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Edited Transcript of NETE earnings conference call or presentation 15-Aug-19 12:30pm GMT

Q2 2019 Net Element Inc Earnings Call

MIAMI Sep 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Net Element Inc earnings conference call or presentation Thursday, August 15, 2019 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. - 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 Second 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 August 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. Thanks to everyone for joining our call this morning to discuss the results for the second quarter of 2019. During the second quarter of 2019, we have focused on optimizing scalable operating expenses and launching proprietary value-added services that will add to our revenues and margin going forward. Example of one of our initiatives is launch of Blade, our proprietary, fully automated, artificial intelligence-powered underwriting solution with predictive scoring, which optimizes resources needed to perform underwriting and risk management functions.

Our North American Transaction Solutions segment continues to grow. Our revenues for the segment for the second quarter were $15.7 million, a growth of 9% as compared to the same period last year. In International Transaction Solutions, revenues decreased to $749,000 in revenue from $2 million in revenue. We have onboarded new relationships, which have completed this integration and began contributing to revenue as of this June. We expect these new relationships to yield significant revenues for the International segment during the second half of this year, and inverse the negative trends that we have experienced there.

Net revenues for the first quarter were flat at $16.5 million as compared to the same period last year, with a decrease in our International Transaction Solutions segment. Total transaction processing volume for the first quarter increased to approximately $950 million, an increase of 8.5% compared to $787 million for the same comparable period.

Total transactions processed for the quarter increased to $28.8 million, an increase of 9.7% over 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 integrated solutions and value-added applications to our technologies stack, built around Netevia, our proprietary payments ecosystem. We are excited about our momentum going into the second half and the ongoing process our team has made to improve gross margins through use of scalable infrastructure and integration of value-added 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.

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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 approximately $1.5 million or a loss of $0.37 per share for the 3 months ended June 30, 2019, as compared to a net loss of approximately $900,000 or $0.23 per share for the 3 months ended June 30, 2018. The increase in the net loss was attributable to stock -- approximately $600,000 was primarily due to an issuance of noncash compensation, valued, at the date of grant, of approximately $2 million, which was offset by an increase of $1.1 million as a result of reversal of accrued expenses during the 3 months ended June 30, 2019, as compared to the 3 months ended June 30, 2018.

Reported a net loss attributable to common stockholders of approximately $2.7 million or $0.66 per share for the 6 months ended June 30, 2019, as compared to a net loss of approximately $2.5 million or $0.65 per share for the 6 months ended June 30, 2018.

The increase in net loss attributable to stockholders was primarily due to the issuance of noncash compensation, valued, at the date of grant, at approximately $2 million during the 3 months ended June 30, 2019, which was partially offset by decreases of approximately $262,000 in selling and general administrative expenses and approximately $517,000 in bad debt expenses, and a reversal of $1.1 million in accrued expenses relating to merchant reserves recorded in a previous year deemed not to be an obligation at June 30, 2019.

Net revenues consist primarily of service fees from transaction processing. Net revenues were primarily -- were approximately $16.5 million for each of the 3 months ended June 30, 2019 and 2018.

It should be noted that dollar volume of transactions processed by International segment has been showing improvement due to the boarding of large merchant account in the beginning of the year where the integration was completed during the second quarter of this year. In June of 2019, the dollar volume processed for international operations increased 7% from the previous month. This trend significantly improved in the month of July 2019, as the dollar volume processed increased 46% from the previous month. We believe this trend will continue and improve the overall performance of the strategic vision of our International segment.

Net revenues consist primarily of service fees from transaction processing. Net revenues were approximately $31.6 million for the 6 months ended June 30, 2019, as compared to approximately $32.4 million for the 6 months ended June 30, 2018.

The decrease in net revenues for the comparable period were primarily related to our International Transactions segment, which experienced competition and certain economic challenges.

The gross margin for the 3 months ended June 30, 2019, was approximately $2.6 million or 15.7% as compared to approximately $2.7 million or 16.1% for the 3 months ended June 30, 2018. The primary reason for the decrease overall was the result of North American Transaction Solutions fees associated with the processing transactions utilizing due to an increase in volume as compared to prior comparable quarter.

The gross margin for the 6 months ended June 30, 2019, was approximately $5.4 million or 17% as compared to approximately $5 million or 15.5% for the 6 months ended. The primary reason for the increase in the gross margin percentage was a result of the North American Transaction Solutions processing of transactions utilizing our self-designated BIN, recurring profitable cash flows from portfolios acquired in the prior year and further acceptance of value-added services by the merchants.

Operating expenses were approximately $5.2 million for the 3 months ended June 30, 2019, as compared to $4.1 million for the 3 months ended June 30, 2018. Operating expenses for the 3 months ended June 30, 2019, primarily consisted of selling and general administrative expenses of approximately $2.3 million, noncash compensation of approximately $2 million, bad debt expense of approximately $0.1 million and depreciation and amortization of approximately $0.7 million. Operating expenses for the 3 months ended June 30, 2018, primarily consisted of selling and general administrative expenses of $2.5 million, bad debt expense of $0.9 million and depreciation and amortization expense of approximately $0.7 million.

Operating expenses were approximately $8.8 million for the 6 months ended June 30, 2019, as compared to $7.4 million for the 6 months ended June 30, 2018. Operating expenses for the 6 months ended June 30, 2019, primarily consisted of selling and general administrative expenses of approximately $4.7 million, noncash compensation of $2 million, bad debt expense of $0.5 million and depreciation and amortization of approximately $1.6 million. Operating expenses for the 6 months ended June 30, primarily -- 2018, primarily consisted of selling, general and administrative expenses of approximately $4.9 million, bad debt expense of approximately $1 million and depreciation and amortization of approximately $1.4 million.

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) And our first question comes from Lisa Thompson from Zacks.

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

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So this is kind of an exciting quarter irregardless of your 2 onetime sort of things the stock-based comp and the reversal. It looks like you are on a trend that you are getting in striking distance of operating breakeven with your reduction in expenses. Does that seem almost possible next quarter?

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

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Well, we are working hard to achieve that as we discussed in our previous calls. And we're doing everything in our powers to do so. We are growing, even though that might seem like we're flat, but North America is still showing positive growth and will continue to show positive growth. And as you saw margin is also in line with what we expected. And we're only seeing improvement from there.

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

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Looks great. Especially in International, I was surprised at how margin picked up. Do you think the gross margin can continue to grow from there in International?

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

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No. International, it's actually -- it will not -- it will be in line with what we have experienced. We cleaned up the portfolios. So we cleaned up everything that has not been producing us any revenues. So there is no dormant merchants of any kind. So everything that we have produces a decent margin. And with the addition of these few merchants that we discussed on the previous call, that already started contributing to revenues, we see only positive trends from there. As Jeff explained in June of 2019 dollar volume process increased 7% from the previous month. It's month-over-month 7% growth. And we are forecasting that's going to even do more.

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

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That's great. So what kind of business are you pursuing over there right now? Who are these merchants that you're bringing on?

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

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We're pursuing mid to large enterprises, Internet resources. They are selling goods or services domestically in CIS and internationally. So they are multinationals. They're either doing business direct only in CIS and looking for an integrator to help them achieve these tasks here and open some value-added services that are needed such as risk management from integration gateways and such. And on the multinational side, these merchants that we look to ask to open other areas for them like United States and Europe.

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

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That sounds really good. Of all the things that you introduced this quarter, you talked about a partnership with HP, the AI scoring, adding crypto and the new Mastercard product. Which of these is going to give you more traction and interest of the customer base?

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

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Right. Blade, we're already seeing the results. Blade is really key to our Netevia ecosystem. It gives us an inability to streamline our underwriting and risk management as you saw our losses have decrease. And we don't need to hire as many people looking at applications anymore and perform these tasks like we did. So on operational side, Blade will definitely contribute and we're already seeing the results of Blade.

On the sales side, we believe the Mastercard could be an interesting product. We already started the deployment of Mastercard. Using our Netevia Mastercard, we're able to offer a rebate to our merchants for making payouts through this card, rebate upwards of 1%, which could be significant saving for small- to medium-sized businesses in North America on their processing and also add some other value-added benefits such as discount at hotels and such. So we believe that Mastercard gives us a new spin to our sales and marketing in North America as we enter issuing space as well. And its really not issuing because we're not distributing these cards to the consumers, but when you -- anybody that looks at payment processing, there is always an issuing component and an acquiring component. And issuing component takes up the bulk of our expenses today as we pay out -- as interchange is really paying to the issuer. So in that sense, if we get paid as an issuer, we're able to refund and share some of those savings with our merchants. And we believe that's going to give us an added value that is needed in this market today.

So those 2 products definitely are going to contribute in the near future. Longer-term place and HP partnership, HP is now integrated with Aptito, and we are going to be making announcements about some of the changes that we made in Aptito, whereby we're already seeing some great results.

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

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Well, that sounds great. So I just want to clarify that reversal you took on the reserves. How exactly did that come about? And why did you reverse it this quarter?

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

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Right. So we...

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

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Well...

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

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I can speak about it, Jeff. One second.

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Jeffrey Ginsberg, Net Element, Inc. - CFO, VP of Finance & Controller [14]

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Okay.

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

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So we had reserves from the acquisition of PayOnline. They were not really a liability in our end. We had indemnity as part of the contract that provided for certain chargeback indemnities. And we have done many tests, and we together working with the legal and accounting, we believe that those potential liabilities are no longer at play. And we together with accounting and legal after doing extensive testing have made a determination to write them off.

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

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Okay. So going forward, what does that do to your provision for loan losses? It's -- where's that going to be? Does that have anything to do with this?

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

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We don't have that -- we don't -- this is not a loan loss. We don't -- this has nothing to do with -- this was earmarked for PayOnline. This was strictly a PayOnline provision.

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

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Okay, it is pure PayOnline. Okay. So that explains that one. So could you -- yes, just talk a little bit about this quarter what to expect. The continued growth in North America. Would you continue gross margin can come back or not?

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

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We're continuing growth in North America. Gross margin is going to be what we have been experiencing. When we talk about decline in gross margin, there is a decline of several basis points. And it's going to pick up, so it's gonna be in line with what we have experienced before. And we're looking to increase that with some value-added products I discussed like Mastercard and some other initiatives. But we'll be announcing in near future after we complete the tests.

With respect to International, as we demonstrated a few months ago, we will turn the trend with the contribution of these merchants that we have signed up and have fully integrated. So we expect that their contribution to revenues will reverse the trend.

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

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Okay. So you should see revenue growth this next quarter -- this quarter?

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

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Yes, yes, yes.

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Operator [22]

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(Operator Instructions) And I am showing no further questions from of our phone lines. I'd now like to turn the conference back over to Oleg Firer for any 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 questions that you might have. And have a great day.

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Operator [24]

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