RS2 plc - Interim Results

On 29 August 2019, RS2 Software plc published its interim financial statements for the six-month period ended 30 June 2019. In this respect, it is important to highlight that the H1 2019 financial results are not directly comparable to the same period last year as the financial performance of RS2 in the first of 2018 was positively impacted by the implementation of accounting rule IFRS 15 which, in turn, had required the one-time release of deferred income amounting to €5.6 million in relation to a Term Licence contract with an option to convert to perpetuity. In relation to the same contract, RS2 had also recognised an additional €1 million in revenue in H1 2018 which was specifically related to the perpetuity option. The latter would have otherwise been accounted for during the current financial year ending 31 December 2019 had it not been for the implementation IFRS 15 in 2018.

Performance Overview

During the first six months of 2019, RS2 generated €11.2 million in revenues compared to the adjusted figure of €9 million in H1 2018. The significant growth of nearly 25% was largely driven by the much higher business within the ‘service fees, transaction processing and customisation’ segment which contributed €8.22 million in revenues compared to €4.88 million in H1 2018. This also included the first income earned by the company from its operations in the US. Furthermore, maintenance fees increased by 37.8% to €1.63 million compared to €1.18 million in the first half of 2018. On the other hand, RS2 registered a marginal decrease in comprehensive packages whilst revenues from ‘licence fees excluding customisation’ contracted sharply to €0.54 million compared to the adjusted figure of €2.53 million in H1 2018.

On the expenditure side, total costs increased by just under 32% to €10.9 million (H1 2018: €8.23 million) as RS2 continued to invest in its human resources and infrastructure capabilities in line with its strategy towards expanding internationally especially in Europe, the US and the Asia-Pacific region. Furthermore, RS2 explained that its various investments are also aimed at enhancing its processes and procedures by automating key functions and improve certain methodologies and technologies that enable it to seamlessly onboard new customers and enhance customer experience.

Overall, RS2 reported a pre-tax profit of €0.3 million compared to the adjusted figure of €0.8 million in H1 2018. After accounting for a tax charge of €0.55 million (H1 2018: €2.76 million) and a loss of €0.27 million related to minority interests, the net profit attributable to the owners of the company amounted to €0.02 million.

The Statement of Financial Position as at 30 June 2019, compared to the corresponding figures as at 31 December 2018, shows that total assets grew by 19.3% to €33.4 million largely reflecting higher values of property, plant and equipment as well as trade receivables. These were partly offset by drops in the value of accrued income and cash balances. Total liabilities increased notably to €16.4 million mostly due to the recognition of lease liabilities amounting to €3.5 million in line with accounting rule IFRS 16. Meanwhile, shareholders’ funds remained virtually unchanged at €18.6 million.

Outlook

In their commentary, the Directors of RS2 provided a detailed explanation of the company’s strategy which is based on four main pillars – namely: (i) growing and expanding the managed services business; (ii) ramping up the US expansion; (iii) building its own direct acquiring business; and (iv) creating a partner network to deliver a true global acquiring solution.

(i) Growing and expanding the managed services business

In the managed services business, RS2 has been able to open up new verticals and regions as follows:

• In Europe, the Middle East and Africa, RS2 won new mandates in the Nordics and continued to deliver on strategic projects with new non-bank financial services businesses in the travel and pharmaceutical industry.
• In Latin America, RS2 rolled out its services in Brazil and Columbia as planned and has been contracted to expand its services to Argentina in the second half of the year. The company is also in promising discussions with a large client to expand its services to Mexico, Chile and Peru.
• In Asia Pacific, RS2 entered into a letter of intent for a joint venture with a money transfer business. The company is also planning to roll out its services in New Zealand and Malaysia before the end of this year adding new markets to its existing customer portfolio.

(ii) Ramping up the US expansion

In the US, RS2 continued to invest heavily in building up the team and infrastructure and delivering full product capabilities to the market. The company is working both on delivering its managed services solution as well as its own direct merchant business in the second half of the year. RS2 is also in the process of securing a couple of significant deals in the US to support the acquiring and issuing business of these customers to expand in more than twenty countries globally. These deals are planned to be concluded before the end of this year.

(iii) Building its own direct acquiring business

In Europe, RS2 is also focusing on increasing its managed services by targeting multinational clients to be serviced outside of the region through the relationship which the company now has with its partners globally. RS2 is also working on submitting the application for its Financial Institution Licence to be regulated under the German financial regulatory body (“BaFin”), targeting to obtain the licence by the end of this year. This step will bring RS2 to the next level of its expansion. This will mean that the company will be in a position to acquire the business of merchants, manage their settlement and funding and charge a percentage of the monetary value of the transaction versus the business model of managed services of today where RS2 is only charging a fixed amount per transaction. For this business, RS2 is also very well positioned due to its unique technology having one single platform covering both issuing and acquiring to service multinational retailers in order to consolidate their business globally providing them with access to their information in real time online for cross omnichannel payments. RS2 also identified a couple of target companies as a potential acquisition to augment services enabling it to support its acquiring business. The company has also signed a sponsorship agreement with a UK-based Financial Service provider and will start rolling out these white label acquiring services by Q1 in 2020. First merchants have been identified and contractual negotiation is ongoing.

(iv) Creating a partner network to deliver a true global acquiring solution

RS2 explained that it is consistently expanding its network of partners to deliver its global acquiring solution. This includes partner banks, Independent Sales Organisations (“ISOs”), Independent Software Vendors (“ISVs”), Payment Facilitators (“PayFacs”), terminal providers and payment gateways across the globe with an initial focus on Europe and the US. RS2 is also building a strategic alliance with giant software and infrastructure solution providers to increase their global reach which will be translated into sales opportunities.

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RS2 Software plc –Interim Financial Statements for the six-month period ended 30 June 2019.