By Lisa Thompson
Net Element (NETE) reported great revenue growth of 35% to $54.3 million in 2016. Its North American Unified Payments business did extraordinarily well growing 54% to $42.1 million. However this result was combined with the Mobile payments business, which declined 34% to $5.9 million and PayOnline, which grew 34% to $6.2 million (due to only a partial year in 2015.) The US business has been adding value added services and is even starting to sell its Aptito SaaS service in Russia, which should result in improving margins throughout the course of the year. Mobile payments struggled as the company discovered that its business model without financing was not conducive to profitability. It required payment up front to suppliers while not receiving payment from customers for 60-90 days. As the credit facility it had in Russia is no longer available, the company is instead focusing on countries such as Poland and Turkey where this upfront financing is not required and expects to grow this business sequentially in 2017. If the company can find appropriate financing, it may also be able to revive the Russian business.
Overall expenses grew less than revenues exhibiting operating leverage, and the operating losses declined year over year. More importantly the company made some progress toward becoming EBITDA positive. Adjusted EBITDA in 2016 was loss of $3.5 million versus a loss of $3.8 million in 2015. Hopefully the company will focus on reaching cash breakeven so that the rise in share count is lessened to match the growth in revenues and per share value will start to grow. The company is still burning about $380,000 a month or $1.1 million a quarter and has been using primarily equity to finance the losses. We do not see that changing and equity dilution should continue. If the company were to decrease losses by increasing operating leverage faster than the share price dilution, or in other words, if investment was accretive, the price per share could improve.
On a GAAP basis the company reported at loss of $13.5 million versus $15 million in 2015. On a non-GAAP basis, without share-based compensation and one-time gains and charges, the company reported a loss of $7.9 million versus a loss of $9.8 million. Shares count however rose 104% to 13.4 million versus 6.4 million a year ago. This is clearly the main reason the value per share has not increased despite improvement in operating results. On a non-GAAP basis the loss was $0.60 per share versus a loss of $1.54 in 2015.
The company continues to focus on growing revenues and is willing to sacrifice short-term profits to generate revenues with a long tail, future profitability and higher margins. As long as public markets are willing to fund the company through equity, this strategy may play out in future years. Due the variation in reporting of revenues of the various competitors of Net Element, we have chosen to use gross margin contribution as a more accurate way to value the companies. Using Net Element’s peer group we find an average valuation of 6.3 times the enterprise value to trailing twelve-month gross margin. If we use that multiple and apply it Net Element’s trailing 12-month gross margin, we see that the stock could be worth $3.56 if it were profitable. Using our forecasts, that price could rise to $4.17 next year using 2017 estimated gross margin of $9.9 million and a share count of 21.3 million shares.
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By Lisa Thompson