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(NETE) CEO Oleg Firer on Q3 2014 Results – Earnings Call Transcript

Nov. 17, 2014 9:04 PM –

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Net Element 2014 Third Quarter Financial Results and Business Update Conference Call. During today’s presentation, all parties will be in a listen-only mode. [Operator Instructions] I would like to remind listeners that during the call management’s prepared remarks may contain forward looking statements which are subject to risks and uncertainties. Management may make additional forward looking statements in response to your questions today. Therefore the company claims protection under Safe Harbor for forward looking statements contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from the results discussed today and therefore we refer you to more detailed discussion of these risks and uncertainties in the company’s filing with the SEC. Any projections as to the company’s future performance represented by management include estimates today as of November 17, 2014 and the company no assumes no obligation to update these projections in the future as market conditions change. The recording and certain financial information provided during the call is available at on the Investor Relations page.

At this time, I’d like to turn the call over to Oleg Firer, CEO. Oleg, please be go ahead.

Oleg Firer

Thank you and thanks to everyone who has joined our call today. We are here today to discuss the results from the third quarter of 2014 and then give an opportunity for those of you listening in to ask questions during the Q&A session. I’d like to begin today’s conference call by acknowledging the highlights from the third quarter of 2014.

Our revenues for the quarter were $6,026,961 versus $4,912,035 for the quarter ended June 30, 2014, a quarter-over-quarter increase of 23%. Operating activities provided $2,959,201 of positive cash flow for the period contrasted with $6,366,221 of net cash used in the third quarter of 2013. In September, we have announced $11 million financing from Alfa-Bank. The financing will allow Net Element to accelerate its growth efforts in Russia. In September, we have finalized debt exchange transaction with Crede Capital. As part of this transaction we have eliminated more than $15 million of debt from our [balance] [ph] sheet. This financial transaction settles most of the company’s debt obligations.

In September, we have also announced availability of Apple Pay to merchants through Unified Payments offering. Currently point of sales terminals deployed by the company are NFC and EMV enabled offering merchants an ability to accept Apple Pay and EMV transactions to the point of sale.

In July, we have appointed financial services industry veteran William Healy to Net Element’s Board of Directors. In July, we have also announced $10 million financing from RBL Capital Group. This financing will allow Net Element to accelerate its growth initiatives.

We are pleased with our third quarter performance which include significant debt reduction and narrowed quarterly loss. In Russia, we have successfully restructured the business and are confident in a significant quarter-over-quarter growth an ongoing basis.

Pivoting from a strong balance sheet, our activities and improvement have set the pace for continued growth and demonstrate our commitment to increasing company value. Third quarter of 2014 was very busy quarter for us which I believe had positive impact on both operations and financials of the company. And we are well positioned to continue to growth trend for the remainder of 2014 and into 2015.

Now I’d like to introduce Jonathan New, Net Element’s Chief Financial Officer, who will provide comment on our financials. Jon, please proceed.

Jonathan New

Thank you, Oleg. Good afternoon, everybody. I’ll provide some brief highlights for the quarter, but please also refer to the 10-Q that was filed last week with the SEC for full details.

In an effort to present a more comparative period-on-period analysis we began reporting non-GAAP net loss which is net loss from discontinued — basically backing out non-recurring expenses from continuing operations and those include discontinued operations, non-share based compensation, goodwill impairment, debt extinguishment and debt restructuring. We believe by backing out these amounts you can see the trends of the business a little more clearly.

The adjusted loss therefore from continuing operations for the third quarter was $2.2 million or loss of $0.05 per share as compared to adjusted loss from continuing operations of $3.4 million or $0.11 per share for the third quarter of 2013. The company attributes the adjusted loss for the third quarter primarily to interest expense, depreciation and amortization and general and administrative expenses.

Going forward as Oleg pointed out, our interest expense will be down due to the pay off the majority of our debt, depreciation and amortization will also be lower on a quarterly basis as we reach full amortization on additional capitalized portfolio.

Our revenues were around $6 million as opposed to $6.5 million a year ago. As Oleg pointed out in his opening remarks, revenues for the last quarter this three months ending June 30 was $4.9 million versus the $6 million reporting this quarter. So the decrease of revenues quarter-over-quarter same quarter of last year is primarily due to Russia. Although that business is now back and poised for future growth. Our revenues were $461,000 in Russia for the third quarter of 2014 and last quarter three months ended June 30, it was $338,000. So that business continues to rebuild and we are rebuilding it with more control and a lot less risk. So we are so far pretty pleased with what’s happening.

In the US, our revenues were up by $56,000 and that’s given the loss of the FDR portfolio which took about $1.5 million out of our revenue that we had in 2013 and we don’t see in 2014, so while our revenues are only up $56,000 it is clear that we replaced the FDR business and then some run-off and then another $56,000 so the business in the US is growing as well.

General and administrative expenses were $1.9 million as compared to $2.8 million for the same period of 2013. So our revenues are up, our losses are down and our expenses are also down. And majority of the expense decrease is due to salaries and benefits and professional fees travel and rent. So we have right sized the business, got it focused on payment processing, mobile payment processing and technology, and lowered the cost as a result of going forward.

On a year-to-date basis, we have adjusted loss from continuing operations of $3.8 million or $0.08 per share as compared to continuing operations of $15 million or $0.51, for the nine months ended September 30, 2013. Net revenues were $15.8 million as compared to $12 million – $13 million for the nine months of 2013, but we have — the results are not really easily comparative because we purchased the Unified Payments credit card business in April of 2013. So we are dealing with five and half months of activity in that year of 2013 as opposed to nine months of activity here and then the increase was offset by an additional $1.6 million of revenue from First Data portfolios which did not repeat, revenue replacement and growth was achieved by organic growth by the company’s current portfolios as well as purchase of certain portfolios that we [Inaudible] for nine months ended September 30.

Operating expenses totaled $7.4 million for the nine months ended September 30 as compared to $17 million for the comparable nine months. Mainly that was due to the recovery of loss provision or the change in loss provision period on period. We had a recovery of $1.3 million for this year reflecting a reduced risk in our Russia operations as compared to an expense of $6.7 million, so we have a swing of about $8 million in loss provision.

Our cash provided by operating activities continues to be positive with almost $3 million for the nine months ended September 30 primarily due to the collection of accounts and notes receivable offset by losses and lower accrued expenses. As Oleg pointed out, our total debt was reduced dramatically; our debt stands at $3.3 million versus $21 million at December 31, 2013, representing reduction of $18 million. The reduction in debt was those in the US business and in the Russian mobile payments business. We continually and significantly reduced our debt and related interest expense. We completed our debt exchange program of Crede in this quarter which eliminated both Capital Sources of New York which was $2.3 million and Georgia Notes which was $13.5 million of debt obligations. Additionally, our factoring line at Alfa-Bank was $2,900 at September 30 as compared to $8.5 million at December 31. This is primarily due to timing of the renewal of this line of credit and to a lesser extent the lower current volume of Russian mobile payment business.

This concludes our formal remarks. And now I’d like to ask the operator to open the call for questions.

Question-and-Answer Session


[Operator Instructions] And I show we have a question from Lisa Thompson of Zacks Investment Research. Your line is open.

Lisa Thompson – Zacks Investment Research

Good afternoon, Jon and Oleg. I have a few questions if you could talk about on the business. First, I would like to get some idea of where you think gross margins are going? I noticed they came down from last quarter even adjusted and I assume it’s because of the older portfolios running off. So could you tell us where you think that’s going to settle out going forward? And then secondly, I’d like to hear a little bit about when you are going to get to more stabilized position with all these one time things? Are we – is that all kind of behind us now?

Jonathan New

Hi, Lisa. This is Jon. Thank you for your questions and your view. Yes, I think to a large degree we settled out a lot of the things that we needed to do that we’re making results difficult to compare divesting of the entertainment assets and getting into a focused operation. And now really paying off all of our debt, and has put us in a position where I think the results –will be much more easy to digest as we go forward. Obviously, we will be looking at organic growth as well as acquisition growth. So anything like that may throw a little bit of a wrench into the situation.

On the margin side, yes, we are dealing – as the industry is we are doing with tighter margins. So we are reacting to those tighter margins with value added products and that’s why we place a big focus on the technology aspect of our business. And also lowering our G&A costs. So those are the two ways because this is the way the markets thrive. So I think our margins have pretty much leveled out at this point in 14% to 17% range and that’s what we’ll see going forward.

Lisa Thompson – Zacks Investment Research

Okay. And just to clarify, where do you think interest expense is per quarter now?

Jonathan New

Well, the interest expense — all we have — not all, but the debt remaining is $3.3 million and the interest expense for each on that is $40,000 a month or $120,000 a quarter and then whatever the Russian Alfa-Bank lines going to be, right now we are very underleveraged on our Alfa-Bank line. So that could go up but even considering increases in the Alfa-Bank line, if we were to draw on that, we’re still looking in the $120,000 to $140,000, $160,000 range per quarter interest expense.

Lisa Thompson – Zacks Investment Research

That’s a lot better.

Jonathan New

Yes, yes, that’s for sure. Well, when you get rid of $18 million in debt, that’s what happens and so we are well positioned as we move forward [Inaudible] to take advantage of whatever comes our way and continue to grow organically.

Lisa Thompson – Zacks Investment Research

Okay. And can you talk a little bit about what’s going on at Aptito? I saw that you put on a new version, how is that going and what are you seeing out in the market place?

Oleg Firer

Well, hi, Lisa, this is Oleg. We have released the version 2.0 for Aptito which is a complete 360 degree revamp from the first version and includes a local server which is needed to cash transaction at the restaurant point if the internet connection goes down. It increases other, enhanced module which have tremendous analytics in the back-end for the merchants. We have launched this version about a week ago or two weeks ago and we are already starting to see tremendous need for the version. Our, both in house sales and independent resellers are picking it up as per their portfolio bringing into the merchants. It is too soon to say how the new version sales would compare to the older version sales. But we are hopefully going to be releasing that information next quarter and letting people know how it compared to the previous version and what kind of successes we are having with it.

Lisa Thompson – Zacks Investment Research

So what do you think are the highlights of what this does at [Inaudible]?

Oleg Firer

Well, the biggest highlight is the fact that it enables merchants to continue operating their restaurants even if the Internet connection goes down, we have a local version of Aptito software support at the merchant location, next is an ability to have analytics on the merchant’s dashboard where we are providing him data to the merchant that give him more details and more insights to what their customer do. And giving an example, the graphic on the customers spending pattern of the customer, where the customer — if the customer shops another fine dining establishments or other dining establishment within area without disclosing obviously the customers identify whether in general basis giving a merchant insight into what the customers do and their shopping pattern. In addition, we’ve also increased the look and feel, enhanced the look and feel of the software itself and brought new logical features into the software itself including the new version for QSR which hopefully is going to bring more merchant to us.

Lisa Thompson – Zacks Investment Research

Sounds great. Was — is there anything new going on in Russia? What’s going on with mobile payments there?

Oleg Firer

Well, we are seeing actually an increase in mobile payment in Russia. Obviously the conversion of a dollar to ruble is affecting the top line. We are however finished with the complete restructuring of the company and are currently growing our business that we believe that we are going to see tremendous growth on quarter-over-quarter basis .And so we are really pleased with the results that we are seeing in Russia on both top and bottom line. And as Jon mentioned we are very underleveraged there in between the credit facilities we have used our own funds in growth in Russia. So we have not been borrowing money on a daily basis from various facilities. And we believe the access to capital that we have in Russia is going to give us an ability to grow the business beyond levels that we have been showing to everybody’s delight.


[Operator Instructions] There are no further questions. Thank you. I’ll turn the call back over to Oleg for closing remarks.

Oleg Firer

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


Thank you. Ladies and gentlemen, this concludes today’s conference. You may now disconnect today.




Wednesday, November 19th, 2014 Uncategorized