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LML Payment Systems, Inc. (NYSEARCA:LMLP)

F1Q 2013 Earnings Call

August 13, 2012 4:30 PM ET

Executives

Patrick Gaines – CEO and Chairman

Craig Thomson – President; and President and CEO, Beanstream Internet Commerce Inc.

Richard Schulz – Controller and Chief Accounting Officer

Analysts

Greg Cole – Sidoti & Company

Operator

Ladies and gentleman, welcome to the LML Payment Systems 2013 first quarter conference call. With us on the call today is Patrick Gaines, Chief Executive Officer; Craig Thomson, President; and Richard Schulz, Controller and Chief Accounting Officer of LML.

Everyone should have access to the press release which went out this morning. If not, the release is available on the LML website at www.lmlpayment.com. Before we begin, we would like to remind everyone that the prepared remarks may contain forward-looking statements regarding future events and future performance of the Corporation and management may make additional forward-looking statements in response to your questions.

These statements do not guarantee future performance. Therefore, undue reliance should not be placed upon them. We refer all of you to the Corporation’s most recent form 10-K and Form 8-K filed with the Securities and Exchange Commission, as well as the Safe Harbor statement in today’s press release for more detailed discussion on the factors that could cause actual results to differ materially from those projected in any forward-looking statements.

The Corporation assumes no obligation to revise any forward-looking projections that maybe made in today’s release or call. As a reminder, today’s call is being recorded, Monday, August 13, 2012. At this time, I would like to turn things over to Mr. Patrick Gaines. Please go ahead sir.

Patrick Gaines

Thank you, operator. Good afternoon everyone, and thank you for joining us here today as we discuss our most recent financial results. Due to the finalization of our litigation this past March, this quarterly report is the first in some time that is absent any one-time non-recurring licensing fees or royalties. Historically, these royalties have proven to be a beneficial catalyst. They’ve allowed us over the course of time to transform the Company from a largely paper-based payments enterprise, to a leading edge electronic payment platform provider, one that we believe is quickly becoming a leading industry innovator, one that has a tremendous market opportunity, and one that is well positioned for future growth.

We have often mentioned the overarching trends that affect our business and they remain, the constant move away from paper-based payments to electronic forms of payment, the use of the internet to make or receive payments and now, emerging new trends such as e-commerce tools being introduced into brick and mortar environments, pre-purchased value-added services such as online couponing to post-purchase value-added services such as award fulfillment and of course mobile payment capabilities.

All these services have one goal in mind and that is to improve the quality of consumer shopping experience. Importantly, these emerging trends help us form strategy and allow us to focus on developing new products and services, broaden our distribution channels and increase our customer base, revenue and profitability.

Figures released last week reported that retail brick and mortar sales increased only 2.2%, while reports indicate our industry is projected to grow between 15% to 25% through 2014. The good news is we anticipate to grow our payment segment by 30%, nearly double, that lower rate. For the quarter, overall revenue was $5.6 million, compared to $5.9 million last year. Gross profit was $2.3 million or 42%. Operating income was $833,000 compared to $1.14 million last year.

Income before taxes was $857,000 compared to $1.19 million last year. Net income was $447,000 compared to net income of $687,000 last year. Earnings per share was $0.02 compared to $0.02 last year. For the quarter, revenue from our TPP segment was $4.6 million, an increase of $942,000 or 26% with gross profit of $1.7 million or 38% and operating income of approximately $1.2 million or 26% compared to $803,000 or 22% last year.

Revenue for this segment is primarily derived from transaction fees, monthly fees including gateway fees and one-time setup fees. Revenue from transaction fees increased 29.6%, monthly fees including gateway increased 28.8% and one-time setup fees increase 18.2% over the same period last year. Key drivers of revenue growth for this segment have been new customer acquisition and the growth of our existing customers’ businesses and the resulting payment volumes.

With the service distribution model that primarily involves marketing indirectly through a network of strategic partners, a network that was expanded by 81 partners during the quarter, our business development efforts allowed us to increase our customer base by just over 900 merchants bringing our total active merchant base to over 14,000.

As we all know, fewer and fewer checks are being written for purchases and consequently, fewer and fewer checks are being converted to electronic transactions. Consistent with this trend, we saw our check volume decreased by 3% from the same period a year ago. However we continued to realize certain operational efficiencies that allow this segment to once again make it profitable contribution.

Revenue for our check segment was $568,000 compared to $609,000 last year, a decrease of 7%. Gross profit was $240,000 or 42% and operating income was $130,000 or 23% compared to $103,000 last year, an improvement of approximately $27,000. Revenue from our intellectual property segment was approximately $424,000 for the quarter compared to $1.7 million last year, a decrease of approximately $1.3 million which was primarily result of not signing any new licensing agreements.

Revenue from this segment consists of both ongoing running royalties and recognized deferred revenue for existing license fees. We anticipate similar running royalty and deferred amounts going forward until our fourth quarter of this fiscal year, at which time the patents associated with these running royalties and deferred income amounts expire. Operating income from our IPL segment was $374,000 or 88% compared to $949,000 or 56% last year.

As previously mentioned, all litigation associated with our RE40220 patent is closed and we had no plans to initiate new litigation with respect to this intellectual property. In terms of creating value by inorganic means, we continued to keep an eye out in terms of evaluating merger and acquisition opportunities. We are primarily interested in opportunities that both reflect emerging trends in the payment industry and also those we believe can help drive the growth of our payment segment more rapidly than organic means alone.

And although during the past quarter, we continued to be active in our investigations and discussions, we know we must remain patient and prudent and as a result, we have nothing definitive to report regarding M&A at this time.

I’ll now turn the call over Craig to say a few words about our operation results for the past quarter.

Craig Thomson

Thanks Pat. During the past quarter we had a number of significant accomplishments. Our mobile acceptance solution for the Apple iPhone was released from beta testing and was also introduced as a white label offering for a major Canadian acquirer. We are currently finalizing developments of an Android and iPad optimized versions of our mobile acceptance solutions and expect to have them available this quarter.

In May, we announced the partnership with MasterCard to support the PayPass wallet service, and in June, we completed our first SSAE 16 audit. Thanks to these efforts, the TPP segment continues to grow at a rate well in excess of our peers. In this past quarter, we saw a revenue growth of 26% compared to the prior year quarter with recurring revenue growth meeting our target of 30%.

During the past quarter, we made key additions to our product development and marketing teams to intensify our focus on both our mobile acceptance products in our integrated partner channels. Our process to APIs have now been upgraded to support mobile specific enhancements such as your location, electronic signature capture to provide us with a significant competitive advantage in the emerging integrated mobile space.

In addition, the new campaign to support traditional integrated solution providers and developers with enhanced use cases, user stories and marketing support were launched later this quarter to help extend our lead in this important segment. During the quarter, we added 900 new customers for a total of more than 14,000 merchants. Significant gain in this past quarter continued in sports and registration, government utilities in the online gaming verticals.

Our ability to support every major acquirer in North America process to more than 150 currencies and our integration into hundreds of third-party products and now our support for mobile solutions as well, makes us a service provider of choice in our target markets.

I’ll now ask Richard to say a few words about our financial results in more detail for the past quarter.

Richard Schulz

Thank you, Craig. As Patrick mentioned earlier, we are pleased with the strong financial results for the first quarter of fiscal year 2013. Our cash provided by operating activities for the past quarter was $947,000. This cash includes primarily attributable to our TPP segment, which contributed $1.2 million in pre-tax income.

Our cash and cash equivalents in short-term investments totaled $30.7 million as at June 30, 2012, up $700,000 from March 31, 2012. Our working capital increased to approximately $700,000 from $28.3 million as at March 31, 2012 to $29 million as at June 30, 2012. We continued to evaluate our options for utilizing our excess cash position and believe the continued investment in growth in our TPP segment to be one such deployment option.

Now I’ll turn the call back to Patrick for some closing remarks.

Patrick Gaines

Thanks Richard. We are truly in the early innings of a very exciting time for our industry. Emerging trends such as e-commerce tools finding their way into the retail sales experience to the vast potential mobile commerce applications to the notion of providing additional value-added services both on our pre and post-purchase basis such as one-click online sales to electronic coupons will lead to unparalleled consumer convenience.

And most importantly, it forms an environment of opportunity for a leading innovator of payments all of which can be distributed from a single platform such as ours. Once again we anticipate organic growth of 30% for the year. We anticipate continuing to look at specific and general inorganic opportunities that we believe will ultimately assist us in providing additional services to additional merchants in additional markets.

Thank you and with that, I’ll turn the call back to the operator so we can take a few questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Greg Cole with Sidoti & Company. Please go ahead.

Greg Cole – Sidoti & Company

Hi, thanks for having me. Just first question, with the 30% growth target, does that include mobile?

Patrick Gaines

Yes, it does.

Greg Cole – Sidoti & Company

Okay. And do you have any – can you break this down any more into that, just the growth rate?

Patrick Gaines

Well we don’t – at this stage, mobile is a new vertical for us, so we don’t separate revenue from the mobile product from what we’re doing in our core e-commerce business.

Greg Cole – Sidoti & Company

Okay, but I mean do you any goals for this year. Has it started generating substantial revenue yet?

Patrick Gaines

I think what’s fair to say is that when we forecasted 30% growth for the year, we forecast very modest growth in mobile, so that I think if the product is extremely successful and generates an inordinate amount of revenue for us that would be an addition to that 30% target.

Greg Cole – Sidoti & Company

Okay. And then what’s your distribution strategy for getting the mobile into the – I guess, the brick and mortar businesses, I mean is it partnering up with the same strategic partners or is it different vertical and all together?

Patrick Gaines

Well its similar, our traditional distribution channel is through indirect sales. So currently with our core products we use banks, as you may be aware we’ve got a white label agreement with TD called Online Mart. We’ve got a white label solution with First Data and we also sell through integrated partners. But the mobile offering as I mentioned, we already have one white label solution in place for the Canadian acquirer. I’d expect to see more of those and I’d also expect to see distribution through mobile application providers that have services and functionality that would build on top of our core payment engine.

Greg Cole – Sidoti & Company

Okay. And then there was a pretty large increase in the funds held for merchants, this quarter on the balance sheet. Is there something to that, it was pretty large jump?

Richard Schulz

Yes, that’s just about timing. If we – with some of our payroll and direct deposit products and such, depending on month-end timing and such we could have had that influx of incoming funds right around the month ending [ph].

Greg Cole – Sidoti & Company

Okay. All right, thank you.

Operator

(Operator Instructions) At this time, we have no further questions to announce, so I’ll now turn the call back to you Mr. Gaines.

Patrick Gaines

Thank you, operator. And thank you everyone for joining us here today. We look forward to talking to you again soon. Have a nice day.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We do thank you again for your participation and ask that you please disconnect your lines.

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