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Executives

Steven van der Velden - Chairman and CEO

Mark Nije - CFO and PAO

Patrick Carroll - CEO, ValidSoft

Peter Salkowski - The Blueshirt Group

Analysts

Edward Woo - Ascendiant Capital

Walter Smith - Private Investor

Steven Baisden - Private Investor

Brandon Williams - Dawson James Securities

Joseph Maugeri - Private Investor

John Bloom - Private Investor

David Myler - Productive Systems Inc.

Ted Wolf - Private Investor

Peter Paras - Cornerstone Capital Corporation

Elephant Talk Communications Corp. (ETAK) Q3 2012 Earnings Conference Call November 8, 2012 11:00 AM ET

Operator

Good morning ladies and gentlemen and thank you for standing by. Welcome to the Elephant Talk Communications Corp. Third Quarter 2012 Shareholder 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 for you to queue up for questions. (Operator Instructions) I’d like to remind everyone that this conference call is being recorded today Thursday November 8, 2012 at 11 AM Eastern Time.

I’ll now turn the meeting over to Mr. Peter Salkowski of Investor Relations. Please go ahead, sir.

Peter Salkowski

Thank you. Good morning everyone in the United States and good afternoon to our European listeners and thank you for joining us at Elephant Talk Communications’ third quarter 2012 shareholder update conference call.

Joining me on the call today is Steven van der Velden, Chairman and CEO of Elephant Talk; Mark Nije, CFO of Elephant Talk; and Pat Carroll, CEO of ValidSoft. Following management’s discussions, we will open the call up to your questions.

Before turning the call over to Steven, I’m going to review the Company’s Safe Harbor statement. We will make certain statements today that are forward-looking and involved a number of risks and uncertainties that could cause actual results to differ materially. Please note that these forward-looking statements reflect our opinions only as of the date of today’s call and we will undertake 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. Please refer to our SEC filings for a more detailed description of the risk factors that may affect our results.

During our call today we will discuss adjusted EBITDA and our press release issued today and in our filings with the SEC, each of – which are posted on our website. You will find additional disclosures regarding this non-GAAP financial measure and reconciliations of net loss to adjusted EBITDA.

With that, I’ll turn the call over to Elephant Talk's Chairman and CEO, Mr. Steven van der Velden.

Steven van der Velden

Thank you, Peter. And thanks to everyone who joins us today for our shareholder update call. I’ll provide a brief update on the Company before turning the call over to Pat for his comments on ValidSoft and to Mark for a recap of the Company’s third quarter results. We will then open the call for your questions.

I’ve three items, I’d like to discuss today. First, I will provide an overview of a contract we recently signed with one of the world’s largest global mobile operators. Second, I will update everyone on the continued success of our higher margin Mobile and Security businesses. And third, I will provide an update regarding the Company’s cash position.

First of all, I’m happy to announce that the agreement to rollout mobile services with a leading global mobile telecommunications company that I first mentioned during the second quarter earnings call, has turned into a multi-year contract to provide mobile platform services in at least three European countries. The initial phase of this new major contract and the first major contract for the fourth quarter, increases the geographic footprint of Elephant Talk’s mobile virtual network operator business into at least two new European markets, and is expected at several million subscribers to the Company’s mobile platforms during the life of this contract.

Under the terms of this contract we will generate recurring monthly revenues on a per mobile subscriber basis. Thereby revenue will increase over time as additional users are added to our platforms. A soft launch is scheduled for later in the fourth quarter, with a full launch expected in early 2013.

We’re pleased and excited by the opportunities presented to us by this new contract and continue to have formal discussions with over a dozen mobile operators throughout the Americas, Europe, and the Middle East, while it can indeed take several quarters to sign a specific outsourcing contract with specific mobile operator. Given our efforts over the last several months, we expect to be able to sign a couple of these new telecommunication contracts in addition to the one we just announced over the coming quarters, resulting in further expansion of our mobile business geographic footprint.

Moving on to our Mobile and Security revenues. In the third quarter, the Company’s Mobile and Security business successfully generated revenues of nearly $3 million, resulting in the fifth consecutive quarter of sequential growth for Mobile and Security revenues as well as record level of revenue for this side of the business.

For the third quarter, Mobile and Security Solutions revenue accounted for nearly 44% of total Company revenues and was a significant contributor to the third quarter margin of $2.1 million. The quarter’s Mobile and Security results were driven by the over 1.1 million active mobile subscribers that we fully manage on behalf of Vodafone, Spain as well as revenues from – Vodafone develops a strategic partnership with Adeptra to provide SIM-swap Fraud Solutions for one of the world’s largest banks.

Develops of partnerships with Adeptra continues to be an excellent example of the strong industry relationship that has been solidified and is expected to allow us to increase our Mobile and Security Solutions revenue going forward.

We continue to work extremely closely with Adeptra to [up-sell] additional functionality to our existing client, while looking to add solutions to several other large deal financial institutions. In addition, ValidSoft is diligently working directly with clients as well as was other partners to sign contracts with larger financial institutions, mobile payment providers, and other financial companies for the use of their fraud prevention solutions.

In fact, the hard work is beginning to pay off. I’m very happy to announce today that ValidSoft has been awarded the contract with a leading financial institution in the United States to provide its Out of Band Authentication and Transaction Verification Solutions known as VALid ID. Congratulations to Pat and the entire ValidSoft organization for getting their first North American financial institution signed up for their fraud detection and prevention capabilities.

We remain confident that other financial institutions will endorse the ValidSoft for detection capabilities by licensing our SIM-swap as well as our other solutions in the very near future. We’re pleased with the ongoing process of the implementation and integration that is occurring with our SMART security platform, in particular with Utiba and Spindle.

Pat Carroll will explain more on these relationships, the ongoing relationship with Adeptra, the contract with a leading U.S. financial institution and ValidSoft’s other accomplishments. Before I turn the call over to Pat. I’d like to discuss the Company specialization.

Due to diligent efforts of everyone at Elephant Talk, the Company ended the first quarter was approximately $4.3 million in unrestricted cash on the balance sheet. This represents a sequential increase from the approximately $4.1 million of unrestricted cash that the Company had at the end of the second quarter. This effort was accomplished with a little impact on our existing operations evidenced by the record level of Mobile and Security revenues for the quarter.

As such, we plan to continue to carefully control spending in the fourth quarter and beyond. Given the Company’s effort to control costs, to predictable and recurring nature of the revenue from Mobile and Security businesses and additional ValidSoft opportunities that we expect to turn into revenue producing contracts, we remain on track to achieve our first-month positive operational cash flow by early 2013.

While looking forward to achieving these milestones, the Company will likely raise funds in the next few quarters – sorry, the next few months or quarters in order to ensure operational flexibility to possibly pay off existing obligations and to provide management with the ability to be opportunistic should a need arise. As such, we will continue to investigate all fund raising opportunities, including debt, preferred stock, straight equity, and vendor and partner financing.

With that, I’ll now turn the call over to Pat.

Patrick Carroll

Thank you, Steven and good day everyone. Since my last update, we’ve been very busy in terms of focus on revenue generation, our growing intellectual property portfolio and our marketing efforts, on the revenue front and as Steven mentioned earlier, its with great pleasure that I can announce that ValidSoft has been awarded a contract with a leading U.S. financial institution, a houseful name for its core Authentication and Transaction Verification Solution, VALid.

The contract is for the provision of Out of Bond Authentication and Transaction Verification services, including our voice biometrics capability. We believe this to be first for U.S. financial institution. This is the key win for ValidSoft. Again, stiff opposition from all leading security vendors. Yet the ValidSoft solution was chosen due primarily we believe to our fully integrated multi-layer, multi-factor design. There will be two phases for the contract, the implementation phase and live production. The implementation will be conducted on a typical project implementation basis and will take approximately six to nine months. This will be followed by live production whereby the revenue model is transaction based. I will share a greater detail on this key win during our next update call.

Continuing on the revenue generation front, and the live report that ValidSoft received confirmation that a major U.K. bank will proceed with the production implementation of VALid-POS, our card fraud prevention solution to our partner Adeptra. This is a major step forward while contract still must be signed, we’re delighted to have reached this decision milestone. This U.K. bank is not alone. In parallel with this achievement I’m delighted to report another major U.K. bank is close to reaching a similar decision for both VALid-POS and VALid-SIM. We are finally achieving the traction that we envisaged.

With regards to leading global financial institution that went live with the Adeptra ValidSoft unique SIM-swap solution in Q2. The solution is running very smoothly in production, achieving its objective and to-date we process in excess of 5 million transactions. This bank is also shown interest in our browser manipulation detection solution as well as our card fraud and fraud [POS] protection and prevention solution VALid-POS.

At this stage we’ve trials of eight solution already underway at the bank. Alongside this, interest in our solutions has been expressed by other entities within the banking group. And we’re progressing these opportunities that present. In fact, in this regard Steven and I will be traveling to Mexico the week mentioned, November the 12th to progress our telecommunications partnering discussions.

Regarding our relationship with Adeptra, you will have read that Adeptra was acquired by FICO, whose client footprint is in excess of 5,000 organizations. FICO is the clear market leader in transaction risk decision analysis and we understand that the risk engine Falcon was responsible processing over 70% of the world’s transactions last year. Since the acquisition announcement we’ve had some preliminary conversations with FICO management and they have expressed great interest in our ValidSoft products. This is clearly a very positive development for ValidSoft as our potential target to address the market has increased significantly. Stay tuned.

With respect to Spindle and Utiba, you would have read the recent press release announcing a partnership between both companies. A partnership will allow for Spindle to provide low cost mobile acceptance technology and services to compliment Utiba’s converging payment solutions. Spindle will also enrich the consumer to merchant experience by integrating this comprehensive mobile marketing capabilities with Utiba’s mobile financial services offering.

Similarly to this integration, Utiba’s customers can expand their payment ecosystem and enrich the user experience, thus increasing both brand stickiness and transaction revenues. This is a very positive development for ValidSoft. On the intellectual property front, we continue to make solid progress, having filed a new patent on August 1st entitled browser manipulation detection, a new and innovative way a method for detecting Man-in-the-Browser Trojan attacks.

Trusteer is a world leader in this space, but our method is new. It has no dependency on MNL services, radically different, functionally richer, and transparent from an end-user perspective. We believe our solution is totally unique. We are also preparing patent specifications for 2/3 of patents which we will file in Q4. And I will update more detail in the next quarterly update.

In terms of our commitment to data protection and data privacy, we’ve been awarded our third Privacy Seal for our SIM-swap solution. We’re now totally unique in the context of being the only Company in the world with three Privacy Seals and we will continue this investment with our next goal, a Privacy Seal for our zero latency correlation solution.

Increasingly we’re being told by analysts and clients that these Privacy Seals are a crucial defense (indiscernible) in emerging context where authentication world and we’re the clear leader in this field. On the marketing front, we successfully showcased our SMART, Secure Mobile Architecture for Real-time Transactions Solution at Finovate Fall, in New York in mid September. ValidSoft successfully went to a selection process to participate in the Finovate Fall conference held in New York.

At the conference the Company performed a live demonstration showing how to securely initialize a mobile based banking application with low friction, transforming the smartphone into a strong authentication device with zero friction, securing a P to P transaction with zero friction. We believe that we’re unique in the world in terms of this combination of a indigenous security capability underpinned by intellectual property.

And closing of this report, I believe that ValidSoft is unique in terms of capability, been at the intersection of security and telecommunication and is at an inflection point in the market in terms of the appreciation and need for the solutions it offers. I expect to see the realization monetization of the relationship we built with some great partners that will progress through the remainder of 2012 and beyond.

I’d now like to turn the call over to Mark Nije, so he can discuss our financials. Mark?

Mark Nije

Thanks, Pat. I will now discuss the Company’s financial results for the third quarter and first nine months of the year. While most of Elephant Talks revenues are generated in euro denominated countries, we’re required to report our financials in U.S. dollars. The devaluation of the euro versus the U.S. dollar has been substantial for the three and especially nine months ended September 30, 2012. Well the result that the impact on reported revenue results has been significant. Therefore, I will refer to both reported as well as constant currency revenue results. In earnings press release published today, you will find for a reconciliation of reported to constant currency revenues.

I will begin with the revenue results for the third quarter of 2012. Reported revenue for the period was $6.7 million, down 14% year-over-year when compared to $7.8 million for the third quarter of 2011. The majority of the decrease was the result of reporting currency translation effects. When adjusted for these effects, third quarter revenue on the constant currency basis was down only 2.5% year-over-year.

Reported revenue for the higher margin Mobile and Security business increased 109% year-over-year to a record level of over $2.9 million and accounted for nearly 44% of total revenues this quarter. This compared to only 18% of revenue for the prior-year period. Reported revenue for the landline business fell 41% year-over-year to $2.6 million.

On a constant currency basis, Mobile and Security revenue increased 141% year-over-year while landline revenue fell nearly 34% versus the third quarter of 2011. There are two contributing factors to the decline in the Company’s landline revenue. The first is a decision earlier this year by landline clients to discontinue their business with us. The second is the overall global trends of communication moving away from landlines towards mobile and wireless.

Turning now to revenue for the first nine months of the year. Reported revenue was $22.4 million representing a year-over-year decrease of 7% when compared to the same period last year. On a constant currency basis, however revenue was up nearly 2% year-over-year when compared to the same period.

Reported Mobile and Security revenue was $8.1 million, up 111% when compared to the same period in 2011, while reported landline revenue drop 30% year-over-year to $14.2 million. On a constant currency basis, Mobile and Security revenue for the first nine months of 2012 increased 131% versus the same period a year earlier.

When turning your attention out to margin, we find this revenue minus cost of service, we see further continued improvement. Margin for the third quarter increased 162% year-over-year to $2.1 million and represented approximately 31% of revenue. This compares to only $0.8 million or 10% of revenue for the third quarter of 2011. The margin improvement was driven by an increased percentage of revenue coming from the higher margin Mobile and Securities activities, which contributed to a year-over-year decline in cost of services of $2.4 million or 34%.

Management expects cost of service to decline further as a percent of revenue has a greater proportion of future revenues comprised of our Mobile services and Security solutions, which have the substantially lower cost of service than our traditional landline business. For the first nine months of the year, margin increased to $5.7 million from $2.0 million for the first nine months of 2011, a year-over-year increase of 178%.

Turning to SG&A, reported SG&A fell slightly to $4.2 million for the third quarter from $4.3 million in the prior-year period. Adjusted EBITDA for the quarter was a loss of $2.1 million which compares to a loss of $3.5 million in the prior-year period. Net loss for the third quarter was $5.5 million compared to $7.3 million in the same quarter last year. The year-over-year improvement in net loss was driven by increased revenue from the higher margin Mobile and Security business combined with lower non-cash compensation expenses.

With that, I’d 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 a strategic effort to improve the Company’s financial standing by growing the higher margin Mobile and Security Solutions business to a record level in the third quarter. It is due to our diligent efforts that a strategic part of the Company grew to nearly 44% of third quarter revenue. We expect Mobile and Security revenues to continue to grow rapidly over the next few quarters and ForEx to have a positive impact of margin and net income.

We’re really excited by the record third quarter Mobile and Security revenues we reported today and even more excited by the expected positive impact of the new opportunities that were discussed today, including our multi-year mobile services contract with a leading global telecommunications company, which moves our mobile operations into at least two new European countries and will expand operations into an existing one. This contract is expected to add several million mobile subscribers to our platform over its line.

Second, ValidSoft being awarded its first North American contract with a leading financial institution in the United States. Thirdly, ValidSoft receiving conformation that a major U.K. bank will proceed with the production implementation of VALid-POS to our partner Adeptra. And last, another major U.K. bank being closed to reaching a similar decision for both VALid-POS as well as VALid-SIM.

It is through our cost controlling efforts, existing Mobile and Security relationships and these new contracts that we remain on track to achieve our first box of positive operational cash flow by early 2013. Management is confident in the direction the Company is heading. We believe the outlook has never been brighter and Elephant Talk is well positioned for future profitable growth.

Based on these beliefs, certain members of management will continue to purchase shares as part of established 10B-5 plans. This concludes management’s update portion of the call.

I’d now like to open up the floor for any questions that you may have. Thank you.

Question-and-Answer Session

Operator

Thank you. One moment please. Ladies and gentlemen, we will now conduct a question-and-answer session. (Operator Instructions) Your first question comes from the line of Ed Woo of Ascendiant Capital. Please go ahead.

Edward Woo - Ascendiant Capital

Yeah, thank you for taking my question. I had a question in terms of the economic environment in Europe and the U.S., its good to see that you’re winning deals. Has the weak economy in either places impacted your, I guess, ability to get contracts?

Steven van der Velden

Thank you. Actually a very good question. Of course, in the short-term, a weak economy makes it difficult for any actor to be successful in short-term. However, we believe that due to these economic conditions mobile operators will turn more often to outsourcing partners like Elephant Talk and as you can see on another side of mobile operations businesses in the radio access network where big vendors are getting more and more outsourcing contracts. We feel the need for mobile operators to also outsource their whole IT and back office operation becomes more and more important based up – also upon reduce the ARPUs, additional cost of deliver, data rich services and of course the whole economic conditions that forces operators to be more diligently with their operations. And I believe outsourcing key elements to a company like Elephant Talk will become more and more important for these companies to remain financially healthy on the long run. So actually on the long run it improves our position and of course based upon the track records we’re building up with companies like Vodafone, we believe that we will become very viable alternative for many operators in this field.

Edward Woo - Ascendiant Capital

Great. And earlier that we got information in the U.S. about how AT&T were going to make significant, made more capital investment in the network, is that also a possible signal that they maybe spending more on some of their IT and back office software?

Steven van der Velden

Possibly. So far as you know we’re not available with our services in the U.S. market. But of course the very fact that mobile operators keep on investing strongly into another words, will only put more pressure on their IT and back office operations on the long run and we believe at the end of the day these operations become so complicated for these mobile operators that they will indeed turn over to more rational solutions by outsourcing and the more emphasis they will put on expanding their networks, the more pressure that will become on the rational operation of these back offices. So we feel comfort that in the long run we can even indeed play a more important role in that too.

Edward Woo - Ascendiant Capital

Very well. Thank you and good luck.

Steven van der Velden

Thank you.

Operator

Your next question comes from the line of Walter Smith, a Private Investor. Please go ahead.

Walter Smith - Private Investor

A ValidSoft contract that you just recently signed with a U.S. financial institution, implementation period of six to nine months, and you mentioned that would be transaction based when you go live, can you give us a little color of what kind of a revenue stream this would provide ValidSoft?

Steven van der Velden

Pat, I suppose that you will deal with this question?

Patrick Carroll

Yeah. Thanks, Walter. I think we – in general we expect that these type of contracts typically generate between $0.5 million to $1.5 million per year per product, I mean, that typically decide that we given in the past and would expect that – a pretty similar result of this particular type of contract. And I guess the contract itself will have different phases with the implementation phase which will have more of a time material base with it, then you move to production, you move into a transaction basis, there is a ramp up associated with that, there is an implementation across the client base that they have today and then possibly there is a broader implementation in the future against maybe there at the total population of customers that they have when they understand how that this can deployed in a broader context. So it is several phases, but the guidance, I’d be happy we’ve given this consistent with what we’ve given in the past which is $0.5 million to $1.5 million in the first year of operation.

Walter Smith - Private Investor

Thank you.

Patrick Carroll

Thanks, Walter.

Operator

(Operator Instructions) Your next question comes from the line of [Brian McCarran] of Enterprise. Please go ahead.

Unidentified Analyst

Congratulations on the new deals. Curious about Vodafone, my understanding is that they’ve pretty decentralized and you had some real success there with cutting their operational expenses dramatically, but where do we stand or where do you stand with getting into the U.K. or Germany or some of these other places within Vodafone? Thank you.

Steven van der Velden

Thank you. Yeah, very good question of course because ultimately its goal of management to leverage our experience and our track record with Vodafone, in Spain to other geographies within Vodafone. But as you say and correctly state Vodafone is straight up of many different operations over about 30 to 40 different geographies and it’s not given that if you’re successfully assisting them in one country that automatically you will be assisting them in other markets, but of course our efforts are focused in the direction and we're trying to leverage our success in Spain into other markets and although I cannot give you any conclusive feedback on that.

We as a management put up a lot of effort to expand our role within the Vodafone Group but at this moment it’s really too early to say whether that will be successful or not, but we believe that we at least have an extremely good start with the current operation going on in Spain.

Operator

Your next question comes from the line of Steven Baisden, a Private Investor. Please go ahead.

Steven Baisden - Private Investor

Good afternoon Steven. This is Steven Baisden. I have a question about – and my line dropped for five minutes or maybe somebody already asked it. You announced that you signing a contract with a leading global telecommunication company. Is that the same as we’ve had in the past with Spain. In other words is that Vodafone or is it different. And the second question is; did we sign already contracts with other mobile operators then only Vodafone?

Steven van der Velden

Well let me then first start with the second question. Yes, indeed we have contracts with carriers like T-mobile, Zain, KPN. Regarding your first question, once we feel that it’s appropriate to announce the name of the mobile operator that we have entered into this contract with, we will certainly let you know. But as you can imagine we can only do so in cooperation and after approval of that mobile operator. And at this point in time, it would be not appropriate to disclose the name. So, I am sorry I cannot really answer that question right away.

Steven Baisden - Private Investor

Okay.

Operator

Your next question comes from the line of Brandon Williams from Dawson James Securities. Please go ahead.

Brandon Williams - Dawson James Securities

Hi, Steven. Congratulations on a fantastic quarter. My question pertains to Elephant Talk’s growth potential in Latin America, most specifically Brazil as it pertains to full-year 2013.

Steven van der Velden

Good question and thank you. Well, it’s definitely true that the company puts up a lot of efforts to gain geographic footprint in Latin America. As I pointed out, actually I will be visiting Mexico next week together with Pat, and we don’t do that as tourists, we do that in order to drive business. Yes, so we have a lot of efforts going on in Latin America. But as you will have read there are regulatory regimes that do not yet make it very easy for a mobile virtual operator’s to enter into the market place and however more and more countries are adopting more aggressive stances on this regulation and the regulation.

So we feel comfortable that the market will indeed open up, and that probably within the next two years dozens of virtual operators will blossom throughout Latin America. And we at Elephant Talk we believe we're pretty well positioned to serve as a decent part of that market having had very intelligent discussions with, about – well probably six, seven, eight mobile operators in that region and quite a few potential virtual operators. So, I think we're well positioned. We do not yet have any operation in Latin America, but we feel comfortable that all of our efforts over the last two years will be a fruit in the very near future.

Brandon Williams - Dawson James Securities

Excellent. As a follow-up question if I may; can you comment on the progress with the Zain telecom relationship?

Steven van der Velden

Yes sure, I can. We entered into this contract earlier. We have recorded our first substantial levels of revenue. We're really cooperating with management at Zain to upgrade the platform to make it available to the current wishes and requirements of Zain management and together with the additional regulatory frameworks that are being created in Saudi Arabia. We believe that in the not too distant future we will indeed be able to service quite a few customers on the same platform. It will be branded services as virtual operators are not yet allowed by the regulatory system in Saudi Arabia, but as co-branded services we believe that Zain will be well positioned in a Saudi market to take advantage of the Elephant Talk platform and thereby bringing substantial revenues down the road for Elephant Talk. So, we should really see that bearing to fruit in the next year.

Brandon Williams - Dawson James Securities

Excellent, Steven. Thank you so much.

Steven van der Velden

Thank you.

Operator

Your next question comes from the line of Joseph Maugeri, a Private Investor. Please go ahead. Yes, well Mr. Maugeri, your line is now open. Please go ahead.

Joseph Maugeri - Private Investor

Hello, this is Joe Maugeri. My question is, that maybe you’ve answered that already I had a drop off for a minute or two, but the contract that you signed in the Americas with a household financial institution, used the term awarded. So, I assume that means that, that is a consummated agreement. And can you identify through that, what that institution is?

Steven van der Velden

Pat, can you address this.

Patrick M. Carroll

Yeah absolutely. Thank you Joseph. Well so, first and foremost the contract has been awarded. It hasn’t been signed yet, so we're in the final stages of signing that contract which we expect to happen in the next few weeks and certainly before the end of this month. We have been through the process of due diligence. We have resolved any issues that remained on the contract and we’re now in the execution stage. So, that’s the issue as regard to the contract.

But that as I have explained earlier there are two phases following from here, the first is an implementation phase which we expect will expand over a six to nine month period, and we’d expect to have time material revenues during that period and then go live on the thorough contraction basis. There will be a roll-out period, there will be ramp-up period be far to when we would expect full implementation and the type of revenues we expect in year one and this will depending on how quickly the roll-out occurs would be between $0.5 million and $1.5 million.

Joseph Maugeri - Private Investor

Thank you.

Patrick M. Carroll

Thanks, Joe.

Operator

Your next question comes from the line of John Bloom, a Private Investor. Please go ahead.

John Bloom - Private Investor

Good morning, gentlemen and again congratulations. It’s nice to see that you guys are getting real close to positive cash flow, I think that’s a major milestone, so thanks for that. I have a two part question. I think one for Steven, and then one for Pat. On the contract, the expansion of the contract that you’ve mentioned expanding in two additional countries and up to, let’s – it sounded to me like a couple of million more additional subscribers. You said during the life of the contract, and I am curious if you can – if I could pressure you for little more details like, how long is that life of the contract and then if you have any idea when you expect you’ll add substantial more subscribers. I mean, is it do you think – I mean is it going to ramp-up relatively quickly or is it going to take five years. I am just curious if you can expand on that part of it?

Steven van der Velden

All right, thank you. Yes, it is in principle a five year contract and indeed it will bring us a couple of million additional subscribers. Typically these new ventures starts slowly. So, I would thus be surprised if, let’s say in the first year already more than a million new subscribers would be on the platform. That would be really on the very high positive side. I would expect it to be lower, how much? Of course it’s always difficult to say.

At the end of the day Elephant Talk has chosen to be positioned as a business-to-business supplier of these managed services. And we're of course always dependant on the roll-out, the speed, the aggressiveness in the market by our contract parties. But of course our contract is made such that there are so many centers for our partners to roll-out these kind of contracts as quickly as possible, but I would believe that normally the ramp-up takes a little bit longer in the first year and then usually it will speed-up very quickly in the second and the third year.

So, normally we should see at least a million subscribers in year two, and then pretty quickly growing to a few million in the course of year three. But I would be kind of conservative about the take up in the first year.

John Bloom - Private Investor

Okay, well even in the second year you start eclipsing an additional million or two subscribers that’s very substantial.

Steven van der Velden

(Indiscernible).

John Bloom - Private Investor

Yeah, thank you for that. And Pat, I was wondering if you could expand upon the Utiba relationship in this regard. A couple of things that’s just going through my mind, first would be, are we generating any revenue out of that partnership yet and if now when do you expect to. And then the second part to that would be, and this comes from my limited understanding and of this whole market and how it all works, but it just seems to me that the tremendous volume of transactions at least will come from retail point of sale kind of stuff and then do you see Elephant or ValidSoft clearing those kinds of transactions with Utiba or is it more – are you more geared to another one of your products, I mean, just help me understand that side of it a little better if you would please.

Patrick M. Carroll

Okay, John. Well I’ll do my best to try to answer both questions. I’ll probably start with the second question first which is, looking at individual transaction type and why it is that we believe that we can create revenue out of each type of transaction. And to understand that very, very briefly you need to understand the issues that exist in the world today. Point number one is that, risk engines are based on historical information, it’s not about real time information or how you deal with the transaction – sorry, that presently is occurring. You need a hold new different technology capability to do that, you need real time data, you need context awareness.

The second big issues is that you need to be able to differentiate at an individual transaction level, so discriminate at that level. And you need to be able to offer a price point that makes sense relative to the context of that transaction. So, if I am spending $25 of buying a cup of coffee, that price point is far lower than if I am sending you $5000 through the P2P payment and the problem with the same technology is that it’s a one size fits all. So, if I go to a site to buy a book, I’ll never get a token or certificate simply because it’s not worth the effort and the cost by the service provider to arrange for the higher level of security because of the price point that’s involved.

So we turned that model instead, we created a model by which we do give and can give institutions and service providers the ability for discriminate right down at that individual transaction levels, that’s point one. So, if we take that now to your first question and look in the context of revenue models and how that applies, Utiba is number one in the world in terms of – sorry, number two in the world last year in terms of transactions volumes. They carried over 12 billion transactions. And when we analyze that level we looked at roughly about three to four billion transactions that potentially could generate revenue from the point of view – security associated with those transactions. That means that we’ve got to be able to bring security down to a level that’s appropriate for the type of transaction that it is, the value of that transaction and the need to provide the carbon that’s necessary.

As we move forward and we look from what's called closed loops to open loops carried the risk profile increases associated with those and then you need to be able to try this technology. And we have the capability to do that, we’re relatively unique world that is there, we can't blend this technology together and provide the right price point to assure the right confidence level associated to proceed with that transaction. If we picked that to, I think your very initial point was when we expect that to start generating revenue?

Well as we said previously and as we emphasized we’ve got a tremendous working relationship with Value, Utiba and also with Spindle. We’re currently working with both companies. We had originally said that we're part of the integration project right now. So, we would expect that some revenues will accrue half towards the back end of this year very small amounts, but just not be able to demonstrate accrue point but more likely would be revenue to accrue in Q1 and Q2 of next year as the implementations at (indiscernible) and that’s consistent with what we’ve said previously.

John Bloom - Private Investor

All right. So, the answer of my second question, and do you see through Utiba, you guys clearing a high volume of retail transaction, I know it’s going to be a blend or a combination of stuffs, but do you see that ultimately occurring at some point in the future?

Patrick M. Carroll

Yeah, absolutely. I mean, they predominantly – the type of transactions that we would think to walk with are either the consumer to the merchant, or merchant-to-merchant or merchant-to-consumer that typically on one side which is predominantly the Spindle model and then on the side its either a P2P payment. So, international remittances that carry risk either by virtue of cash-in, cash-out or more likely it will perceive in the future of what we saw cash-out true an open loop system.

John Bloom - Private Investor

All right. Well that’s tremendous, once that develops I mean the volume there is just mind-boggling, so looking forward …

Patrick M. Carroll

It’s not so – it’s not so.

John Bloom - Private Investor Question

Yeah, and I guess looking forward to that. We’ll thank you gentlemen for your time and I appreciate what you guys are doing.

Your, welcome.

Patrick M. Carroll

Thanks, John.

Steven van der Velden

Welcome. Thank you.

Operator

Your next question comes from the line of David Myler from Productive Systems Inc. Please go ahead.

David Myler - Productive Systems Inc.

Steve, and Pat nice job on the quarter. I think as a stockholder that has held the stock patiently for the last two – maybe two and half years, it’s nice to see today’s report. Thank you so much, nice job. I know that doesn’t come easy the effort that goes into it is time consuming and I really appreciate it. The question that I have is, looking forward at what point will you be comfortable providing guidance on top line revenue. Thank you.

Steven van der Velden

Yeah, a good question. Of course it’s a little dangerous in our business to give you that guidance especially because we basically have two main activities, one is our – what we call residual legacy traffic which was the original landline outsourcing business of Elephant Talk. And as Mark, already pointed out that is declining for years and fully anticipated by the way, because also we do not really allocate any resources to it anymore. So, that part is a little bit difficult to anticipate how quickly it will further decline.

On the other hand as I also started a little earlier we strongly believe that on the mobile and security side of the business we will see quite a few quarters coming up with strong growth and that’s based upon not only the current pipeline, but also currently signed contracts that are being provisioned as we speak or over the next few months. And from that perspective I believe that we will see a strong growth in our mobile and security business. However for some time to come that will be unfortunately compensation by reduced revenues in the landline legacy business. So the mix is kind of difficult to anticipate, but I would say that, that in not too distant future the growth in our solutions business for mobile and security should be larger than the reductions in landline legacy business.

David Myler - Productive Systems Inc.

Thank you, Steven.

Steven van der Velden

Welcome.

Operator

Your next question comes from the line of Ted Wolf, a Private Investor. Please go ahead.

Ted Wolf - Private Investor

Yes. Thank you and congratulations on your new financial contract, it’s very exciting. I’m a stockholder of about two years and I am wondering if you could just address your concept and your thoughts behind what I am going to call confidentiality of contracts. I remember last year or maybe around this time a large European financial institution you got an award and started doing work with, but you could not disclose the name of them and that caused quite a bit of confusion I think in the stock and, I am just wondering if you can help me understand your thoughts behind the confidentiality and why you cannot disclose some of these names, because I think in the American business community that might cause some negative suspicion maybe unwarranted, but if you could help maybe explain your philosophy behind that or the reasons that might help a lot of maybe nervous stockholders.

Steven van der Velden

Yes, well before I give the floor Pat, to answer a very relevant question on your side. Let me just give you a very high-level approach to this. We have to be honest, we are in comparison to our contract partners, a very small company. We usually deal with the largest billion dollar companies and even though for us a contract might have a substantial impact on our financials, it may only be seen as a minor contract for these huge companies. That’s one element we have to take into account.

Secondly, from a competitive point of view, from a regulatory, from a compliance point of view our customers do not always wish to be too upfront about asking us for help on an outsourcing service basis. So, we have taken the approach in the past and we will also take that approach in the future that our customer is king and that we do not like to endanger our relationship by trying too early or inappropriately disclosing the names of our customers.

So, this a very generic approach and I very well understand the concept of disclosing as much information as possible towards our shareholders, but on the other hand I think it’s in the best interest of our shareholders that we try to align the interests of our customers as much as possible. So this is a very generic statement and actually it does not only apply to banks or financial institutions. It does apply to mobile operators at the same time. Maybe Pat, you want to address this more specifically.

Patrick M. Carroll

Yeah, absolutely. Thanks Steven, and thanks Ted. I mean, from our point of view I guess part of the difficultly is that we’re walking in a space where you’re dealing with security and security matters. And for that reason there is lots of issues that a bank might have having its name mentioned or associated with the fact that it may be implementing a solution which would immediately give information to the broader community that is not capable of defending itself against specific brought back to a surprise and therefore you potentially leave that bank exposed.

Clearly that’s not in our interest to do that and clearly the last we want to do is attract more attention to our banking clients. Having said that, some of the solutions that we have was they’re clearly focused on broad better prevention, others maybe towards the other end of the scale whereby they’re focused on the customer relationship.

So our VALid-POS product for example is probably more about looking after the customer, giving the customer a better experience when transacting with your card than necessarily for prevention although you can achieve that as well, and therefore a bank maybe more prepared to go out and make the same password that’s using VALid-POS as a means of improving the relationship with the customers, that will still remain to be seen. But unfortunately that’s the world that we live in.

We live in that world whereby we have to protect the banks reputation. We got to make sure that we don’t attract a lot of attention and unfortunately that means that we can't make the press release with a specific name, we have to fulfill the obligation and our estimates to our clients.

Steven van der Velden

Okay. well I would add to that is, I think that’s probably one of the bigger communication challenges you have to make the business American community feel comparable with non-disclosure and in fully understanding what you’re up against, so that you can build that credibility and I know it’s a big challenge, but the more you can figure out a strategy to better communicate that I think it will reflect itself in the stock price.

Ted Wolf - Private Investor

Yeah, I totally agree.

Patrick M. Carroll

Thanks Ted. We fully agree with you, that’s one of the biggest challenges that we try to struggle with.

Operator

Your next question comes from the line of Peter Paras of Cornerstone Capital. Please go ahead.

Peter Paras - Cornerstone Capital Corporation

Hello guys, I am happy to see your continued progress in increasing the security component of the revenues, at the same (indiscernible) it doesn’t seem to respond in a positive manner to either the earnings reports or the contracts. I hope that’s going to change. My question is for Pat, since you seem to be offering a somewhat unique solution, I’d like to know how the price benchmarks are established in this market and more importantly whether you’re having flexibility in pricing as the contracts with large players accumulate maybe establish more of a leadership position?

Patrick M. Carroll

Yeah, thanks Peter. So, we’re quite fortunate in the sense that we have a strong partner relationship with Adeptra, and Adeptra have been now – have built relationships which our clients. As our solutions form part of their solutions into the client base we’re looking off that in this particular context, I mean this segment of the market place we have been able to establish pretty solid pricing metrics by which we can offer a service to the market place and we feel pretty confident that the pricing is pretty good and we’ve been through that a number of different instance in the past and that all come out in the same sort of spread.

I guess as we move forward into the world of mobile payments and in particular where we’re dealing with for example the life of international remittances then the challenge becomes one of the type of technologies and finding the right basis point for those transactions and in the past we’ve kind of thrown out some metrics that say, from perhaps a penny, half a penny up to 25 penny’s for securing a particular transaction and we’re still going through that experience as we walk with the partners to figure out what that price point is, and that is a challenge that we have. But I think we thought at least we could handle on it, I think we’re working with very smart partners in the market place who already know roughly what the metrics are and what we have to play around with.

We’re working with not just new disruptive technologies, but traditional bricks and water businesses that are building digital payment business on top of that. So, there’s good base data on which we can actually correlate between both sides of that, the disruptive and the bricks and water and find out where the actual metrics should lie. And I think it is part of an (indiscernible) opportunity going forward but nevertheless I think we’re making very good progress there.

Peter Paras - Cornerstone Capital Corporation

If I could just follow-up briefly, will you be able to demonstrate in the next year or two that fraud is declining or at least diminishing in growth or is this just through bigger global number to be able to have some kind of empirical evidence?

Patrick M. Carroll

Empirical evidence is always crucial in the area that’s best that we work in and certainly the metrics that we apply where our solutions get deployed within the clock we have to be able to demonstrate empirically that we’re actually having a positive impact on those businesses, and we would seek to wherever we’re deployed for whatever solution we would certainly seek to be able to show and demonstrate quite clearly that our solutions are having the impact and I think that’s crucial.

And we know for a fact that we're achieving that already where our solutions have been deployed. We have some very some – someone from clients that we have deployed our solutions from including some that have said that, not only has the – that’s also been extremely reliable, but also to the fact that our fraud has tended to zero as we start implement those are distortive case studies that we want to be able to emphasize as we move forward and really make sure they’re part of our market collateral.

Peter Paras - Cornerstone Capital Corporation

Thank you. Best wishes.

Patrick M. Carroll

Thanks, Peter.

Operator

Your next question comes from the line of (indiscernible), a Private Investor. Please go ahead.

Unidentified Analyst

Very good quarter. I’m – [I’ve been an] investor with you guys for a couple of years and I had a couple of questions actually. One was regarding the German Police Department’s contract, any update on that?

Steven van der Velden

No unfortunately we have no update in that area, and once we will have that we will certainly announce it publicly through our release, or through an 8-K.

Unidentified Analyst

Okay. Do you feel like it’s getting resolved, or is there any inclination or any kind of feeling that you have about that?

Steven van der Velden

No. At the moment we don’t see anything from a solutions point of view. We are simply not informed, so we just don’t know. And as I stated before, once we do know anything that’s relevant we will certainly communicate that.

Unidentified Analyst

Great, thank you. And the second question I have is, with regards to the leading bank that we signed a contract with U.S. Bank, when we say leading bank and that comes across the magnitude of transactions, and I want to verify that when you stated earlier you’re looking at possibly revenues in terms of $500 to $1.5 million per year or was it per month regardless to those kind of a direct contract with the banks?

Patrick M. Carroll

Yeah, thanks [Neilson]. The answer to that question as I said earlier on, in the first year we would expect the magnitude of revenues to be in the order of $0.5 million to $1.5 million. The reason that there’s that variance is that it all depends on the pace of rollout, it all depends how quickly they can achieve and get up to a run rate. So, if you take – and that’s per annum, because you’ve got a roll-out process that depends on them and their customers, its outside of our control. Beyond that you can extrapolate that, but I prefer not to do that at this point, we absolutely make sure that we get the implementation stage successfully and get it done as quickly as possible and that’s the guidance that we’re giving in terms of just the first year.

Unidentified Analyst

Just the first year?

Patrick M. Carroll

Yeah.

Unidentified Analyst

Correct. Okay, now the final question is, do you guys have in some way, with regard in looking at the stock price even declining today with a great quarter like this. Is there any major analyst coverage or, the major analyst that are looking at the stock or are you guys interviewing with regards to any of these kind of banks, – major banks out there about Elephant Talk and coverage on our stock to give us more visibility to the street.

Steven van der Velden

Yeah, so well at the moment there are no major banks that are holding our stock, and its indeed a challenge for management to present the Company and to indeed attract attention from major analysts to start to follow the company, and this will be one of the major objectives for next year together with our IR advisors to get as many eyeballs as possible from these kind of analysts and to make sure that we are being followed all the way. At this moment as I said before, we're not being followed by any major analyst.

Unidentified Analyst

All right, guys. Thank you very much. Again, good quarter.

Steven van der Velden

Thank you.

Operator

Your last question comes from the line of Brandon Williams with Dawson James Securities. Please go ahead.

Brandon Williams - Dawson James Securities

Just a follow-up actually Dawson James has a research report out on Elephant Talk if you haven’t see that one yet you could probably visit the website and find it there. And lastly Steven, if you could comment on how Elephant Talk Communications can penetrate the U.S. market from the telecom standpoint? That would be greatly appreciated. Thank you.

Steven van der Velden

Thanks. Yeah, sorry Brandon, you’re right. I should have mentioned the Dawson James report. Although I thought your question was aimed at one of the major banks that we also, let’s say have on our radar screen from a ValidSoft point of view and that’s why I didn’t mentioned you. Now with respect to your question about the U.S. market, as we have discussed before we are definitely looking into the U.S. market and we feel comfortable that in the not too distant future we can indeed play a role there, and however there have been quite a few opportunity so far in Europe and we have been looking mostly at Latin America, but aside those two major markets we're definitely looking at North America and then yes we believe that we indeed have something to add to the outsourcing portfolio now being offered in the United States.

Brandon Williams - Dawson James Securities

Excellent. Thank you.

Steven van der Velden

Thank you.

Operator

Gentlemen, there are no further questions at this time. Please continue.

Steven van der Velden

All right. Thank you. On behalf of everyone at Elephant Talk communications and ValidSoft I would like to thank all for joining us today on today’s call, and thanks again to all of our long-term shareholders for their patients as well as commitment to the company. As stated earlier, we look forward to providing additional updates on future milestones as they’re realized. Thank you all and have a great day.

Operator

Ladies and gentlemen, this concludes the Elephant Talk Communications Corp third quarter 2012 shareholder conference call. Thank you for your participation and you may now disconnect your lines.

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