Elephant Talk Communications Corp. (NYSEMKT:ETAK)
Q2 2012 Earnings Call
August 1, 2012 11:00 a.m. ET
Steven van der Velden - Chairman & CEO
Pat Carroll - CEO ValidSoft
Mark Nije – CFO
Peter Salkowski – Investor Relations
Justin Colatosti - Dawson James Securities
Good morning ladies and gentlemen and thank you for standing by. Welcome to the Elephant Talk Communications Corp.’s Second Quarter 2012 Conference Call. At this time, all participants are in a listen-only mode. Following the presentation we will conduct a question and answer session and instructions will be provided at that time. (Operator Instructions). I will now turn the conference over to Mr. Peter Salkowski. Go ahead, sir.
Thank you, Ron. Good morning everyone in the United States and good afternoon to our European listeners and thank you for joining us on Elephant Talk Communications' Second Quarter Shareholder Update Conference Call. On our call today will be Steven van der Velden, Chairman & CEO of Elephant Talk; Mark Nije, CFO; and Pat Carroll - CEO ValidSoft Limited. Following management’s discussion, there will be a Q & A session open to all participants on the call.
Remarks made on this call may contain forward-looking statements within the meaning of the Section 27A of the Securities Act of 1933 as amended and Section 21-E of the Securities Act of 1934 also as amended. All forward-looking statements are inherently uncertain as they are based on current expectations and assumptions concerning future events or future performance of the Company.
Listeners are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. In evaluating these such statements, perspective investors should review carefully various risks and uncertainties identified on this conference call in the manner stated in the Company’s SEC filings. These risks and uncertainties could cause the Company's actual results to differ materially from those indicated in the forward-looking statements. The Company undertakes no obligation to revise or publicly release the results of any revisions to these forward-looking statements in light of the information or future events.
During our call today we will discuss adjusted EBITDA and other non-GAAP financial measures in our press release issued this morning in the United States and this afternoon in Europe and our filings with the ICC each of which is posted on our website. You'll find additional disclosures regarding non-GAAP financial measures including reconciliation of these measures with comparable GAAP measures. With that out of the way, I would now like to turn the call over to Elephant Talk's Chairman and CEO, Mr. Steven van der Velden.
Steven van der Velden
Steven, are you there? We can hear you.
Steven van der Velden
You hear me? Okay. Sorry. Thank you, Peter. And thanks to everyone who joined us today for our shareholders update call. The Company’s mobile and Security business has a successful second quarter generating revenue of $2.8 million. This is the highest quarterly revenue produced from this side of the Company and has resulted in the fourth consecutive quarter of sequential growth for mobile and security revenue.
Mobile and Security Solutions accounted for nearly 40% of our total second quarter revenue and was the significant contributor to the Company's margin of $1.9 million. Contributing to the strength of the second quarter, Mobile and Security revenue were two recent accomplishments. One accomplishment came from Elephant Talk and the other one came from ValidSoft as illustrating the Company's unique product offerings in expertise in mobile and fraud solutions market segments.
Our first accomplishment was reaching the milestone of 1 million active mobile subscribers that we fully manage on behalf of Vodafone in Spain. approximately 400,000 mobile users were added to the Elephant Talk platform since the beginning of the year. This accomplishment illustrates the unparalleled and advanced capabilities of our mobile platform. Our second accomplishment was generating a full quarter of high margin revenue from ValidSoft's strategic partnership with Adeptra to provide SIM swap fraud solutions to one of the world's largest banks.
We are product of what we have achieved technically and commercially with these large clients and believe the Company is well positioned for future growth through the expansion of our existing relationships and the creation of new opportunities with the world's largest banks and mobile network operators.
In Germany, we recently announced that the Company began generating revenue from a two year MVNO contract that was singed in the second quarter. Under this agreement Elephant Talk will provide mobile services including airtime to at least 65,000 mobile users. On July 24th, we announced getting to approximately 4,000 mobile users on our platform. The number of mobile users on our platform as of today has already increased to approximately 10,000 and we expect to gradually implement the remaining users over the next five months.
This is the first contact Elephant Talk has signed with a large MVNO in Germany, Europe's largest telecom market. Based on the strong relationship the Company has developed with Toture [ph] Telecom to do mobile, we expect Germany to serve as the strong contributor to our future financial growth. In fact, this contract is expected to generate at least $30 million in revenue for Elephant Talk over the contract period.
In early July, we successfully executed the migration of 100,000 additional mobile users in Spain to the Elephant Talk platform. This migration was accomplished in a single night representing the strength and flexibility of our platform. Elephant Talk now supports over 1.1 million mobile users in Spain. Additionally, we are announcing here for the first time the Elephant Talk was recently selected to provide our mobile platform services to one of the world's largest global mobile operators. For competitive reasons, at this time, we are not permitted to release the name of the operator. What we can mentioned is the initial phase of this agreement has Elephant rolling out mobile services across three major markets. We expect this agreement to go live and to begin generating revenue for the Company by the end of this year with the potential to add several million subscribers to our mobile platform during the lifetime of that agreement.
These new opportunities continue to enhance already strong global reputations in the mobile telecommunications industry. And we believe will lead to additional subscribers managed through Elephant Talk's mobile platforms during the remainder of 2012. While adding mobile users to our platforms, the most direct recognition of Elephant Talk's ability to provide excellent service recognition of our abilities has been provided in other ways as well. But recognition of our strong reputation came in late May at the Latin addition of the MVNO Summit World Series in Sao Paulo. The managing director of Vodafone in Enabler Spain, the Vodafone Group company that Elephant Talk partners with to provide our mobile platform in Spain presented a case study on the many benefits that Elephant's Talk’s mobile platform has provided Vodafone. Luis Jimenez-Tuñón discussed the importance of a close relationship with the right technology partner. We believe presentations by industry like Mr. Tuñón helps to further position Elephant Talk as a viable outsourcing partner for the largest mobile operators in the world.
Elephant Talk's partnership with the Adeptra is another example of a strong industry relationship that has been solidified that should allow us to continue to increase our mobile and security solutions revenue. We are generating high margin revenue through the contract we signed from Adeptra partnership. They need to work extremely close with them to up-sell additional functionality and to add solutions to multiple large scale financial institutions. We remain a very confident that other financial institutions will license our SIM swap fraud protection capabilities along with other ValidSoft solutions. We are very pleased with the ongoing process of the implementation, integration, and/or development that is occurring with Utiba, Spindle, and SOCURE. Pat Carroll will expand more on those companies, what is happening with Adeptra, and ValidSoft's other accomplishments.
Before turning the call over to Pat, I would like to mention that the announcement earlier this week of the resignation of Martin Zuurbier from our Board of Directors was based solely on the New York Stock Exchange Corporate Governance requirement. That at least the majority of our directors be (inaudible). Martin remains our Chief Technology Officer and will continue to serve as an observer to world.
With that, I will now turn the call over to Pat.
Thank you, Steven. And good day, everyone. In this update I plan to focus on value creation and ValidSoft revenue generation efforts. Since my last update, we've been very busy in terms of focus on product creation, intellectual property, and of course, revenue generation. On the product front, I'm delighted to announce the general availability of our new indigenous five factor multi-layer, mutli-authentication and transaction verification platform. We believe that we are truly unique in being able to offer this indigenous capability, which we believe is fundamental in order to properly secure transactions at risk.
Traditional security models are broken. We can offer world markets a new security architecture that can counter the most sophisticated fraud we encounter globally today but also the ability to configure this capability on an OpEx basis, meaning on a per transaction basis there by enabling financial services and service providers to dynamically map their required level of security to the perceived risk of any transaction and insuring the best possible balance between risk and cost fraud prevention.
So in addition to our current four factors for which we own the intellectual property and underpinned by file patent, these four factors comprising one, something you know, knowledge, something you have, a mobile phone or smartphone, something you are, voice by metrics, somewhere you are or not, proximity correlation. We have added the additional fifth factor of something you trust. In our fifth factor representation of trust we relate to the level of mathematical confidence engendered by the application of trust technology that is digital certificates, encryption in many forms, and invisible authentication all capable of being deployed on a para-transaction basis and designed specifically for the mobile and wireless world. Alongside this capability, we've also introduced our profiling capability, which is all a part of our invisible authentication solution. This means that we have the ability to authenticate a user associated with a device, be that a PC, a laptop, a netbook, or any mobile device in real time to a number of different mechanisms all based on a mathematically computed confidence factor.
We believe that our five factor capability is essential to successfully compete and ultimately dominate in the security solutions landscape today. ValidSoft is at the forefront of this new emerging market. Remember, traditional security models are broken and have been since 2007. The world needs a new security architecture. The world needs ValidSoft.
On the Intellectual property front we continue to make solid progress having filed a new patent entitled Zero Latency Correlation. A powerful capability that speaks to ensure that our proximity correlation capability can operate in a real time manner. That is, zero latency at the time of correlation. In addition to this filed patent, we have a portfolio for additional patents that we intend to file in the third quarter. I plan to report on these patents in the next quarterly update.
My final update in terms of value creation relates to our privacy seals. We are the only security company in the world with two privacy seals and we have a third seal close to being awarded. The value of these privacy seals in the world of context aware security solutions cannot be underestimated. Compliance with ever more stringent data protection and privacy regulations, we believe, will be a crucial differentiators in the future award of new security contracts and ETAK is far ahead of any competition in this regard.
On the revenue generation front, you are aware of our success with a leading global financial institution, which went live with Adeptra ValidSoft unique SIM swap solution during the last week of April. The deployment at the bank consists of SIM swap protection provided by ValidSoft baseline processing system and fully integrates it in the bank's risk management platform, via the Adeptra platform. Once a suspected case has been highlighted, Adeptra's sufficient engine considers all available detection sources and a wide array of consumer data to ascertain the risk level. The system then determines what a communication with the customer requires and initiates the communication via the most appropriate channel for that particular customer.
This is a major achievement for both Adeptra and ValidSoft and is a world first in terms of implementation of a solution for the prevention of SIM swap fraud. We are now three months into live production of the bank with the system performing smoothly and already demonstrating its value of its inherent capability to identify and authenticate between a genuine SIM swap and a fraudulent one. To date, we have executed close to 5 million transactions, which we expect to double over the remainder of this year. In parallel, we are already in discussion with this leading global financial institution and others to extend the capability geographically and also looking across selling other Valid Soft Solutions via the Adeptra platform. This is indeed the model we envisioned and is now underway. We've been working tirelessly in this regard with Adeptra building a solid pipeline of opportunity and laying the foundation for a collaborative approach for the significant commercial opportunities and market penetration throughout the remainder of 2012 and beyond.
Since Adeptra's technology platform is already integrated in the risk engines of the institutions we are targeting, the deployment of ValidSoft technology is greatly facilitated opening the way for a simplified API integration to all of the ValidSoft solutions via the already installed Adeptra platform. As I mentioned in a previous update, we would anticipate that any geographic entity within these large global bank is capable of generating revenues for ValidSoft in the range of $500,000 US to $1.5 million US per year in recurring transactions fees. These target global banks fall within the top tier of what (inaudible) as the ValidSoft GDP, the Global Transaction Pyramid and are capable of generating $500 million to $1 billion transactions per year per entity. In the middle tier of the global transaction pyramid lies the merchant acquiring capability in which I include machine to machine merchant size and capability. These entities are capable of generating 1 billion to 5 billion transactions per year per entity.
Finally in the bottom tier of the pyramid, we find mobile money and payment. Here are the target entities that are capable of generating in excess of 5 billion transactions per year per entity. Since my last update you will have read the press release we issued concerning our partnership with Spindle, a pioneering and a leading provider of alternative and mobile commerce payment platforms for merchants and consumers. Spindle primary focus is the US market and they've already been successful in signing (inaudible) contracts with a leading global merchant acquirer [ph].
Spindle chose ValidSoft new SMART architecture as a best in class payment specific layered authentication and security solution custom built for the mobile payments world. We are currently integrating our technology in the Spindle platform with the goal of being live this year. this is immensely exciting space for ValidSoft with transaction volumes running into the billion per year. Companies such as Square, Pay Anywhere, and others have validated the space and companies like Spindle are very well positioned to capitalize. In this segment, ValidSoft anticipates that it can generate revenue per transaction in the range of half a percent of the transaction value.
With respect to our position at global and mobile payment world, I spoke on the last update regarding out relationship with Utiba, a global leader in mobile payments and mobile financial service solutions. Utiba processed over 12 billion transactions in 2011 and is on target to process in excess of 16 billion this year.
Earlier this year Utiba announced convergence payment strategy alongside its former announcement of its partnership with MasterCard, a participation in the MasterCard mobile money partnership. The primary goal of the converging payment strategy calls for the intersection or joining of mobile wallet network with entire base payment network there by enabling the linking of a prepay debit or credit card to the customer's balance held in the mobile wallet. The card virtual or physical can then be used to make purchases in the global acceptance network held in the Internet. We are currently in discussions concerning the first live trials of the ValidSoft technology on the Utiba platform with a very significant client of Utiba.
As I mentioned in my last update, we estimate that just from Utiba the addressable volume of transactions is 3 billion to 4 billion per year excluding the new transactions that will result from the convergent payment strategy. We anticipate that our revenue per transaction will be in the area of six 100ths of a percent, 0.06% of the transaction value with a very heavy emphasis on the invisible authentication capability of the ValidSoft SMART architecture.
And closing off this report I believe that ValidSoft is unique in terms of its capability be that the intersection of security and telecommunications and is at an inflection point in the marketplace in terms of the appreciation and need for the solutions it offers. I expect to see the realization, monetization of the relationships we've built with some great partners as we've progressed to the remainder of 2012 and beyond.
I'd now like to turn the call over to Mark Nije so he can discuss our finances. Mark, over to you.
Thanks, Pat. Welcome, everybody. I will now discuss the Company's financial results for the second quarter and first six months of the year. I would like to point out that when I am discussing the financials I will often refer to figures in real terms or figures corrected for translation or reported events. The reason for providing both reported and constant currency has to do with the fact that while most of our activities are carried out in euro denominated countries, we are required to report our financials in US dollars. The devaluation of the euro versus the US dollar has been substantial for the three and six months ended June 30th, 2012 and therefore the impact on our reported results has been significant. As a result, while our reported total revenue declined for the three and six month periods ending June 30th, 2012, when compared to the constant currency basis, total revenue actually increased.
Let me now turn to the revenue in more detail. Total revenue for the three months ended June 30th, 2012 was $7.1 million, a decreased of 1.7 million from 9.1% year-over-year compared to 7.8 million for the three months ending June 30th last year. the decrease in total revenue was the result of reporting currency translations effects. When adjusting for these effects, total company second quarter revenue increased 2.3% year-over-year on a constant currency basis.
Revenue for the higher margin Mobile and Security Solutions business, increased 193% year-over-year to 2.8 million in the second quarter of 2012. Revenue for mobile security solutions accounted now for 39.3% of total revenue for the second quarter ended June 30th, 2012, compared to only 12.2% for the three months ended June 30th last year. On a constant currency basis, mobile and security revenue increased 233% year-over-year for the second quarter.
Revenue for the Landline business for the second quarter of 2012 declined 37% year-over-year to 4.3 million this quarter. On a constant currency basis, the second quarter 2012 Landline revenue decline 29.3% when compared to the prior year period. Two factors contributed to the declined in the company's Landline revenue. The first was the Company's decisions not to expand an existing customer relationship due to an expected low return on needed investments. Our decision resulted in declines discontinuing this Landline business with us. The second factor is the global trend of communication moving away from landlines to mobile and wireless platforms. And we expect the latter to continue to have an impact on our Landline business.
Looking at revenues for the first six months of the year, total revenue for the six months ended June 30th, 2012 was 15.7 million, a decrease of 3.9% year-over-year when compared to 16.3 million six months last year. The decrease in total revenue was again the result of reporting currency legislation effects. When adjusted for these effects, total revenue for the six months ended June 30th, 2012 increased 3.8% year-over-year on a constant currency basis.
On sixth months of 2012, Mobile and Security revenues was 5.2 million and increased 112% year-over-year when compared to the first six months of 2011. Meanwhile Landline revenue declined to 10.5 million, a decrease of 24.5% year-over-year when compared to the same period a year earlier. When adjusting for currency translation effects, Mobile and Security revenue for the first six months of 2012 increased 129% year-over-year and Landline revenue decreased 18% year-over-year when compared to the first six months of 2011.
I would like now turn your attention to customer service and margin defined as revenue minus cost of service. Margin in the second quarter ended June 2012, increased 540% year-over-year to 1.9 million, bringing 26.8% of revenue compared to 0.3 million, or 3.8% of revenue, for the three months ended June 30, 2011. The improvement in second quarter 2012 margin was driven by an increased percentage of (inaudible) revenue coming from the high end margin mobile and security services which resulted in a 2.3 million or 30.8% year-over-year drop in custom services.
Management expects costs of service to decline further as a percent of revenue, as a greater proportion of future revenue is comprised of our mobile services and security services, which have a substantially lower cost of service than a traditional landline business.
For the first six months of 2012, margin tripled to 3.6 million from 1.2 million for the first six months high year. The improvement was driven by 3 million year-over-year declining cost of service for the six months of 2012, versus the same period a year earlier.
Looking at SG&A expenses, SG&A expenses for the second quarter of 2012 were 4.6 million, an increase of 0.7 million or 19.4% from 3.8 million in the same period previous year. The higher SG&A expenses were mainly the result of a 22.2% year-over-year increase in starting levels, largely European mobile and security hires, as well as hiring investor relations, and sales marketing and communication-related staffing and expenses.
In the second quarter of 2012, higher SG&A expenses were offset by lower cost of service expenses, resulting in a 0.9 million improvement in adjusted EBITDA. Adjusted EBITDA for the second quarter of 2012 was a loss of 2.7 million versus a loss of 3.5 million in the prior year period. Compared to the first quarter of this year, second quarter adjusted EBITDA improved with 0.2 million.
Adjusting for currency translations, second quarter 2012 adjusted EBITDA improved 0.4 million on a year-on-year basis, and improved 0.3 million versus the first quarter of 2012. Net loss for the second quarter of 2012 was 5 million compared to 6.7 million in the same quarter last year.
The 1.7 million year-over-year improvement in net loss for the quarter was driven mostly by a 1.5 million year-over-year decrease in the loss from operations. Net loss for the second quarter of 2012 improved 1 million compared with the first quarter 2012.
With that, I would now like to turn the call back over to our CEO for final comments. Steven?
Steven van der Velden
Thank you, Mark. Management has made strategic effort to improve the company’s financial standing by (inaudible) the high end margin Mobile and Security Solutions business. It’s due to our diligent efforts that this strategic part of the company grew to nearly 40% of total revenue in the second quarter.
We expect mobile and security revenue to continue to grow rapidly over the next few quarters, and for it to have a positive impact on margin and net income. Driven by the July immigration of an additional 100,000 mobile users, which now brings us to over 1.1 million subscribers on our platform in Spain, we expected incremental SIM migration in the third quarter.
The ramp up of our operations in Germany and ValidSoft seems to have contracts with one of the world’s top financial institutions. We expect to report our fifth consecutive quarter of sequential growth for mobile and security revenue when we report third quarter results later this year.
The unpredictability and recurring nature of the mobile and security revenue, its associated margin and expected growth in the third and fourth quarters, we believe that the Company is on track to achieve its first months, whereby the Company’s margin (inaudible) with revenues minus cost of service, should be sufficient to cover its operational (inaudible) outflows, not including non-cash expenses and capital expenditures by the end of 2012 or early 2013.
In addition, we are in involved discussions with over a dozen mobile operators throughout the Americas, Europe, and the Middle East, while as you know it can take several months, sometimes even years, before we can secure any individual a contract. We expect to sign at least a couple of new contracts for these mobile operators over the next few quarters, further extending our geographical presence.
Lastly, we continue to target the launch of Elephant Talk and ValidSoft operations in the United States and Latin America. Management is confident about the direction the company is heading. We believe the outlook has never been brighter, and Elephant Talk is well-positioned for future growth.
This concludes management update portion of the call. I would now like to open up the floor for any questions that you might have.
Thank you, ladies and gentlemen. We will now conduct the question and answer session. (Operator instructions) One moment please, for your first question. Your first question comes from Justin Colatosti from Dawson James. Please go ahead.
Justin Colatosti - Dawson James Securities
Hey, good morning, everyone. Congratulations on a nice quarter. It’s definitely appreciated the breakdown in revenue between the two segments of your business, but I was hoping we could drill down a little further into costs, if possible. If I were to, for example, view Elephant Talk as three business segments, being ValidSoft, the mobile side of Elephant Talk, I guess calling it the ET box platform, and then also the legacy business.
I was hoping for that standpoint. If you could apportion perhaps both costs of revenue and SG&A expenses into those three kind of segments.
Steven van der Velden
Mark, would you like to address that question?
Yes, I can give a brief answer on that. In general the composition as we’ve also communicated in the various investment presentations, in general, the margins that we have on the land line business, they are in general in the very low one to 3% area gross margin. If you talk about the ValidSoft revenues, you’re talking about anywhere in the region of around 60 to 70%, depending on the particular deals. The third segment, really, is the mobile managed service area, which is a 90 to 100% margin.
The fourth area is related to the NGO side of the business, which could yield anything between 20 and 25% gross margin.
Justin Colatosti - Dawson James Securities
Great. If I could, a quick follow up. Really what I was trying to get out and to hopefully back out and figure out is in terms of the specific mobile side of the business, as you would refer to it. That specific entity as a standalone, would that entity - would you currently estimate that that is cash flow positive or earnings positive?
Steven van der Velden
Well, as you can see, we do not report yet in those area segments. So, in that respect, we do not have those specific details publicly available yet.
Justin Colatosti - Dawson James Securities
Understandable. Well, thank you for taking my questions.
Your next question comes from the line of Robert [Scott] a Private Investor. Please go ahead.
Robert [Scott] - Private Investor
Hi, guys. Nice quarter, sounds like things are coming along quite nicely. My question is for Pat Carroll. With Utiba and prepaid credit cards and mobile transactions, there’s definitely enough money out there as the transaction fees are so high when you’re moving money around with prepaid cards, and the equipment is there to support it as well.
With the point-of-sale, there seems to be two things, one the financial side, and two the equipment. How well (inaudible) the merchant becoming with the hardware to support a valid (inaudible) transaction?
Okay. So, with the way the marketplace is structured today, we have (inaudible) the closed loop situation. Those (inaudible) are based around specific telecommunications relationships. That’s the way they are today. What’s happening in the world of Utiba is one they’re extending that capability. (inaudible) transaction-based (inaudible) into 16 billion in the coming year.
Alongside that, they have this convergent payment strategy, which is enabling the movement of cash from the closed loop now into the open loop, in which case then it becomes a standard way of distribution of cash into the open networks. So, if MasterCard is the partner in this particular instance, then one can imagine that MasterCard to (inaudible) or some other technology that they’ve got to the mobile world will enable that cash that’s on that device or associated with the user of that device enabled to be used within the merchant infrastructure that is already in place.
That’s the goal, so we’re not looking to create any new (inaudible) this year. In fact, we’re not part of that creation of the infrastructure. We’re simply lavishing the fact that that’s already what’s happening out in the world and we’re providing the security. Because if you can imagine when the world moves from a closed loop to an open loop, you now have cash out, and cash out means cash out at the merchant. It means cash out for the customer, and that increases the risk of those transactions. That’s exactly where we want to play a part.
Robert [Scott] - Private Investor
That all sounds very favorable to us, particularly with the real time authentication. So, that’s great. Thank you so much.
(operator instructions) One moment, please. Your next question comes from [Coke Agapanthos], private investor. Please go ahead.
Hello, everybody. Nice report, same thing (inaudible). The resignation of Mr. Zuurbier, is that related at all to the resignation earlier of Jacque [Karast]? I have a follow up.
Steven van der Velden
Yes. Jacque [Karast] resigned as the New York Stock Exchange requires a board that consists itself a majority of independent directors. It was held most appropriate, at least until the next annual meeting to reduce the board with one seat. The resignation of Martin [Zubeer] being a management representative of the board, meant that we now have again a majority independent board consisting of three independent directors and only two not independent directors.
Do you feel free to comment on the circumstances of Mr. [Karast’s] resignation?
Steven van der Velden
Well, Mr. [Karast] wanted to explore other opportunities and I think that was a quite good understanding and there was no disagreement whatsoever. So, yes, although of course any resignation is always unfortunate, there were not any specific circumstances that led to that resignation.
On another subject, with respect to the land line-based service that is winding down, do you have a projected sunset or ending of landline service support in the future?
Steven van der Velden
Well, let us put it this way, we have never been too fond of the landline business in the last couple of years. On the other hand, to provide the mobile services and to connect the mobile platforms, we basically need the landline infrastructure anyway. You have to understand that a mobile call of course is different than a landline call. But once a mobile call hits the tower, it basically becomes a landline call and is using many of the same network ingredient systems that would be used for a landline call.
So, from that respect, we need the underlying infrastructure anyway, and we’ve always taken the position that if we could contrast through it and at least gain some additional coverage of our overhead, it would make sense.
As Mark pointed out, we have not been willing to test resources for this specific segment, because of the reason why this line actually accelerated recently. However, we believe that landline business would normally always be part of our revenue mix, although it’s becoming less and less important.
However, on the long run, it might quite well be that due to converging services, the landline business actually becomes more important again. Because at the end of the day, for you as a subscriber, you do not mind how the signal gets to you, whether it’s landline, wireless, mobile, satellite, cable. At the end of the day, you want to be connected.
Converging business will make sure that landline (inaudible) its own place in the whole distribution of calls. So, we believe that it’s important for us to produce mobile services to keep the landline infrastructure. Actually on the long run based on converging services, it might indeed play a more important role than it plays today.
Based on that discussion, do you then anticipate reallocating, if you will, the cost of supporting that underlying landline requirement to continue the service to the mobile side?
Steven van der Velden
Yes. For us, the whole network infrastructure, the underlying infrastructure, is kind of a cost to do the mobile business. We don’t specify specifically the landline profitability, but we could reduce only very little cost if we were to stop with the landline activities. So, from that perspective, it would not really make sense.
One last question, please? Certainly, I think many of us do understand the stance that the banks and other financial institutions feel they need to play with respect to their security issues and costs of possible fraud and so forth. But do you see in the near future, banks, you might say, lifting the curtain on the existence of and the support of a balance off to their customer security business?
Steven van der Velden
Thank you. Well, Pat, I think this is a good question for you to answer.
Absolutely. I think we’re starting to see a change in the marketplace, although it is going to take time. If you look at the guidelines that are out there today, the world is still pouting. (inaudible) authentication is the gold standard despite the fact that it’s been broken as far back as 2005. That’s the way the world is today. It is taking time to respond to that. But I expect that to happen as a natural process of moving forward with security and the prevention of fraud.
Alongside that, we have a whole new ecosystem emerging, the world of mobile payments. Traditional security is not well-designed for this world. We need a whole new architecture, and one that can be sliced and diced based on approaching (inaudible) and that’s why we’re starting to get (inaudible) in the world in today. It’s because these companies, and these are big companies, the likes of Utiba have been around 12 billion transactions in 2011, 16 billion transactions this year, relationships with some of the biggest mobile network operators, five, 600 million subscribers. These people are already doing their research. They are analyzing the marketplace and trying to figure out what architecture is appropriate for this new world. What can be defined on a (inaudible) transaction basis? What can be (inaudible) the transaction? What can be deemed to be invisible without ever interfering or interrupting your customer relationship? That’s where we’re at. So, we see a whole a new world emerging, and we’re going to be at the center of that. (inaudible)
I guess the question winds up being, do you have a hoped for or projected timeframe as to when our contribution to their security operations might be unveiled?
Well, I think that’s already happening. We’re starting to make our credentials. Very difficult as a small company to establish credentials in this world, it’s dominated by the biggest players in the world. I think what’s starting to happen is that the realization is there that the world needs to adapt (inaudible) something different from what already exists. The cost of trying to defend fraud is prohibitive.
Now, the bank infrastructure doesn’t have that analysis because the world is broken up into pockets and you’ve got fraud on one side and you’ve got the administration of fraud on another, and you’ve got (inaudible) consumer in third. It’s when you start to aggregate that, and that’s what we’re starting to see happening out in the major banks right now.
They’re starting to bring together those sides of those different elements of the banking infrastructure of the various support groups to start to look at this holistically. That’s where we will surely win again.
Got you. Thank you very much.
Your next question comes from Nathan Sugarman, private investor. Please go ahead, sir.
Nathan Sugarman - Private Investor
Steven, I wonder if you could talk about the $75 million (inaudible) and could you spell out the capital needs you have for the balance of this year, and what are your capital needs for next year?
Steven van der Velden
Thank you, Nathan. Well, we expect to use between $3 and $5 million in Q3 and Q4. This of course will depend on how the business develops and how much we will spend on the CapEx. Of course also, the U.S. Dollar/Euro exchange rate has an influence for our current revenue base, that’s mostly in Europe. We continuously investigate all the fundraising opportunities, debt, (inaudible), straight equity, our partner and (inaudible) financing.
The shelf provides us with the flexibility to address our funding needs with any of these instruments for years to come. We have put the shelf in place to take advantage of any opportunity or requirement as they may arise. We don’t have any specific plans at this juncture yet, to raise capital through these mechanisms, other than possible (inaudible) funding to provide (inaudible) requirements.
The shelf also allows us to acquire other companies through shares without having to go to the market to raise additional funds. We believe altogether, even though the shelf of $75 million sounds very high, the shelf is an instrument that has (inaudible) for three years. It’s just a matter of being prepared as a company to take advantage of any opportunity that may come by.
So, even though we have no final plans today, we will probably raise certain funds over the next few months in order to make sure that we can carry our cash flow. But there’s not necessarily need to go through equity, also other instruments might be available, including vendor and partner finance.
(Operator instructions) One moment, please. Your next question comes from [Zedrick Toiman], private investor. Please go ahead, sir.
Hello, Mr. [Toiman], your line is fully interactive. Please, go ahead.
Okay. I have a short question concerning the burn rate of the company because I don’t see a real decrease in the burn rate. Do you see any improvements in the next coming months, or how are you going to improve the situation?
Steven van der Velden
Thank. Well, a very good question. Well, let me start out first that there are definitely substantial improvements in the burn rate. As we explained in earlier quarter conference calls, we had to expand our capability basis in order to make sure that we could service the banks and all the mobile operators that were in the pipeline and that also have materialized in the meantime. But even though we’re having to increase our operation basin to accept a raise in SG&A, we have been able to reduce our burn rate.
As I explained earlier, we expect to have always the use of capital in the range of $3 to $5 million for the second half of this year. That’s a couple of million dollars less than we used in the first half of this year. Based upon the additional migration in Spain, based upon the German contract, based upon a couple of additional contracts that ValidSoft expects to get out of the pipeline in the next few weeks and months, and we will certainly be able to close that burn gap.
We expect that to way, as I said before, that by the end of this year or early next year, we will have the first month of being operational cash flow positive, meaning, in fact, that we have closed the burn rate.
Okay, thank you. I wonder, in case if you, because we heard in the call that there would be cash breakeven, but in case this time, there would be no cash breakeven with the current stock prices. Do you think there will be no issue to raise extra money?
Steven van der Velden
Well, as I said before, the company is prepared to raise additional funds. That’s of course why the shelf has been put in place. There are various instruments, debt, (inaudible), straight equity, but especially also partner and vendor financing. We believe that based upon the contracts that we have, we have enough money to run the operation for the time being.
We believe strongly that, of course, based upon the contracts that have already been provisioned and that are currently generating revenues, but are not yet reflected in the Q2 numbers. Because for example, the migration in Spain of the additional 100,000 subscribers only took place in the first weekend of July, the German contract only started to generate revenues in the month of July.
All these effects, they’re not yet being reflected in the Q2 numbers, of course. So, once we will add those, plus some of the other contracts that we are currently provisioning, we feel comfortable that we can get very close to breakeven. As I said before, we expect these first months of being operational cash flow either by the end of this year or early next year.
Okay, thank you. You don’t see any problem in the decrease of the stock price in the last month?
Steven van der Velden
Well, we don’t see any problem. I think the company is healthier than ever. We are in a better shape than ever before, and we are fully comfortable that the market will ultimately recognize that.
Okay, thank you.
Mr. van der Velden, if there are no further questions, I will turn it over to you for closing
Steven van der Velden
Hold on, one second please? On behalf of everyone at Elephant Talk Communications and ValidSoft, I would like to thank you all for joining us today on today’s call. Thank you again to all of our long-term shareholders for their patience and commitment to the company. As stated earlier, we look forward to providing additional updates on future milestones as they are realized. Thank you all and have a great day.
Ladies and gentlemen, that does conclude our conference call for today. Thanks for participating. You may now disconnect your lines.
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