Net Element, Inc.

Net revenue for Q1 2019 was approximately $15 million, down 5.9% from approximately $16 million in Q1 2018. Gross margin increased to approximately $2.8 million, or 18.5% of net revenue, from approximately $2.4 million, or 14.8%, a year earlier. Loss attributable to common stockholders was approximately $1.1 million, or $0.29 per share, compared with a net loss of approximately $1.6 million, or $0.42 per share, in Q1 2018. Cost of revenues was approximately $12.3 million versus approximately $13.6 million last year; operating expenses were approximately $3.6 million versus $3.4 million. Total transaction processing volume increased to approximately $787 million from $739 million. North American Transaction Solutions net revenue rose 4% to approximately $14.4 million, while International Transaction Solutions was weaker due to competition and economic challenges. Forward-looking commentary: management expected international to improve over the next few quarters and said it believed it would be up sequentially in the current quarter; it also said gross margin still had room to expand, but gave no quantitative guidance.

Oleg Firer said the quarter reflected progress toward a higher-margin model as the company continues to mature in value-added services and use scalable infrastructure. He emphasized that North America remained positive, while international was hurt by lost clients and a slower-than-expected ramp of replacements. His tone was constructive but cautious, repeatedly noting that margin improvement should continue while admitting the company could not yet forecast how much.

Jeffrey Ginsberg highlighted a smaller loss of about $1.1 million versus $1.6 million last year, and tied the improvement mainly to better North American gross margin and about $264,000 lower other expenses. He walked through the financials: net revenue of about $15 million, cost of revenues of about $12.3 million, gross margin of about $2.8 million or 18.5%, and operating expenses of about $3.6 million. In Q&A he said the cash burn was about $250,000 a month, cash was about $3.3 million, debt capacity was still sufficient to get to the next 12 months, and a stock-based compensation item of about $1.5 million could hit in Q2.

Analysts focused on why international revenue was not improving sequentially, and management said it lost several clients due to economic trouble and bankruptcies, then replaced them, but the new business needed time to ramp. On margins, management said there was still room to improve as it scales proprietary processing and value-added services, though it would not quantify the upside. The analyst also asked about the Sputnik Bank joint venture; management said regulators did not approve Sputnik, it replaced the partner, and it is now in the process of Visa and MasterCard certification, with VTB Bank as settlement bank offering better pricing economics.