Research, Inc. - Senior Technology Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Net Element's Second Quarter and First Half 2018 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 August 15, 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.

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

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Good morning, everyone. Thanks to everyone for joining our call today to discuss the results from the second quarter and first half of 2018.

Net revenues for the second quarter increased to $16.46 million, an increase of 2% compared to the second quarter of 2017. The increase in net revenues is primarily due to organic growth in our North American Transaction Solutions segment, which experienced 6% growth over the prior year. International Transaction Solutions segment experienced an expected decline of 19%, due to elimination of branded content business, which accounted for $684,000 in net revenues in 2017. Normalizing the elimination of branded content business resulted in 11% growth in the International Transaction Solutions segment and 6.5% across all segments over the same period of the prior year.

Net revenues for the first half of 2018 increased to $32.45 million, an increase of 9% over the prior year. The increase in net revenues was primarily due to organic growth in North American Transaction Solutions segment which experienced 15% growth over the prior year.

International Transaction Solutions segment experienced an expected decline of 21% due to elimination of branded content business which accounted for $1.34 million of net revenues in 2017. Normalizing the elimination of branded content business resulted in growth of 7.3% in the International Transaction Solutions segment and 14.4% across all segments over the same period of the prior year.

Geographically, the United States accounted for 88% of total revenues for the second quarter and 87% for the first half of 2018, while international revenues were 12% for the second quarter and 14% for the first half of 2018.

Total dollars processed for the first half of 2018 increased 37% to $1.62 billion, led by robust growth from our subsidiary, Unified Payments. The North American Transaction segment saw the largest increase of 40% to $1.4 billion, while International Transaction Solutions increased 20% to $211 million.

Total transactions processed during the first half of 2018 increased 41% to 50.2 million. The increase in transactions processed came primarily from North American Transactions segment with some increase of 41% to 21.1 -- I'm sorry, to 28.1 million. While International Transaction Solutions segment saw an increase of 40% to 21 million. These results include the reorganization of the mobile payments segment into International Transaction Solutions segment.

On the operational side, we implemented stronger internal controls and procedures and have also established [this quarter] committee. We believe this enhanced our corporate governance, and this enhanced corporate governance will be a very important step going forward.

With respect to our product development, our R&D team continues to work and deliver value-added products that set out to differentiate our offerings to small- and medium-sized businesses.

During the second quarter 2018, we launched Netevia Smart Vendor Payment Solutions to enter a multi-trillion dollars global B2B payments market. We continue to work on Netevia, our future-ready omni-channel payments platform that was launched early this year. And we're on track to launch services we set out to do this year, including blockchain technology solutions and value-added services.

We launched an intelligent multichannel processing solution for the multibillion-dollar (inaudible) and event industry.

I'm also very happy to report that on July 31, 2018, we acquired the recurring cash flow portfolio that is projected to have over $5 million in gross profits over the next 4 years. And on August 9, 2018, we launched subscription-based payment processing for small businesses, which really is to gain traction to a partnership agreement with Payment Club, which is projected to add over $1.5 million in gross profit over the next 4 years.

Combined, these strategic initiatives are expected to add over $6.5 million in gross profit over the next 4 years.

We're on track to deliver another year of growth and financial improvement and are pleased with our results as we continue to focus on long-term growth plans.

We are confident that our strategic initiatives and continue to invest in commerce-enabled technologies are creating significant value for our shareholders.

Now I'd like to introduce Jeffrey Ginsburg, Net Element's Chief Financial Officer, to review our financial results in more detail. Jeff has been with us since inception and recently assumed the role of a Chief Financial Officer. Jeff, please proceed. Jeff?

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

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Thank you, Oleg, and good morning, everyone. We reported a net loss attributable to common stockholders of $903,731 or $23 per share for the second quarter of 2018 as compared to net loss of $1,640,340 or $0.93 per share for the second quarter of 2017. This resulted in a decrease in net loss attributable to stockholders of $736,609, primarily due to an increase in revenues and other income as well as decreases in general and administrative and noncash compensation expenses, which were offset by increases in depreciation and amortization expenses.

Net loss for the first half of 2018 was $2,514,577 or $0.65 per share for the 6 months ended June 30, 2018 as compared to a net loss attributable to stockholders of $4,127,837 or $2.41 per share for the first half of 2017, which resulted in a decrease in net loss attributable to stockholders of $1,613,260, primarily due to an increase in revenues and other income as well as decreases in general and administrative expenses and noncash compensation, which were offset by increases in depreciation and amortization.

Adjusting for noncash compensation, we have a non-GAAP adjusted net loss attributable to common stockholders of $881,231 or $0.22 loss per share for the second quarter of 2018 as compared to non-GAAP adjusted net loss attributable to common stockholders of $1,511,803 or $0.84 loss per share for the second quarter of 2017.

Non-GAAP adjusted net loss for the first half of 2018 was $2,410,066 or $0.62 loss per share as compared to a non-GAAP adjusted net loss of $3,402,896 or $1.99 loss per share for the first half of 2017.

Net revenues for the second quarter of 2018 were $16,464,717 as compared to $16,141,041 for the second quarter of 2017. The increase was driven -- this increase was driven by an increase of $806,347 or 6% in net revenues from our North American Transaction Solutions segment due to an organic growth, which was partially offset by a decrease of $482,671 or a minus 19% in net revenues from our International Transaction Solutions segment as we reorganize our international business and consolidate our mobile payments operations with PayOnline.

For the second quarter of 2018, there was no branded content revenue from our mobile payment operations as compared to $684,731 of branded content revenue in the second quarter of 2017.

Net revenues for the first half of 2018 was $32,447,111 as compared to $29,702,982 for the first half of 2017. The increase in net revenue is primarily due to organic growth of merchants in North America Transaction Solutions segment, which resulted in an increase in North American Transaction Solutions segment revenue of $3,808,045 for the first half of 2018. This was partially offset by a decrease of $1,063,916 in net revenues from our International Transaction Solutions segment, which was reorganized -- our international business and consolidated our mobile payments operations with PayOnline. For the first half of 2018, there was no branded content revenue from our mobile payment operations as compared to $1,340,896 of branded content revenue in the first half of 2017.

We continue to explore partnership opportunities that can monetize our relationships and contracts with mobile operators. We have not yet identified an acceptable joint venture partner or other arrangements.

Gross margin for the second quarter of 2018 was $2,650,709 or 16.1% of net revenue as compared to $2,822,649 or 17.5% of net revenue for the second quarter of 2017. Gross margin for the first half of 2018 was $5,014,769 or 15.5% of net revenue as compared to $4,924,598 or 16.6% of net revenue for the first half of 2017. The primary reason the gross margin percentage decreased was because of increases in North America Transaction Solutions segment's fixed costs as we began processing transaction utilizing our self-designated BIN/ICA. We estimated that this margin will normalize as we meet volume and transaction requirements on this new structure.

Gross margin was lower also due to a decrease in our mobile payments business in our International Transaction Solutions segment that have typically higher margins than our North American Transaction Solutions segment.

General and administrative expenses for the second quarter of 2018 were $2,499,496 as compared to $2,599,178 for the second quarter of 2017. The reduction of $99,682 in general and administrative expenses was primarily due to decreases in salaries and benefits of $76,347, professional fees of $51,954 and rent of $66,033, offset by increases in office expenses of $32,961 and communication expenses of $39,541 (sic) [$39,549].

General and administrative expenses for the first half 2018 were $4,945,977 as compared to $5,430,338 for the first half of 2017. The $484,361 reduction in general and administrative expenses was primarily due to decreases in salaries and benefits of $415,134, professional fees of $158,537 and rent of $138,045, offset by increases in transaction gain and losses of $32,429 (sic) [$72,429] and other general and administrative expenses of $95,000.

The general and administrative variances increase -- or decrease for the second quarter of first half of 2018 compared to the second quarter of first half of 2017 included salaries and benefits and taxes and contractor payments for the second quarter 2018 of $1,296,472 as compared to $1,372,819 for the second quarter 2017. Salaries decreased by $76,000 due to a decrease of $67,208 in transaction -- International Transactions segment and mobile payment operations are reduced while we continue to seek other arrangements and by $86,592 in North America because of a switch from salary commission to third-party commission payments for our second quarter of 2018. This was offset by an increase of $77,453 in corporate payroll.

Salaries and benefits, taxes and contracted payments were $2,625,395 for the first half of 2018 as compared to $3,040,529 for the first half of 2017. The decrease in salaries of $415,000 was primarily because of a $300,000 reduction in discretionary bonus and because -- in sales incentives charged to cost of sales through commission versus salaries.

International Transaction Solutions segment salaries decreased by $139,350.

Professional fees for the second quarter of 2018 decreased by $51,954. Professional fees for the first half of 2018 were $1,175,880 as compared to $1,334,417 for the first half of 2017. Professional fees decreased by $158,000 -- $158,537,000, primarily due to a decrease in consulting fees in the International Transaction Solutions segment, partially offset by an increase in corporate, general and legal fees. Corporate, general and legal fees increased due to increased litigation fees and legal fees due to increased activity in the Zell and Aptito.com cases and legal fees relating to certain financing transaction.

Rent expense was $70,045 for the second quarter of 2018 as compared to $136,078 for the second quarter of 2017. The decrease of $66,033 was primarily due to a reduction of $46,470 in rent in our International Transaction Solutions segment. Rent expense in the first half of 2018 was $151,000 as compared to $289,143 for the first half of 2017. The decrease of $138,045 was primarily due to a reduction of $102,508 in rent in our International Transaction Solutions segment as we substantially reorganize this business and produce office space -- and reduce office space, excuse me.

Transaction gain and losses represent changes in exchange rates between our functional currency and foreign currency, in which transaction is -- in which the transaction is denominated. During the first half of 2018 and 2017, respectively, we incurred $52,917, and we gained $19,570 of foreign currency transaction loss gains.

Other general and administrative expenses include taxes, utilities and business licenses. For the first half of the -- of 2018, these expenses were $187,494 as compared to $92,232 for the first half of 2017. The increase was caused primarily by an increase of $83,155 driven by State of Delaware franchise taxes in 2018 due to higher assessments and a credit taken in 2017.

We had a good quarter and first half of 2018, and we encourage you to review our 10-Q on our website or sec.gov for the further details.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from the line of Lisa Thompson with Zacks Investment.

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

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So [I have a couple of questions] about things that happened since the quarter ended, which seems to be more interesting than the quarter was. Oleg, could you talk a little bit about this broader portfolio and also, the deal with Payment Club? But first, on the portfolio, cryptically, you said that it was -- go ahead.

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

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No, no. Go ahead, go ahead.

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

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No. I said, cryptically, it said you bought something that will generate $5 million in gross profits over this next 4 years. So how does that translate into like revenue?

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

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Right. So we have acquired a portfolio from a partner of ours that has been submitting business. As you know, as this is the way our business works, we pay portion of our revenues to our agents and the partner that source the business on a residual recurring basis. So we bought that back, which means that we are now reducing a payout to that partner by this amount. And when we say gross profit, it's really going to drop to the bottom line. We have not bought the new money against it. We have not issued any stock against it. Instead of paying our partner his commission, the commission will be going to us. And the way we structured the deal is we have an attrition guarantee for a certain period of time, which results in what we're projecting, which is over $5 million in gross profit because we have some guarantees in the production and then -- and enhanced revenues over the period. So it's a -- it's at least going to be $5 million. But we're projecting it's going to be more.

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

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So how does that work? Do you get revenues from this? And then you get...

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

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Right.

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

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Like the 15% margins? That's how you book it? Or is it just your margin's going to increase because now you own it?

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

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Our margin is going to increase because the way it's done now, we have our revenues that we -- that comes in and then we pay out our referral partners. This is one of our referral partners. So instead of paying out a -- to -- making a payout to our referral partners, we're repaying those cash flows which means that our margin will increase. The revenues will not increase because we already have this in our revenue line, just that our margin will increase.

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Jeffrey Ginsberg, Net Element, Inc. - CFO, VP of Finance & Controller [10]

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Our cost of sales will decrease.

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Lisa R. Thompson, Zacks Investment Research, Inc. - Senior Technology Analyst [11]

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Okay. So that -- and that's all in North America, right?

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Jeffrey Ginsberg, Net Element, Inc. - CFO, VP of Finance & Controller [12]

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Yes.

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

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Yes. Like Jeff said, our cost of sales will decrease.

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

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Okay, good. I was just trying to understand that. And then, can you talk about this deal with Payment Club? Who are they? What do they do? And are you like a reseller for them now?

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

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Right. The Payment Club is a new brand that one of our valued resellers have launched. And it's a brand which is launched for the purpose of having subscription-based payment processes. Instead of charging margins on top of the rates, such as interchange, this valued reseller will be offering flat rates to their merchants and plan the merchants to subscribe to, to get transparent bill. We have signed a long-term agreement with Payment Club, which has a commitment and penalty set forth if they don't meet this commitment over a certain period of time, which translates in gross profit, like we said in our release. This will result in new revenue. This is not something that we bought that's existing already on our platform. So this will also result in additional revenues and gross profits. However, when we did the press release, we have only reported the gross profits portion of the deal. This is what holds the guarantee, the revenues come with gross profits. But the new increase -- this deal will increase both the revenue side and the gross profit side.

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

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And is it at the same margins, like 15%? Or is it higher or lower?

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Oleg Firer, Net Element, Inc. - CEO & Director [17]

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No. This deal will -- when we talk about the revenues, the margin will be more or less the same. It's not going to be bigger. However, the gross profits will be as stated, but the margin, yes, it will be probably around [60%].

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

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Okay. All right. And then, I have one question for Jeff. So the only strange thing in the second quarter report is other income, which was $674,000. Can you talk a little bit about what's in there? I assume that's a onetime thing, right?

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

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Yes. They're not -- this is non-reoccurring income, so there were 2 primary factors that contributed it to this other income. One was we wrote off the stock guarantee accrual for SDV, and that was in the amount of $312,000. And then we also wrote off certain legacy payables that have been on our books for quite some time because we accrue them due to possible contractual obligations. But after 3 years, we decided to -- that no claim or anything were made against them, and we decided to write them off. That was around $600,000. And then, netting against that was -- there was that Bunker Capital $200,000 decrease. It all -- all in all, it wound up -- a decrease in prepaids, sorry because we wrote that off. So all in all, it netted to the $674,000 other income that you see in our statement of operations and comprehensive loss.

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

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Didn't I see something about PayOnline in there, though? (inaudible)

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

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PayOnline, yes, the stock guarantee was related to the PayOnline acquisition. So when we bought it from PayOnline, we issued a stock price guarantee so -- and there was a [year] look-back period. After that year look-back period, there was no longer a claim, so there was no liability, and we wrote that liability off. But because of GAAP and the obligation that was upon us, so that yes, we had to (inaudible).

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Lisa R. Thompson, Zacks Investment Research, Inc. - Senior Technology Analyst [22]

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Okay, good. That explains that.

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Operator [23]

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

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Oleg Firer, Net Element, Inc. - CEO & Director [24]

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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. Thank you.

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Jeffrey Ginsberg, Net Element, Inc. - CFO, VP of Finance & Controller [25]

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Thank you.

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Operator [26]

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Ladies and gentlemen, that does conclude the Net Element Second Quarter and First Half 2018 Financial Results and Business Update Conference Call. Thank you for your participation. You may now disconnect.