RS2 plc - Interim Results

August 27, 2020

On 27 August 2020, RS2 Software plc published its interim financial statements for the six-month period ended 30 June 2020.

Performance Overview

During the first six months of 2020, revenues eased by 3.4% to €10.8 million reflecting some delays in the execution of business in the European market due to ‘COVID-19’. The drop in revenues from the ‘Licensing’ segment to €5.9 million (H1: €7.12 million) was partly offset by the growth within the ‘Processing’ segment (+5.4% to €4.32 million) as well as the initial contribution of €0.62 million from the company’s newest segment which includes point-of-sale (“POS”) services, acquiring and financial services.

On the expenditure side, total costs increased by 26.5% to €13.7 million (H1 2019: €10.9 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, Latin America and the Asia-Pacific region. Furthermore, RS2 explained that it is investing in implementing a ‘Global Operation Centre’ that will include staff from all regions where RS2 has a presence in order to deliver services covering all time zones and to provide services during any clients’ working hours. The ‘Global Operation Centre’ will be servicing all of RS2’s business activities related to software delivery, processing services and merchant acquiring, which in the medium-to-long term will provide substantial saving by eliminating the need to have separate operation centres for the various business lines.

In view of the slight drop in revenues and the significant increase in operating costs, RS2 reported an operating loss of €2.9 million compared to an operating profit of €0.36 million in the first half of 2019. Meanwhile, net finance costs increased to €0.16 million (H1 2019: €0.06 million) as RS2 took on additional borrowings to finance its expansion strategy including the acquisition of Kalicom Liebers Zahlungssysteme KG (“Kalicom”) which was announced in January 2020. In this respect, RS2 also added that the integration of Kalicom is under way and should be concluded in October 2020, including the rebranding of the company to RS2 Zahlungssysteme GmbH.

Overall, RS2 posted a pre-tax loss of €3.06 million compared to a pre-tax profit of €0.3 million in H1 2019. After accounting for a tax charge of €0.58 million and a net loss of €1.34 million related to minority interests (namely the operations of RS2 Software Inc in the US), the net loss for the period under review amounted to €2.3 million.

The Statement of Financial Position as at 30 June 2020, compared to the corresponding figures as at 31 December 2019, shows that total assets grew by 9.4% to €34.8 million reflecting higher values of intangible assets and goodwill (+€2.65 million to €11.6 million – although the potential and capacity of RS2’s intellectual property far outweigh the value attributed to it), accrued income and contract costs (+€1.53 million to €4.15 million) and cash balances (+€0.62 million to €3.04 million). Total liabilities expanded by almost 37% to €24.3 million due to the substantial increase in bank borrowings to €9.7 million compared to €3.98 million as at the end of 2019. In virtue of this, shareholders’ funds contracted by 13% to €14.8 million.

Outlook

In their commentary, the Directors of RS2 provided a detailed explanation of the company’s trading performance and business prospects. In this respect, RS2 explained that following the outbreak of ‘COVID-19’, a slowdown in business momentum was registered although this was followed by a strong pickup in activity in Q2 2020 to more normal levels. Furthermore, the delay in certain business recorded in the first part of the year, together with the onboarding of new clients, will translate into considerable activity in H2 2020, some of which was not previously anticipated to take place this year. In fact, RS2 noted that it is expecting to meet, and possibly exceed, its original targets for the 2020 financial year, and that it has sufficient cash to meet its obligations and continue with the implementation of its expansion strategy including the further rollout of the new ‘Acquiring’ business line. The latter should be providing RS2 higher margin business activity (when compared to the ‘Processing’ segment) as processing agreements generate a fixed fee per transaction that is processed whilst the ‘Acquiring’ model charges a percentage of the transaction value rather than a fixed fee. RS2 established RS2 Financial Services GmbH in Germany to run this new business segment using the services of RS2 Smart Processing Ltd. to provide the processing of the business. RS2 Financial Services GmbH is investing in building a fully digitalised merchant ecosystem that streamlines the entire onboarding, servicing, and clearing and funding process.

RS2 Smart Processing Ltd. continues to increase the efficiency of its business operation by automating and digitalising its processes internally and externally for its customers, providing a large set of application programming interface (APIs) to consolidate and reconcile clients’ business. In this respect, RS2 expressed its confidence about achieving operational targets which also include the onboarding of a leading New York Stock Exchange listed bank ranking among the global top ten banks by total assets and Tier-1 capital. This new managed service agreement has now started generating revenues and will allow RS2 to continue on track to hit the 1 billion transaction mark by 2021 – in addition to other large acquirers being onboarded and the volume that will be ramped up in 2021. In fact, other significant businesses are expected to start processing large volumes in Q4 2020.

Besides the above, RS2 Smart Processing will continue to expand its offering to other regions and will be investing in sales talent and technical human resources to continue adding value to its product by enhancing its alerting system and automating its transactions processing and reporting digital merchant and cardholders’ process flows while undergoing the research and development to enhance the data warehousing capability that will be empowered by an artificial intelligence (AI) engine. Furthermore, RS2 Smart Processing continues to implement its healthy pipeline after embarking on a number of initiatives such as its migration to a cloud-hosting system, automation and digitalisation of its service (which has been nearly completed) as well as strengthen its HR capabilities. The process and the platform to provide these services is proprietary and has been built inhouse.

In terms of its geographical expansion, RS2 explained that:

In the US, it has launched the core global platform with online processing in Q4 2019 and has expanded to offline processing and acquiring in early 2020 while issuer and closed-loop processing will follow in late 2020. Over time, the core platform will be supplemented with additional utility and value-added services such as analytics, loyalty and rewards, and third-party or internally-developed services to develop a modular Payments-as-a-Service platform.
In Europe, the market entry strategy will be focusing on: (i) global acquiring and issuing international Independent Sales Organisation (“ISOs”), Payment Facilitators (“PayFacs”), Independent Software Vendors (“ISVs”) and multinational merchants, own Direct Merchant Acquiring and Issuing, which will be rolled out in two phases; (ii) ease of use of omni-channel processor on one single platform covering multi-regions; (iii) closed-loop processing large, international merchants covering Acquiring and Issuing of reward, loyalty, gift cards and prepaid instant funding/instant credit alternative lenders, merchants’ disbursements for insurers and retail; (iv) excelling on its offering through specialisation into different verticals (hospitality and healthcare); (v) adding in European core markets selective SME capabilities and portfolios; (vi) partnering with established local players allowing quick entry to non-core markets; (vii) developing bank and sponsoring partnership with acquirers in the regions; (viii) e-commerce clients will be targeted whilst delivering POS services to SMEs in Germany, directly via acquisitions or indirectly through referred partnerships; and (ix) multinational customers will be targeted to consolidate its omni-channel acquiring series.
In the APAC region, RS2 will be mainly focusing on: (i) delivering Payment-as-a-Service for Issuing and Acquiring to financial institutions of any size; and (ii) offering term licences for Issuing and Acquiring to large international banks. RS2 will also be establishing sponsorship relationships with its card customers currently in the Philippines, Vietnam, Malaysia, Australia and New Zealand in order to be able to service multinational corporates. Moreover, RS2’s subsidiary out of the Philippines will be managing the sales and marketing activities and client support, including implementation and customisation services for the licence clients and running the operation for the Managed Services clients. At the same time, the subsidiary will also be providing cross-services to RS2 such as call centre activities and chargeback processing.
In LATAM, RS2 will be mainly focusing on: (i) continuing to increase the services to its current customers in Brazil, Argentina and Colombia by supporting their regional expansion while also following on large opportunities in Brazil; and (ii) In Colombia, together with its customer and partner, RS2 is building an offering for Acquiring services to SMEs in the country.

In conclusion, RS2 explained that its competitive advantage over competitors is mainly attributable to its proprietary in-house developed high-performance and highly scalable platform that supports any size of business covering both Issuing and Acquiring, ranging from small payment service providers with a few millions of transactions, right up to top league chart banks processing tens of billions in transactions. The platform is future-proofed by a unique team of long-serving skilled people and this should accelerate the growth of RS2 eliminating the dependencies on third party suppliers.

RS2 is also consistently expanding its network of partners to deliver its global Acquiring solution. This includes partner banks, ISOs, ISVs, PayFacs, terminal providers and payment gateways across the globe with an initial focus on Europe and the US.

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RS2 Software plc – Interim Financial Statements for the six-month period ended 30 June 2020.