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NETE: Unified Payments is Still the Star of the Show With Growth of 40%

05/16/2017
By Lisa Thompson

NASDAQ:NETE

Net Element (NASDAQ:NETE) revenue growth reaccelerated to 20.4% in Q1 2017. It reported revenues of $13.6 million in 2017 versus $11.3 million in 2016. All of that growth came again from the North American Unified Payments division, which grew 40% and added $3.1 million to revenues. PayOnline grew 23%, adding $300,000 to revenues although all of this growth was due to currency exchange as the Ruble strengthened from 75 Rubles per dollar in 2016 to 59 Rubles per dollar in 2017. The Mobile payments business dragged down the average once again declining 57% to just $857,000 and contributing just $40,000 to gross margin. The decline was worse in constant currency. We believe these two businesses will again benefit from currency effects in Q2 2017.  

Unified Payments continued its strong growth due to aggressive marketing efforts in the quarter as the company added a record 1,500 merchants to the customer base. Rapid customer acquisition also continues into Q2 according to the company. The company is still planning to launch its Aptito front-end system in Russia to be sold by PayOnline and is working on gaining compliance with regulations. It could take another three months before the product is launched there. The company believes Aptito will be very completive in the restaurant market versus alternatives there now.

PayOnline is in the process of being certified in the US, which is expected in the next 30-45 days. Most importantly, Unified Payments will be immediately able to use PayOnline rather than a third party reducing some of its costs and increasing margins. The company believes as much as 15% of Unified’s transactions would benefit. Both online transactions and those that are API-based (such as those coming from Poynt’s terminals via the internet, rather than telephone-based transactions) would be able to use PayOnline. 

Expenses in the quarter were impacted greatly by currency translation that added at least 20% to the Russian operations when converted to dollars. Gross margins declined percentage-wise, but were $227,000 higher. Total expenses however increased to $4.4 million from $3.6 million due to currency, bonuses and some increased payroll costs. The operating loss increased to $2.3 million from $1.7 million.

This quarter there were 16.5 million average shares outstanding while last year there were only 11.3 million or 46% more than last year. The adjusted non-GAAP operating loss was again $1.9 million versus $1.4 million a year ago. On a per share basis however, the adjusted non-GAAP loss per share declined slightly to $0.11 per share versus a loss of $0.13 per share in 2015 due the increased number of shares rather than a reduction in losses. The company reported it had 17.6 million shares outstanding on May 15, 2017.

The company is still burning about $380,000 a month or $1.1 million a quarter and has been using primarily equity to finance the losses. We do not see that changing and equity dilution should continue. If the company were to decrease losses by increasing operating leverage faster than the share price dilution, or in other words, if investment was accretive, the price per share could improve. The company continues to focus on growing revenues and is willing to sacrifice short-term profits to generate revenues with a long tail, future profitability and higher margins. As long as public markets are willing to fund the company through equity, this strategy may play out in future years.

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