U.S. Markets open in 30 mins

Edited Transcript of NETE earnings conference call or presentation 15-Nov-18 1:30pm GMT

Q3 2018 Net Element Inc Earnings Call

MIAMI Nov 16, 2018 (Thomson StreetEvents) -- Edited Transcript of Net Element Inc earnings conference call or presentation Thursday, November 15, 2018 at 1:30:00pm GMT

TEXT version of Transcript

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

Corporate Participants

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

* Jeffrey Ginsberg

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

* Oleg Firer

Net Element, Inc. - CEO & Director

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

Conference Call Participants

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

* Lisa R. Thompson

Zacks Investment Research, Inc. - Senior Technology Analyst

* Tharren Charles Duffy

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

Presentation

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

Operator [1]

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

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Net Element Third Quarter 2018 Final Results -- Financial Results and Business Update Conference Call. (Operator Instructions).

I like to remind listeners that during the call, management's prepared remarks may contain forward-looking statements, which are subject to risk 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 risk 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, 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.

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

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

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

Good morning, everyone. Thanks to everyone for joining our call today to discuss the results for the third quarter of 2018.

Net revenues for the third quarter increased to $17.2 million, an increase of 15.7% compared to the third quarter of 2017. The increase in net revenues is primarily due to growth in our North American Transaction Solutions segment, which experienced 19% growth over the prior year.

Net revenues for the 9 months ended September 30, 2018 increased to $49.7 million, increase of 11.5% over the prior year. The increase in net revenues is primarily due to organic growth in North American Transaction Solutions segment, which experienced 16.6% growth over the prior year.

International Transaction Solutions segment experienced an expected decline of 17%, due to elimination of branded content business, which accounted for $1.34 million of net revenues in 2017.

Normalizing elimination of branded content business resulted in growth of 2.7% in International Transaction Solutions segment and 14.9% across all segments over the same period of the prior year.

Geographically, the United States business accounted for 90.4% of total revenues for the third quarter, and 88.5% for the 9 months ended September 30, 2018, while International revenues were 9.6% in the third quarter and 11.5% for the 9-month ended September 30, 2018.

Total dollars process for the 9 months ended September 30, 2018, increased 35% to $2.45 billion, from $1.81 billion in transaction volumes during the same period in 2017. Led by robust growth from our subsidiary Unified Payments, North American transaction segment saw the largest increase of 39% to $2.17 billion, while International Transaction Solutions increased 10% to $283 million.

Total transactions processed during the 9 months ended September 30, 2018, increased 34% to $73 million.

The increase in transactions processed came primarily from North American Transactions segment, which saw an increase of 40% to $43.7 million. While International Transaction Solutions segment saw increase of 25% to $29.3 million.

Growth in other segments was organic.

On the operational side, we continue to implement stronger internal controls and procedures with the help of the recently established disclosure committee. Our North American Transaction segment has shown some positive trends on the business development and acquisition side. During the third quarter of 2018, we have acquired the recurring cash flow assets for a total $2.7 million, which are expected to generate in excess of $5 million in gross profits over the next 4 years. We launched subscription-based payment processing offering aimed at small business in the United States. The new offering targets to multibillion-dollar subscription economy and gains traction through a partnership agreement with Payment Club, projected to add over $1.5 million in gross profit over the next 4 years.

Combined strategic initiatives are expected to add over $6.5 million in gross profit over the next 4 years. We continue to work and deliver value-added products that set out to differentiate our offerings to small- and medium-sized businesses. Recently we have launched Aptito software, and the world's first smart payment terminal. There is calibration with point, we move 1 step closer to our goals helping merchants transact seamlessly across multiple touch points.

October was a busy month for several strategic initiatives. During the month of October, Unified Payments launched compliant payment solution for legal cannabis industry, new offering targets to SaaS, growing CBD industry. Since the launch of this solution on October 22nd, we have been receiving significant interest from merchants across United States, and working diligently in on-boarding of search merchants.

According to the experts the CBD market is projected to hit $22 billion by 2022, and we're excited to play a part in this growing trend.

On October 10, we have announced the partnership with VIP Systems to launch Seamless Payments for the hospitality industry, which target the multibillion-dollar travel and hospitality industry.

VIP System is a preferred technology integrator for Marriott International, Choice Hotels International, Simon Property Group and InterContinental Hotels Group, to name a few. We're very excited to work with this leading technology integrator and provide value-added payment solutions to its clients.

On October 2, we have announced a joint venture with Bank Sputnik to develop and launch a new payment processing center, which will enable financial institutions and value-added providers to meet consumer demand for secure frictionless payment acceptance.

As part of this JV, Bank Sputnik will provide the capacities for the data centers as well as financial instruments and several other transactions, and funding required for the deployment and implementation.

The joint venture with Bank Sputnik is subject regulatory approval, which we hope to receive during the fourth quarter of 2018.

I'm also very happy to report that we have made significant improvements to our balance sheet and with significant pay down of debt over the course of the year, we now have access to over $10 million in debt as part of our borrowing facility.

We're pleased with our performance in the third quarter and the 9 months period as we continue to deliver double-digit revenue growth with improved gross margin performance, underscoring the ongoing execution of our technology-enabled value-added strategy.

We continue to take steps that will enhance our long-term performance as we remain focused on growth and building value for our shareholders.

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

Jeff has been with us since inception and, as you know from the previous call we had, assumed the role of Chief Financial Officer. 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 $0.9 million or 0.23 -- $0.23 per share loss for the 3 months ended September 30, 2018, as compared to a net loss of approximately $1.7 million or $0.90 per share loss for the prior year.

The decrease in net loss attributable to stockholders of $0.8 million was, primarily, due to an increase in revenues for the quarter.

For 9 months ended September 30, 2018, we reported a net loss attributable to stockholders of approximately $3.4 million or $0.88 per share loss as compared to net loss attributable to stockholders of approximately $5.8 million or $3.29 per share loss for the prior year.

The decrease in net loss attributable to stockholders of approximately $2.4 million was, primarily, due to an increase in revenues and other income as well as a decrease in noncash compensation.

Adjusting for noncash compensation, we have a non-GAAP adjusted net loss attributable to common stockholders of approximately $0.9 million or $0.22 loss per share for the quarter ended September 30, 2018 as compared to approximately $1.6 million or $0.82 per loss per share for the prior year.

For the 9 months ended September 30, 2018, we have a non-GAAP adjusted net loss attributable to common stockholders of approximately $5.7 million or $1.99 loss per share as compared to approximately $5.1 million or $2.88 loss per share for the prior year.

Net loss consisted primarily of service fees from transaction processing.

Net revenues were approximately $7.2 million for the 3 months ended September 30, 2018, as it compared to approximately $14.9 million for the prior year, the increase was primarily driven by an approximately $2.5 million or 19% increase in net revenues from our North American Transaction Solutions segment due to organic growth, and the acquisition of certain transactional services portfolio.

Net revenues were approximately $49 million for the 9 months ended September 30, 2018, compared to approximately $44.6 million for the prior year. The increase of approximately $5.1 million or 11.5% in total net revenues for the 9 months ended September 30, is primarily due to organic growth of merchants in our North American Transaction Solutions segment, which was partially offset by approximately $1.2 million or 17.2% decrease in net revenues from our International Transaction Solutions segment, as we continued reorganizing and combining our mobile payments operations with PayOnline.

We've eliminated mobile payment operations staff and assigned current responsibilities to team members that PayOnline and TOT Group Russia, and continue to explore partnership opportunities that can monetize our experience and relationships with mobile operators and local institutions.

The gross margin for the 3 months ended September 30, 2018, was approximately $2.7 million or 15.6% of net revenue as compared to approximately $2.1 million or 14.4% of net revenue the prior year.

The primary reason for the increase in gross margin percentage was the result of North American Transaction Solutions negotiating favorable on-boarding contract terms and processing of transactions utilizing our self-designated BIN/ICA.

Gross margin for the 9 months ended September 30, 2018 was approximately $7.7 million or 15.5% of net revenue as compared to approximately $7.1 million or 15.8% of net revenue for the prior year. The gross margin was slightly lower due to a decrease in our mobile payment operations and our International Transaction Solutions segment that had typically higher margins than our North American Transaction Solutions segment.

Selling and general administrative expenses remained flat at $2.4 million for the 3 months ended September 30, '18 as compared to the prior year period. Selling and general administrative expenses for the 9 months ended, September 30, 2018, were approximately $7.3 million as compared to $7.8 million for the prior year. The approximate $500,000 reduction in general and administrative expenses was due to various increase or decrease in the 9 months ended September '18 compared to the prior year, which included salaries and benefits payments approximately $3.9 million for the 9 months ended as compared to $4.3 million for the prior year. The decrease in salaries and benefits of approximately $0.4 million was primarily due to the result of the company's continued monitoring of labor cost in relation to processing revenues and also our mobile payment operations being compliant with PayOnline.

Professional fees were approximately $0.6 million as compared to approximately $0.7 million for the prior year. The decrease was due to the reorganization of mobile operations in to PayOnline, which was offset by an increase in consulting fees relating to compliance training for the Board of Directors and continue an internal control evaluation procedures.

For the 9 months ended September 30, 2018, professional fees were approximately $1.8 million as compared to $2 million for the prior year, the decrease was primarily the result of combining mobile payment operations into PayOnline, which was offset by an increase in general legal fees in connection with certain litigation matters.

Rent was approximately $74,000 for the third quarter 2018 as it compared to approximately $103,000 for the third quarter of 2017.

For the 9 months ended September 30, 2018, versus prior year. Rent decreased approximately $225 from approximately $390,000, respectively. Due to office space lease for our mobile payment operations in Russia not being renewed, as these operations were combined into PayOnline.

We had a good quarter for the first 9 months of 2018, and we encourage you to review our 10-Q on our website or sec.gov for further details. Thank you.

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

Oleg Firer, Net Element, Inc. - CEO & Director [4]

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

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

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

Questions and Answers

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

Operator [1]

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

(Operator Instructions) And our first question comes from Lisa Thompson with Zacks Investment.

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

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

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

So I have a few questions about the quarter. First off, can we just talk a little bit about -- North America, right? It grew 19%, that was all organic, isn't it? Because the portfolio purchase didn't effect revenues? Is that right?

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

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

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

Correct, everything -- as I mentioned in the beginning script, all of our growth for the quarter was organic. The portfolio purchase is only going to kick in the following quarters. And that's also, the portfolio purchases are, if you remember, also then increase the margins that we hope in the coming quarters as well.

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

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

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

Right. Shouldn't affect the revenues, though, right?

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

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

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

No, it should not, it's not going to...

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

Jeffrey Ginsberg, Net Element, Inc. - CFO, VP of Finance & Controller [6]

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

No, it'll be -- it will decrease our cost of goods sold.

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

Lisa R. Thompson, Zacks Investment Research, Inc. - Senior Technology Analyst [7]

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

Okay, great, just clarifying that. Now in International, is there some seasonality there? Like why was revenues down sequentially?

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

Oleg Firer, Net Element, Inc. - CEO & Director [8]

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

It was seasonality, there was -- because the third quarter falls into the holiday season, so it starts slow. We have experienced seasonality last year as well. So it's really seasonal, and we believe the fourth quarter is going to have a rebound.

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

Lisa R. Thompson, Zacks Investment Research, Inc. - Senior Technology Analyst [9]

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

So where do they get their revenues from primarily?

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

Oleg Firer, Net Element, Inc. - CEO & Director [10]

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

Right now, it's all service-driven e-commerce, so it's (inaudible) sites, it's book sold, it's goods -- various goods sold online, so it's really a lot of online merchants, including some of the larger merchants in the country.

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

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

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

So it'll have a Christmas effect, right?

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

Oleg Firer, Net Element, Inc. - CEO & Director [12]

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

Yes, yes.

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

Lisa R. Thompson, Zacks Investment Research, Inc. - Senior Technology Analyst [13]

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

Okay, good. And then back to the updates on (inaudible) -- very encouragingly the cannabis vertical market has already got some interest in it. Is that just a marketing thing to say that you're selling to them? Or did you actually have to add software and capabilities just for them?

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

Oleg Firer, Net Element, Inc. - CEO & Director [14]

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

We had to fine tune our systems underwriting mechanism books. Get the partnering bank to accept this type of business, because the biggest thing is to have the bank that is able to settle these type of transactions, and we're taking very active approach. We have people right now at cannabis convention Las Vegas, speaking to prospective merchants. And as I mentioned, we're getting a big influx of interested parties calling us on daily basis and we are cautiously reviewing every single one of them, but optimistic enough to say that's going to have an effect in the future.

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

Lisa R. Thompson, Zacks Investment Research, Inc. - Senior Technology Analyst [15]

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

So is there anything you're waiting for to sign up or you're just...

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

Oleg Firer, Net Element, Inc. - CEO & Director [16]

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

No, we're signing up -- we're on-boarding merchants as we speak.

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

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

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

Yes, that's what I've -- systems are already, and we are on-boarding merchants as we speak. And it's -- as I mentioned, we're really going after the CBD market, rather than the full cannabis industry and the CBD market is large enough opportunity for us to go after, and we are on-boarding merchants as we speak.

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

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

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

Great. Okay, and so back to Sputnik. Is that deal ready to be signed just pending approval or you're still working out the terms?

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

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

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

No, the terms are ready. We are pending regulatory approval. We have submitted the full package to the regulators and that just we're waiting for them to give us the green light and then we'll proceed. We have schematics ready. We have a plan in place. We have everything ready and waiting for regulatory approval. We have to submit all the documents to the regulators, and we're waiting for them to approve the transaction, and it's taking some time. Typically, with somehow that's been there and stuff, it's taking a bit longer than expected, but we are still optimistic enough to say that we should have the approval in the fourth quarter of 2018.

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

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

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

That's exciting. So after you get approval, how long do you think its going to take till you actually have a product to go to market with?

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

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

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

Well. We have a plan to roll out the product over the12 months after we get engaged, so it's really -- if we get approval this year, we hope to launch it probably mid-next year or so.

It's not going to have an immediate impact, but it's going to have a long-term impact.

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

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

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

Right, it will be there. Can you just explain one thing for me, about transaction volumes? Why is it that the transaction volumes go up so much more than revenues do? How are they related?

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

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

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

Right. So we have, especially, in United States, we have referral partners, we have independent sales organizations that go out and market our businesses and the reason why revenues are not going -- the transaction volume goes up and the revenues don't go up as much is because we -- they target different demographics and historically, we have the merchants that were processing less than $10,000 a month, now what they are processing, the latest report, $15,000 a month on average. So a different demographic of merchants, the changes and the revenues go with it. So if we going -- if our distribution metrics are going to change in the future, the revenues could go up as well. So more than they have historically. So it's really depends on the distribution channels and distribution channels that we have today have larger average tickets.

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

Lisa R. Thompson, Zacks Investment Research, Inc. - Senior Technology Analyst [24]

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

Okay. That makes sense. And I guess, my final question is, what do you have for your goals for 2019? Is there any financial or marketing...

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

Oleg Firer, Net Element, Inc. - CEO & Director [25]

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

I think the biggest goal that I could tell you is, we're looking to reach breakeven and profitability and that's our main goal today. Now that we have -- we're working on all cylinders, our objective for 2019 would be to breakeven and achieve sustainable profitable growth.

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

Lisa R. Thompson, Zacks Investment Research, Inc. - Senior Technology Analyst [26]

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

Well. That's pretty exciting. It's been a long process, but -- it's frustrating, it is. Every time I look at the numbers to get -- every year, it's getting better and better. So it looks like you're on track.

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

Oleg Firer, Net Element, Inc. - CEO & Director [27]

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

But you -- we -- as you remember, we weathered the large storms and...

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

Lisa R. Thompson, Zacks Investment Research, Inc. - Senior Technology Analyst [28]

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

Yes, you did.

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

Oleg Firer, Net Element, Inc. - CEO & Director [29]

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

So we feel -- and we're still standing and we're very optimistic that we're on the right track, as you just mentioned.

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

Operator [30]

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

(Operator Instructions) And our next question comes from Tharren Duffy with Duffy Emergency Medicine.

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

Tharren Charles Duffy, [31]

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

So just a quick question. Do you anticipate being able to break into the recreational cannabis market?

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

Oleg Firer, Net Element, Inc. - CEO & Director [32]

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

Well, we are -- thank you, Tharren and pleasure to meet you. We are, obviously, exploring all opportunities and we're -- obviously, there's some regulations in place that are not giving us ability to do it faster than we can, but we are still in the middle of exploring alternative payment schemes to be able to service that industry.

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

Operator [33]

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

And I'm not showing any further questions at this time, I would now like to turn the call back over to management for any closing remarks.

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

Oleg Firer, Net Element, Inc. - CEO & Director [34]

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

Thank you to everyone for being on the call this morning. Please do not hesitate to contact us with any questions that you have, and have a great day. Thank you.

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

Operator [35]

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

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