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NETE: Q4 Results Should Rebound as Restructuring and Hurricanes Hurt Q3 Results

11/17/2017
By Lisa Thompson

NASDAQ:NETE

Results for Q3 2017 were negatively affected by both the restructuring of Net Element’s (NASDAQ:NETE) Russian operations and the recent hurricanes. In Q4 however, operations, growth, and margins should be back to normal. The hurricanes affected customers in Texas and South Florida as many were closed for a number of days and payment processing revenues were reduced in those locations. In Russia, the company’s revamp of operations and no sales at all in the mobile business caused a hit on revenues and margins. In Q2 the company began to take steps to reduce expenses in Russia by consolidating the two separate offices for Mobile and PayOnline into one, and eliminating redundant and excess staff. The company also cancelled its lease on a Russian apartment. These actions happened late in Q2 and throughout Q3. While there were some one-time expenses during Q3 for these actions, the company did not break them out. Also the full impact of these cost reductions has not yet been seen. In Q4 gross margins for PayOnline should go back up to more normal levels, and operating margins should also improve. The Russian operations were already cash flow positive and this reduction in expense can only help overall margins going forward.

Results By Segment


While total revenues for Q3 rose 6.4% year over year to $14.9 million from $14.0 million a year ago, they were down sequentially from $16.1 million in Q2 for the reasons stated above. North America grew 17.3%, even with the impact of hurricanes, Mobile Payment reported no revenues at all as Net Element rethinks how to profitably sell to that market, and PayOnline grew 11.3% year over year and was impacted by currency translation. Total gross margin declined to 14.4% as the Russian disruption knocked margins at PayOnline down to 16.9% versus 33.4% a year ago and 33.2% in Q2. The company expects margins there to move back up to historical levels as cost savings kick in. North American margin should also improve as volumes return to normal particularly as we go into the Christmas season.

Total operating expenses decreased to $3.4 million from $4.1 million again primarily due to a reduction in stock-based compensation which declined $621,000. The operating loss declined $500,000 from last year and was flat with Q2 2017. Russia should contribute to a reduction in G&A going forward.

Interest expense decreased to $302,000 from $609,000 in Q2 2016 due to more favorable lending terms 

This quarter there were 1.89 million average primary shares outstanding after the 10 for 1 reverse split, while last year there were only 1.4 million, or 35% more than last year. 

The adjusted non-GAAP operating loss was $1.6 million flat with last year. On a per share basis however, the adjusted non-GAAP loss per share declined slightly to $0.84 per share versus a loss of $1.15 per share in 2016 due the increased number of shares rather than a reduction in losses. The company reported it had 2.5 million primary shares outstanding on August 11, 2017.

The Cash Burn Continues as Net Element Invests In Growth


The company is burning about $350,000 a month, reduced from a previous $400,000-500,000 a month. In September and October actual cash usage was negligible due to some annual payments being received. In Q3, $415,000 was invested in client acquisition. After October, the company was done paying for PayOnline, which now costs $200,000 per month as change that will be seen only on the balance sheet. The company has yet to launch its Aptito front-end system in Russia to be sold by PayOnline and is waiting on the Russian government to finalize new regulations. The company believes Aptito will be very competitive in the restaurant market versus the alternatives now available in Russia.

We believe the company could grow revenues 14% to $62 million in revenues in 2017 through internal growth. It is trading at a market value of $9.9 million, and an enterprise value of $16.8 million or 0.3Xs enterprise value to forecasted 2017 sales. If NETE achieves our forecasts without further common stock dilution than that already predicted and no incremental debt, we believe its common stock could be worth $24.00 per share by next year based on an industry average valuation of approximately 7.0xs enterprise value to gross margin if the company achieves breakeven EBITDA results.

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