Net Element's (NETE) CEO Oleg Firer on Q4 2015 Results - Earnings Call Transcript

| About: Net Element (NETE)

Net Element International Inc (NASDAQ:NETE)

Q4 2015 Earnings Conference Call

March 31, 2016 04:30 PM ET

Executives

Oleg Firer - CEO

Jonathan New - CFO

Analysts

Lisa Thompson - Zacks Investment

Jason Simmons - Charles Schwab

Operator

Good day ladies and gentlemen. Thank you for standing by. Welcome to the Net Element 2015 Annual Financial Results and Business Update Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. [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 the 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 filing with the SEC. Any projections as to the company's future performance represented by management include estimates today as of March 31, 2016 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

Thank you and thanks to everyone for joining our call today to discuss 2015 operational and financial results, as well as given opportunity for those of you listening in to ask questions during the Q&A session.

2015 was a significant year with a number of notable achievements. I'd like to begin today's conference call by acknowledging our accomplishments in 2016. Our net revenues have increased 89.5% to $40.2 million for 2015 versus $21.2 million for 2014. $19 million increase in net revenues is primarily due to growth in the company's three segments.

North America transaction solutions segments continued organic growth of small to medium size merchants with emphasis on value added offerings. The revenue for this segment we're $27.4 million, a 41% increase over the prior year. Mobile solutions segments, as a result of a new business model which was introduced in the third quarter of 2015. We began generating the revenues from branded content revenues for this segment were $9 million, a 385% increase over the prior year.

Online solutions segments, we completed an acquisition of PayOnline, leading to online payment platform in emerging markets and began consolidating our online solutions segment in May of 2015. As a result of this acquisition, we recorded $3.8 million of revenue during 2015 which represents a partial year of results.

Our gross margin for 2015 was $6.3 million or 16% of net revenue. As compared to $5.3 million or 25% of net revenue for 2014. There were several factors which caused our margin to decline. North America transaction solution segment margin was lower in 2015 due to attrition of high margins legacy merchant portfolios, which were replaced with new lower margin clients. We expect to increase adaptation of value added offerings by this client during 2016, which will subsidies a new reduction of margin.

In addition our operational efficiency allows for greatest scalability without the need to significantly increase our G&A expenses. Mobile solutions segments went through a complete restructuring during 2014, which resulted in the launch of proprietary platforms and a new business model for this segment. As a result of a new business model, we extended our service offerings to include branded content and stabilized the margins to the industry standard.

During 2015, we have extended our service offerings to several new markets which includes GCC states Kazakhstan, Kyrgyzstan. As a result of our entry into this markets we have signed new key partnerships as a world secured key clients to ease our transactions services platform.

2015 was also a year of new product launches. During the year, we have launched Restoactive a comprehensive restaurant solution integrated with some of the biggest U.S. and restaurants managements platform such as MICROS, POSitouch, Aloha and Symphony. By integrating into the leading POS and restaurant management platforms Restoactive is now available to over 500,000 restaurants in the United States.

PayOnline launched Pay-Travel to automate payments for travel industry including integration with Global Distribution Systems, which includes Amadeus and Sabre and available for online and mobile application payments acceptance.

PayOnline launched new payment solution for iOS to existing Microsoft and Android processing capabilities. The new software development kit enables integration of PayOnline transaction processing into Apple's iPad and iPhone applications. PayOnline successfully deployed master cards, MasterPass digital wallets to over 800 online merchants. Aptito added EMV and mobile payments acceptance including Android Pay, Apple Pay and Samsung Pay to its POS offering. Merchants Using Aptito POS Systems are provided secure EMV-compliant and mobile payment acceptance hardware. We have also expanded our service offerings to over 100 payment methods internationally.

We are very pleased with our strong finish to the year with positive momentum across all channels. Our results are a reflection of our ability to deliver growth, with limited financial resources. We are excited about 2016 and are confident that we can deliver continued growth throughout the year.

Now I’d like to introduce Jonathan New, Net Element’s Chief Financial Officer, who will provide comments in our financials.

Jonathan New

Thank you, Oleg. We reported adjusted net loss of 9.8 million or $0.15 loss per share for 12 months ended December 31, 2015. As compared to a net loss of 6.9 million or $0.19 loss per share for the 12 months ended December 31, 2014. So our net loss went up 2.9 million and I’m going to talk about that loss increase. 2015 was a year of transition and growth in our mobile solutions segment as already pointed out. And for North America transaction solutions, we grew the business organically mostly and of course we brought PayOnline. So there was a lot of rounding out of our breadth and product offering throughout 2015.

As a result, net revenues for 40.2 million for 2015 as compared to 21 million for the 12 months ended December 31, 2014. So we had almost $19 million increase in revenues and all it pointed out that we grew our North America transaction solutions by 8 million, we acquired and began consolidating online solutions, when we brought PayOnline in May so it’s a partial year, 3.8 million of revenue recorded. And we began generating revenue for branded content in our mobile solution segment that begun in the third quarter and as a result mobile was up 7.2 million.

Oleg talked about the margin 6.2 million for the year 16% in that revenue, that’s compared to 5.3 million last year or 25% in net revenue. Again Oleg explained that the revenue composition mix and associated costs as well as the restructuring of the mobile solutions business affected our margins. 2015 business mix had branded content revenue, which yields lower margins. But it’s a better business model for us and as Oleg pointed out its standard margins for that business.

Additionally, we experience lower margins on revenues from North America, despite higher sales volume year-on-year. So this is just the nature of what’s happening in the market today, our legacy portfolios are earning more, but they’re running off and they’re being replaced with new portfolios that have lower market lower, but they’re lower margins than they used to be. So that’s why you’re seeing decline in North America and transaction services.

In terms of adjusted G&A, when I say adjusted G&A, what we’re stripping out is non-cash compensation and the cost of the restructuring of debt and derivative gains and losses, these are non-recurring type gains and they’re easily traced, if you have the press release, even trace these numbers to our financials. Anyway our G&A increased 2.2 million to 9.3 million for the full year 2015 as compared to 7 million for the 12 months ended December 31, 2014.

Primarily due to a 1.4 million increased in professional fees and the $600,000 increased in salaries and benefits. But if you look at it from a segment perspective online solutions added 1.2 million of G&A, which included 789,000 of professional fees and 333,000 of salaries and benefits. What we’re saying is a good part of our increase in G&A is a direct result of just growing the business with the acquisition of PayOnline in May. Salaries benefits, taxes, contractor payments increased 600,000, primarily resulting from 330,000 from PayOnline. Balance was due to increased management headcount professional fees increased 1.4 million, primarily again resulting from 789,000 from PayOnline and the balance of that increase was from increasingly on accounting fees this year from compared to 2014. Simply, because we had more filings, we had two annual meetings or regular meeting and a special meeting and there just was a lot of filing activity.

Other expenses increased almost a million bucks in 2015 from 825 -- increased to $2 million in 2015 from 825,000 in 2014, sorry. 174,000 increase was primarily comprised of PayOnline again 46,000, most of that was mobile solution segment 500,000 and that’s management charge that they charged themselves and they offset incorporate. 44,000 increase in North America transaction solutions, primarily due to an increase in communications and office expenses and that was offset by a variety of decreases offsetting measures, saving 424,000 in other corporate expenses.

The other expenses includes general office expenses and expenses related to communications primarily. We recorded a provision for bad debt is 650,000 this year, this is a big swing from last year where we had a recovery of net 1.1 million and that resulted from the successful reorganization of the mobile solutions segment where we were at great risk of taking large losses that management was able to avoid and there we're able to reverse that charge in 2014.

Of course it looks dramatic this year because we have normalized loss charge of 650,000 for the year. We took no losses in mobile solutions all of that [indiscernible] from North America and maybe some of PayOnline. Depreciation and amortization expense consist primarily of the amortization of merchant portfolios and we also take depreciation on fixed assets, client acquisition cost, capitalized software expenses, non-competes, it was 2.5 million this year as compared to almost 2.4 million in last year and it was primarily due to purchased merchant portfolios reaching full amortization in 2014, so we didn't have that charge in 2015, offset by an increase of intangible assets from the PayOnline acquisition and you can see note four or five, I think it is PayOnline acquisition in the notes for the financials and if you read the details for that.

Interest expense was 3.6 million as compared to 3.7 million but this was a real win for us this year, the 3.6 million, we reported this year was primarily due to derivative activities, so it's non-cash, we did a great job this year, the company has $4 million of debt in total so, it really delevered the balance sheet and we really have no -- the interest charge is very small if you look at the cash flow, you can see we paid 550,000 in cash interest for the year.

So, the net effect with all of the activities above, I'm leaving out with some of the minor staff, produced and adjusted net loss of 9.8 million or $0.15 loss per share for the 12 months ended December 31 as compared to an adjusted net loss of 6.9 million or $0.19 loss per share for the 12 months ended December 31, 2014.

So, in summary 2015 we added substantial breadth of service with the addition of PayOnline and new offerings of branded content in mobile solutions, we successfully reorganized the mobile solutions business, we set a major litigations in that business, we've replaced the entire management team, we implemented our own proprietary billing system and enhanced our product offering. From the North America side, we grew our business organically by over 40% and this business segment should continue to provide double-digit growth in 2016.

That concludes our formal remarks, now I'd like to ask Chelsea to open the call for questions.

Question-and-Answer Session

Operator

Thank you, sir. Ladies and gentlemen, we'll now begin the question-and-answer session. [Operator Instructions] Our first question is from the line of Lisa Thompson with Zacks Investment. Your line is now open.

Lisa Thompson

Hi, Oleg and Jon. Very good showing in the revenue growth this quarter that was unexpected, I missed the few minutes of the call, so I hope I don’t repeat myself if anything is said already can you just go a little -- clarify a little bit more the three business segments, I think I'm a little confused with some of that went. I know, in North America its credit card processing, is that also Aptito from there too.

Jonathan New

Yes, so we now have -- North America is everything that we have in the United States and that includes Aptito and all the value added products that we have in the United States, when we're going to promoting this product in different regions, they will fall into the different sectors but North America transaction solutions segment, they include Aptito and Brick and Motor business omni-channel processing that we did domestically. Mobile solutions segment is our direct carrier billing business, mobile payments that we do internationally and online solutions segment is PayOnline.

Lisa Thompson

Okay and PayOnline is only in Russia or where has that --?

Jonathan New

PayOnline is not only in Russia, it's in entire commonwealth independent state which is former Soviet Union block, Asia, Europe and Middle East, we have about 40% of volume of revenue that the company generates outside of CAF regions, which is Asia, Europe and other emerging markets.

Lisa Thompson

Okay, so the difference between PayOnline and the mobile business is one is done with the phone and the others is on the internet?

Jonathan New

PayOnline has a mobile component as well, with PayOnline we're doing a purchase in mobile payments, PayOnline ties us to credit card or other cashless forms of payments where mobile solution segment is direct carrier billing, [indiscernible] mobile operators rather than going to Visa, MasterCard or other metrics.

Lisa Thompson

Okay, that explains it, thank you. We’re still like we’re back were we were last year this time, when you were a smaller company, but yet needed to raise capital to grow and I think we're back right where we were last year, I was wondering, talk a little bit about by your strategy for growth. I'm not quite sure what your cash burn was in Q4, but I think it was around 800,000 plus another 600,000 in interest expense. So, talk about how you plan to grow and how you -- and if you have any plans to get to EBITDA breakeven?

Jonathan New

Well Oleg is thinking about that, let me just reframe interest for you, if I missed that, mostly interest we recorded this year was non-cash derivative interest, the total interest for the year was 550,000 cash interest paid from the cash flow statement and the debt outstanding at year end was around 4 million.

Lisa Thompson

So how much is that a quarter, that you're going to have to pay in cash?

Jonathan New

It's very small right now, it's 150 a quarter, 200 a quarter.

Lisa Thompson

What's the plan this year, I mean obviously --.

Oleg Firer

So, the plan is that we're going to continue to grow and reach critical mass and turn profitable. We are continuing to grow as I mentioned in my speech even with limited resources we're able to show significant growth in the business. The only capital that we really raised since the last time that we spoke is the capital that we used to make an acquisition of PayOnline. Everything else pretty much the business is used its own resources to continue to grow, there was no capital injection of any other sort and we -- unfortunately the stock suffered because of toxic [ph] transaction that we did and we believe that, that has already -- came and went and now we're focused in the business, focused on growing the business, continue to grow the business with very limited resources that we have, we do still have a credit facility available to us domestically to continue to grow and so we have not increased our debt tremendously since the last time we spoke last year.

I believe last year we had $3.5 million in debt and this year we're around 4 million. It's not it -- hasn’t been a huge increase of debt, we are trying to work with the limited resources that we have and continued the growth and we believe all of the segments this year will continue to show great results and we believe that breakeven profitability is just around the corner.

Lisa Thompson

Do you know what revenue number that is that you feel you'll reach breakeven, cash breakeven?

Jonathan New

[Multiple Speakers] for projection yet like that.

Lisa Thompson

Right I mean I was just doing with a map gun and it seems like you're using other 8 million in revenues a quarter?

Oleg Firer

It's not, it's not --.

Jonathan New

We are not breaking the margin down carefully by segments, so Oleg will explained that, I don't know, were you here for the margin discussion?

Lisa Thompson

Part of it, I don't know.

Oleg Firer

So, we are -- as John said we have not given anybody guidance on what the breakeven is or profitability, but we feel with the growth that we've been experiencing, if we continue to grow in the same manner, it's right around the corner and every quarter we're losing less and less capital as I mentioned in the beginning of the call we have the -- our infrastructure is scalable, we don't need to increase our G&A tremendously to grow the business to double or triple digits.

Jonathan New

[Multiple Speakers] We have to back out and adjust stores, there was a certain gross up going on with the new business and the mobile content, and so it's skewing the margin percentages and dollars to some degree, so it's a big change starting in the third quarter with the mobile content, so we go over that maybe --.

Lisa Thompson

I understand how that works, obviously blend of three businesses to get whatever going forward margins are, but you still need I mean if your gross margin is 2 million a quarter your expenses are way higher than that, so either the expenses come down or the revenues go up and it sounds like you're just planning for the revenues to go up?

Jonathan New

All of this positions the company for growth at this point, we're don’t really expect add much expenses this year other than normal growth type stuffs that it goes to company has some good scalability even though you can't really see it clearly in the P&L.

Oleg Firer

Six weeks tomorrow we have [ph] -- we double our business, I don't need to double my G&A so the margin will inherently be down and with respect to spending significantly more we are still feeling our growth so if we stop growing obviously the business can reach profitability much sooner, but we want to continue to grow the business we want to continue with the momentum that we have and that we believe that we have the recipe for success and to get this business to the that level.

Lisa Thompson

As far as quarter is going forward this year given your newish business mix is there any seasonality involved or do you expect to kind of grow sequentially every quarter?

Oleg Firer

No, there is seasonality involved, it's similar to all of the transactional businesses where the first quarter of the year is usually the lowest because of in a very [indiscernible] days involved and the way the commerce works in January months versus December. So typically we’re still subject to seasonality in January, February timeframe and then we have summer seasonality, so we still have that effect and will continue to have that effect.

Lisa Thompson

Okay, so it's lower in March and then and the next three quarters similar and then --.

Oleg Firer

No. First it's lower in January and February and then in March rebounds and then we have June, July and then it goes by or June I think June and July is -- summer is also weird because of some of the segments that we are targeting, in United States we have educational sectors that we have as part of our mix which gets shutdown for the summer. Some segments get effected more than others, but overall we don’t just look at the quarter-by-quarter, we look at the entire year.

Lisa Thompson

So I think I noticed in the 10-K that you relate 50% restaurant is that right?

Oleg Firer

In the United States domestically it's not 50%. Jon what's the breakdown right now?

Jonathan New

Let me I'll grab that in a moment.

Oleg Firer

[Multiple Speakers]. The reason why we are having this value of the product that we are promoting at the restaurants. Aptito’s first version was and the version that we started which was the hospitality version and we just recently extended to retail. So obviously it's going that way.

Jonathan New

We have about 48% versus 44% in restaurants. And schools are now 15% -- 16% versus 18%. So the schools are coming down as the other restaurant portfolio builds around it that restaurants are going up as that seat of sales. As we focus with our internal sales forces focus on Aptito and they’re doing a nice job.

Lisa Thompson

Alright, the Restoactive products of the restaurants what exactly does that do [Multiple Speakers] you don’t get that type of MICROS or any of those?

Jonathan New

Well Restoactive is really bringing our Aptito iPad interactive solution to the traditional MICROS type of a POS environment, where if you have a MICROS system and you would like to have a standalone kiosk that's a iOS based or would like to have a displace your menus with the iPad based menus or have mobile communicators which are more affordable then MICROS original mobile communicators we have then integration into MICROS and allow restaurant owners to get those graphical temples and streamline product that are fully integrated with MICROS.

Lisa Thompson

Okay, so that makes sense and new MICROS have those products but, just got a different one at the different pricing and [Multiple Speaker] it goes with your service. Right?

Jonathan New

And we are much more affordable than MICROS.

Lisa Thompson

Alright, especially now that they’re owned by some big company. Okay great. Okay so what should we look for this year as what during the next changes regular growth or you looking at any adding portfolios?

Jonathan New

We will be very opportunistic and very selective. We want to reach breakeven and profitability as you said and we will be very opportunistic and let the opportunity come to the table and that increases our position in certain markets or gives us a distribution or something proprietary that adds to the next we will consider it, otherwise we will continue on a faster organic growth and occupy open for any other opportunities that come to the table.

Lisa Thompson

Oh, great I really like to see that as like a nice calm year, just organic growth, would be just wonderful.

Jonathan New

Thank you.

Operator

Thank you. And our next question comes from the line of Christian [indiscernible] with Ink Global. Your line is now open.

Unidentified Analyst

So just a couple of very simple questions from me. The first question would be you mentioned earlier that there was some loss of legacy accounts falling off and they will be in replace by lower margin. Is there a plan to lower expenses and loose these lower margins?

Jonathan New

No, really when we acquire merchant, we acquire merchant that we could sell other services too. So our plan is obviously to all other business, legacy business that we have in our book has been would up for years, and it's a trade in and it's not a trade in as a terrible pace, it's trade in at the very low percentage point compared to the industry standard.

However, when we acquire that merchant we focus our company and base our company around value added services that we could also sell for these merchants that will increase the margins back to where they were. And we have already tried, we have several pilots going on right now, and we believe that we have a few products that we will be launching this year that exist today in our portfolio to the merchants that we increase the revenues, increase the margins for those merchants. It's really lowering our expenses, we could lower our expenses but the growth will be handicapped. We have a scalable infrastructure today and anything we do south of that will give us an ability -- and will not give us an ability to grow as fastest as we can, and obviously our cost will be more expensive if we outsource the services.

Unidentified Analyst

Okay and my next question would with regards to reverse split. Is that still plans for reverse play on the horizon?

Oleg Firer

Well, we have received the notice from NASDAQ and we have to comply with that notice by certain date. So we have two options either we’re going to comply with it organically or we would to do reverse stock split. But we have certain date by which we have to comply.

Unidentified Analyst

Okay. And my last question would be obviously with the result of earnings being released this morning, that stock price took a little bit of a tumble, was there any sentiment or anything you like to share with the public to quell fears on the market?

Oleg Firer

We don’t control the market, I’m still bullish about the company. We said in the filings, I have acquired, I’ve increased my position overtime and I still believe in the company and vision of the company and future of the company. So obviously I can’t control the big trading or anybody that’s willing to sell the shares, but I’m still committed to the business and significant shareholders and insider of the company are still committed to the business.

Operator

Thank you. Our next question comes from the line of Kurtis Walls [ph] with AJA Capital. Your line is now open.

Unidentified Analyst

My question is the following. You mentioned the rollout of the POS integration tool. I couldn’t remember -- I don’t remember that was just for the U.S. market reflects for every market that you’re trading or working in. But what effect will that have on your sales cycle for your services and specifically how does it impact the timeline and the cost acquisition for new customers. And finally, what your projections for this year on revenues and margins for services related to this particular tool?

Oleg Firer

Right. So speaking of this tool. This tool gives us an ability to penetrate more merchant. As we go out and solicit the merchant, where we have our direct sales force, in direct sales force visiting the merchant, they’ll have a better chance to attract more merchant, because not every merchant does not have a POS system or would like to displace their existing POS system, just to allow us to integrating to existing POS system give them value added services that enhances their experience with existing POS system.

We have to not forecasted this product out yet, this is a relatively new product that was launched this year, it’s only available in the U.S. market today. Even though that we launched the Aptito hospitality POS in other markets, this product is still only available in U.S. and we hope that it’s going to contribute significantly, but as I said it’s a new product and the time will show. So far we’re seeing that we’re to attract as I mentioned more merchant, the merchant that we would typically turn away, we’re able to work with them and providing them with the products and to your question on the forecast, we have not released any forecast to the public.

Unidentified Analyst

That does make your sales cycle much more compact and much easier to get through or is it pretty much in the sales cycle?

Oleg Firer

Absolutely, it’s easier, it makes our sales cycle much shorter, because we don’t turn away merchant. If I’m walking into a restaurant that’s using MICROS I’m able to often him a solution that could work, rather than telling him to comeback or I can’t take you on as a client, or it’s only due payment processing, we’re able to sell a comprehensive solution to the restaurant owners that already have invested significant resources into much larger enterprise solution.

Unidentified Analyst

Okay. Thank you. That’s the only question I had.

Oleg Firer

Thank you.

Operator

Thank you. And our next question comes from the line of Tony [indiscernible], he is a private investor. Your line is now open.

Unidentified Analyst

I just wanted to know in regard to the timeframe on the split. As I understood, I know it was supposed to happening in the end of the year and then you receiving an extension. So what is the date that we should be looking at for that?

Oleg Firer

The extension is through I believe ’16 or ’13, Jon correct me from what’s the date certain?

Jonathan New

’16, I believe, June ’16.

Unidentified Analyst

Excellent. Thank you very much. That’s all, that’s my only question.

Jonathan New

No, he is just saying, we have till June ’16 to do sometime. He didn’t really answer the question yet.

Unidentified Analyst

It’s by June that was --

Jonathan New

The question is, do you have a date certain, you have --?

Oleg Firer

More gap, they certain is we have to comply with NASDAQ regulations by June ’16. So it’s any, if we don’t, you have to [multiple speakers] organically to over a dollar, we have to do a reverse stock split, we don’t have a date and which we will evaluate our options, but we have to comply by the ’16 June.

Unidentified Analyst

Understood. Great. Thank you very much.

Operator

Thank you. And our next question comes from the line of Jason Simmons with Charles Schwab. Your line is now open.

Jason Simmons

Hello, congratulations on the year. I have a question, you have speaking about organic growth. You guys plan on hiring more sales team members or how do you guys plan to grow organically?

Jonathan New

Hi Jason, thank you for your question. We have historically and to date being growing organically through independent distribution channels. We employed indirect sales officers, indirect entrepreneurs, value added resellers, integrators, affinity partners, association to our mix of distribution channel goal, we have over 100 different partners that bring us business on exclusive and nonexclusive basis and we're rapidly expanding that channel, hence the results of the business on year-over-year basis.

We believe by adding indirect distribution channel allows us to scale faster without direct expenses attributable to hiring sales people. We do however have a small team of direct sales people that focus on enterprise solutions and promoting value of the services, but outside of that most of our distributions is indirect through various partner channels.

Jason Simmons

That was my only question. Thank you very much.

Operator

[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.

Oleg Firer

Again, I want to thank everyone for participating on our call today. Please do not hesitate to contact myself or John with any follow up questions. Thank you.

Operator

Ladies and gentlemen, that does conclude the Net Element 2015 financial results conference call. Thank you for your participation. You may now disconnect.

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