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Edited Transcript of NETE earnings conference call or presentation 15-Nov-19 1:30pm GMT

Q3 2019 Net Element Inc Earnings Call

MIAMI Dec 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Net Element Inc earnings conference call or presentation Friday, November 15, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jeffrey Ginsberg

Net Element, Inc. - CFO

* Oleg Firer

Net Element, Inc. - Executive Chairman & CEO

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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 Third 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 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, 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 would like to turn the call over to Oleg Firer, CEO. Oleg, please go ahead.

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

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Good morning, everyone. Welcome to our third quarter 2019 financial and business update call. I would like to expand on our challenges and achievements for the quarter as reported in our filings and the press release filed yesterday.

Our revenues were down approximately 2.4% as compared to the same period last year. This loss in revenue is made up of expected decline in our International Transaction Solutions segment and an effort of -- and an effect of an unexpected industry-wide change for enhanced car association and sponsoring bank compliance in certain merchant categories for our North American Transaction Solutions segment.

In basic terms, starting with North American Transaction Solutions segment, certain merchants that were considered acceptable non-risk merchants by the card associations, such as Visa and MasterCard and sponsoring supplement banks are now considered prohibited categories and their accounts had to be immediately terminated. This resulted in a net loss of merchant accounts and revenues associated with it.

We have, however, immediately took action and replaced these revenues with a new category of value-added solutions, which includes licensing our Netevia platform as a service along with its suite of solutions such as: Aptito, restaurant and retail management system; Unified mPOS, mobile point-of-sale solution; and Zero Pay, our innovative platform, which allows merchants to except transaction at no cost.

As a result of these efforts, in the North American Transaction Solutions segment, our net revenues for this segment have increased to $15.920 million, a slight increase from $15.9 million for the same comparable period. While our gross margin was approximately $2.74 million or 16.3% of net revenue, a slight increase from $2.68 million or 15.6% of net revenue of the same comparable period. $572,000 of new revenue for the quarter is attributable to the value-added solution's category, up 58% over the same comparable period last year and $226,000 of gross margin, or 39.5% of net revenues, an increase of 47% over the same comparable period.

Our quarterly results demonstrate a demand for our suite of value-added payment acceptance solutions fueled by the continued growth in transaction's profit, utilizing our proprietary Netevia platform.

Despite the challenges we have experienced thus far, the industry changes, in addition to the loss of revenue in our International Solutions segment, we have demonstrated a continued increase in gross margin for our North American Transaction Solutions segment, and our ability to replace lost business. We continue to execute on our strategy with a focus on delivering long-term value to our shareholders, as such we will be exploring strategic alternatives for certain markets in our International Transaction Solutions segment, and continue working diligently to improve both the top and the bottom line and reaching profitability.

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.

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Jeffrey Ginsberg, Net Element, Inc. - CFO [3]

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Thank you, Oleg, and good morning, everyone. We reported a net loss attributable to common stockholders of approximately $1 million or $0.24 per share loss for the 3 months ended September 30, 2019, as compared to a net loss of approximately $900,000 or $0.23 per share loss for the 3 months ended September 30, 2018.

The increase in net loss, attributable to stockholders of approximately $100,000, was primarily due to a decrease in the service fees of approximately $423,000, a corresponding increase of approximately $362,000 in amortization of client acquisition cost, and a reversible of an over-accrued liability of approximately $153,000 reflected as other income.

Net revenues consist primarily of service fees and transaction processing. Net revenues were approximately $16.8 million and approximately $17.2 million for the 3 months ended September 30, 2019, and 2018, respectively. The decrease in net revenues is primarily related to our International Transaction Solutions segment, which experienced competition, certain economic challenges and the loss of a major customer. In addition, growth in our North American Transaction Solutions segment was offset by the wind down of certain merchant categories due to the industry-wide changes for enhanced card association and sponsoring compliance.

The gross revenue for the 3 months ended September 30, 2019, was approximately $2.7 million or 16.3% of net revenues as compared to approximately $2.7 million or 5.6% (sic) [15.6%] of net revenues for the 3 months ended September 30, 2018. The primary reason for the increase in the overall gross margin percentage was the result of North American transaction fees associated with the processing of transactions utilizing our self-designated BIN and due to an increase in dollar volume processed as compared to prior comparable quarter.

Operating expenses were approximately $3.6 million for the 3 months ended September 30, 2019 as compared to $3.4 million for the 3 months ended September 30, 2018. Operating expenses for the 3 months ended September 30 primarily consisted of selling and generally -- general administrative expenses of approximately $2.4 million, bad debt expense of approximately $400,000 and depreciation and amortization expense of approximately $800,000. Operating expenses for the 3 months ended September 30, 2018, primarily consisted of selling, general and administrative expenses of approximately $2.3 million, bad debt expense of $600,000 and depreciation and amortization expense of approximately $500,000.

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 comes from the line of Lisa Thompson with Zacks Investment Research.

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

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So I have a few specific questions on what happened in the quarter, and then I'd like to move to just a big picture of strategy, kind of, question. So first off, could you explain more specifically, what happened with this industry-wide change? Explain it in lay terms? And when exactly this happened?

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

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Sure. It happened at the beginning of this year. We were to shut down certain merchant category codes, came from our -- from Visa, MasterCard and our sponsoring banks. And Visa and MasterCard being the card associations, sponsoring banks are the settlement banks that we use where we have our unique bank identification numbers with. And we were told to shut down certain merchant categories. And as you know, in this industry, if you're told to shut it down, you have to shut it down. And the reason is that those category codes are no longer accepted for processing by Visa and MasterCard. And we are not the only ones affected by it. That's a -- there's other companies in the industry that made such a closure as well.

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

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So do you know what -- how much of that you had in the fourth quarter of last year, revenues from those categories?

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

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Yes. We have -- we do have that number. And we actually -- have we put it out there? If we didn't, I'll give it to you. We do have those numbers.

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

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For Q4, so one coming up.

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

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To Q4, no. I have the Q3. I do not have the Q4. But we will get it for you. Yes. The Q4, we will get it for you. But we already, as we said in our press release, and just I said on the call, we already replaced those revenues with value-added solutions segment that we've been building. So we have all the products that we have been launching in our Netevia platform, we're licensing it out, and that's creating a lot of traction. And we believe that's going to continue. And as you saw the margins are pretty healthy there.

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

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Right. So value-added solutions, what do you define that as specifically? Is that like a property management stuff? And does that include Aptito?

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

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No. So it does include Aptito. So we have -- Netevia platform is a robust merchant-management platform. We have the front and then the back end. The front end is available for the merchants to manage their transactions, to do a load balancing on certain card types, includes fraud-management tools. Those are some of the tools on the front end as well as marketing data-mining tools and some of the artificial intelligence that we built for scoring.

In the back end, it allows for our agents and our value-added resellers to manage their portfolios, to manage their merchant relationships to see the risk, to see pretty much everything in real time. So it's a comprehensive front and back end platform that we have licensing on. And that's the biggest line item in that category right now.

In addition to that, that also includes Aptito, it also includes Unified mPOS, which is our mobile POS application that we license out and that includes licensing it out to both value-added resellers and directly to the merchants, but we collect the licensing fee for it. In addition, it also includes our Zero Pay system, where we allow merchants to process without the fee, process transaction and other fee, and we also license that platform for a fee.

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

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Okay. That sounds good. So I assume that, that's going to continue to grow sequentially. Correct?

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

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Yes. It is. As you saw, it's a -- it has -- we have demonstrated double-digit growth, and we will continue to do so. And with the margins -- we've always discussed margins, this type of business is on boarding at 39.5% margin.

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

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Very good. Just on International, just to pick on that, I know it's not a lot of dollars but the margin was down a lot. Do expect that to go back up? Is there something unusual that happened this quarter?

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

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Well, it's -- the new merchant that we have on board is at a lower margin. But we also balanced out expenses, it's not that it's costing us a lot to maintain that business, but we are, as I explained on the call, due to the fact that we've been trying to secure some financing in our International markets, and we are unable to secure the financing, we will be looking at strategic opportunities for that segment. And just broadly looking at a picture and seeing how we can monetize it more for the shareholders. And we will exhaust all the options.

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

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Okay. Interesting. Let me look to more questions. Okay, so -- then I'm going to move on to my big picture question. So it looks like this year is going to, kind of, end up where you were last year. So what do you feel like it's going to take to just get you over that hurdle to get to the profitability? I know you're really closed as far as cash burn. And it just seems like you need, I don't know, is it $3 million, $5 million in revenues? What is it?

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

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No, no, no. So what we have -- so let's break it down a little. So we have actually improved our cash position, our cash burn by a lot. If you're looking at this year on a EBITDA cash loss basis, right now for the past quarter we're about $150,000 loss per month and that's improving on a month-to-month basis. So we are where we're narrowing down losses. We still believe that we are on the track to reach breakeven profitability very soon. And with the new business, they were putting out a higher margin, so we believe that's going to happen sooner than later. And as I said, we're very close. It's -- if we're comparing to last year, it's a significant improvement. It's a $150,000 versus, I believe, this time last year we talked about $300,000.

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

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Great. Okay. So that does look a lot better. And so just a nitpicking thing, on the Q4 last year, you were down sequentially because of seasonality. Is that the same that you expect for this year or has your merchant mix changed?

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

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No. We're not expecting the down. We're expecting normal. It all depends on how Christmas is going to do, but we're not expecting a down quarter.

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

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Okay. And that sequentially as usual…

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Oleg Firer, Net Element, Inc. - Executive Chairman & CEO [19]

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So far, we're seeing all the right signs.

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

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Great. Okay. Because I know in the past that you had -- like a long time ago, you had a lot of schools and things that were closed in the fourth quarter. I assume that stuff, kind of, changed.

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Oleg Firer, Net Element, Inc. - Executive Chairman & CEO [21]

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Right, right, right. But that's changed. That demographic has changed. So we no longer -- yes, you were right, we used to service some schools, we used to service some of those relationships. We still service some of them, but it's more on a platform basis rather than acquiring basis. So it's a fixed-fee type of arrangement. So we've already seen that curve. So we're not seeing any signs of decline for the fourth quarter at this point.

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Operator [22]

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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. - Executive Chairman & CEO [23]

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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 that you might have. Have a great day, and a wonderful weekend. Thank you.

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Operator [24]

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Ladies and gentlemen, that does conclude the Net Element's Third Quarter 2019 Financial Results and Business Update Conference Call. Thank you for your participation. You may now disconnect.