RS2 Software plc - Interim Results

On 24 August 2022, RS2 Software plc published its interim financial statements for the six-month period ended 30 June 2022.

Revenues increased by 2.4% to €18.8 million as the growth achieved by the ‘Processing Solutions’ arm (+13.5% to €9.82 million) and the ‘Merchant Solutions’ business (+29.9% to €1.17 million) offset the drop in income from ‘Software (Licensing) Solutions’ (-11.4% to €7.8 million). Within ‘Processing Solutions’ and ‘Merchant Solutions’, the growth was driven by the Group’s activities in Europe. On the other hand, the ‘Software (Licensing) Solutions’ segment recorded a near 19% drop in sales in Europe which was only partially compensated by the increase in income from North America (+10.2% to €2.52 million).

Operating costs (net of other income) surged by 16.7% to €18.2 million (H1 2021: €15.6 million) reflecting higher cost of sales as well as administrative and marketing expenses which outweighed the much lower level of net impairment charges. In contrast, RS2’s financial performance was boosted by a €2.13 million exchange gain on operating activities compared to just €0.03 million in the previous comparable period. Nonetheless, in view of the sharper increase in net operating costs, operating profit eased by 2.5% to €2.71 million compared to €2.78 million in H1 2021. However, excluding depreciation and amortisation charges, EBITDA grew by 7% to €4.15 million (H1 2021: €3.88 million) whilst the EBITDA margin improved to 22.1% compared to 21.2% in the first half of 2021.

After accounting for net finance costs of €0.01 million, tax charges of €1.23 million, and minority losses of €0.14 million, RS2 reported a net profit of €1.6 million compared to €1.09 million in H1 2021. The net profit translates into an annualised return on average equity of 11.2% which is superior to the return of 10.1% achieved in the previous corresponding period.

In terms of financial position, total assets contracted by 6.3% to €44.6 million (31 December 2021: €47.6 million) whilst total liabilities dropped by 12.1% to €19.5 million (31 December 2021: €22.2 million). Although RS2 reduced its total indebtedness by 10.9% to €3.88 million (when including lease liabilities amounting to €2.51 million), the Group’s net cash position contracted to €3.16 million (31 December 2021: €4.41 million) reflecting the reduction in cash balances to €7.04 million from €8.22 million as at the end of 2021. Overall, shareholders’ funds dropped by 4% to just under €29 million from €30.2 million as at 31 December 2021.

Notice of Material Variance

Despite the increase in profitability, RS2 noted that the results for H1 2022 vary when compared to the projections made at the time of the issuance of the preference shares in February 2021. The prevailing macroeconomic dynamics across the world including very high levels of inflation are contributing to tighter financial conditions which are negatively impacting RS2’s customers. As a result, several forecast revenues did not materialise as yet whilst the Group experienced delays in expected revenues from business operations due to unforeseen circumstances and dependence on third party deliverables. Despite this, cost savings were prioritised with a view of safeguarding profitability which not only met but exceeded projected results.

Outlook for 2022 and Beyond

RS2 continues to maintain its momentum and the execution of its strategy in all business segments. During the first half of 2022, despite the war in Ukraine and higher-than-expected inflation forcing customers to slow down on planned investments, the Group successfully entered new markets in various regions. This has allowed RS2 to expand its processing business, which will materialise in terms of transaction volumes in Q3 and Q4 of 2022, along with a new client installation expected to kick-off in Q3 2022 which will result in increased volume generation as from Q1 2023.

Regional Business Update

Latin America (“LATAM”)

RS2 has extended its presence in LATAM adding Mexico, Chile, and Peru to the current operational markets – namely Brazil, Columbia, and Argentina. In these markets, the Group will be offering transaction processing services to Payment Service Providers (“PSPs”), banks and financial institutions that provide acquiring services to online merchants, as well as stores and shops. Integration with local schemes within these markets will enhance the acceptance rate of customers which, in turn, mitigates fraud risk and increases their profitability.

Asia Pacific (“APAC”)

The Group added Australia as a new market and will be launching this business in Q3 2022. This is deemed to be another major market in APAC, in addition to the current operative ones – namely Philippines, Singapore, Malaysia, Indonesia, and Vietnam. In particular to the Philippines, RS2 is in the process of adding InstaPay, the real-time online local scheme, which will allow the Group to offer services to banks using its own developed application (“APP”) for fund transfers, bill payments and other banking services.

North America – the US

The Group’s subsidiary is the US continues to ramp up its client base with respect to the Independent Sales Organisations (“ISO”) processing business, whereby it has added another three ISOs to its portfolio. RS2 has successfully managed to get this line of business streamlined, allowing it to start focusing on new businesses in the market.

Today, the US subsidiary manages two business lines – the ISO processing business and the enterprise business. For the enterprise business, the company manages the client’s private infrastructure on the cloud in addition to providing processing and other services. On the other hand, with respect to the ISO processing business, the company runs the business on the Group’s dedicated cloud.

In addition, the subsidiary in the US is diversifying its services to enable its offering of issuing processing services in the US market by partnering with a technology company that services over 400 community banks and other customers in the US. Together with this selected partner, the company will start these processing operations in Q1 2023. This partnership and respective operations signify an important achievement in the US, as this represents a new line of business as well as a new revenue stream, over and above the acquiring business.

RS2 North America is also embarking on a new market segment of Payment Facilitators (“PayFac”) and Independent Software Vendors (“ISVs”). This market segment fits perfectly within the Group’s strategy due to the nature of their business being global and more technology driven, and engagement with potential customers is well underway.

RS2 Smart Processing

This company continues to increase its transaction processing volumes through its existing customers as well as new customers. In fact, during the first half of 2022, an additional 4 clients were contracted. One of these new implementations is currently in its pilot phase, while a second one is expected to be completed in Q3 2022. The remaining two implementations are expected to go live by the end of 2022.

Through the Group’s recent investments in quality relationships with new premium clients, RS2 has continued to increase the volume of transactions processed on its platform. This increase is expected to progress together with the gradual increase from existing clients and the on-boarding of various new clients.

RS2 Financial Services

In May 2021, RS2 announced that its German subsidiary – RS2 Financial Services GmbH – was granted an E-Money Institution (“EMI”) license by the German Federal Financial Supervisory Authority (“BaFin”). As an EMI institution, the Group is now able to provide direct acquiring and issuing services to merchants and is now expected to start offering such services from Q3 2022.

The licensed subsidiary has successfully achieved a pivotal milestone in obtaining its principal membership from VISA as well as MasterCard. While the initial focus will be on the German market, the company has already passported its license to Austria.

The product offering in this business line will cover international credit and debit card acquiring services, Girocard acquiring services (being a German interbank network and debit card service), Point of Sale (“POS”) terminals, as well as Payment Service Provider (“PSP”) and Network Service Provider (“NSP”) services. The Group is ramping up its business by initially cross selling acquiring services into the portfolio of RS2 Zahlungssysteme GmbH (a Group company). Eventually this is expected to increase through organic growth via on-boarding of sales partners and potential selective add-on acquisitions of profitable merchant portfolios.

This new acquiring business line will provide the Group with a higher profit margin as compared to the processing model. Under processing agreements, a fixed fee is charged per transaction related to processing services, while on the other hand, an acquiring model will allow the Group to charge a percentage of the transaction value rather than just a fixed fee, resulting is more favourable profit margins.

Technology and Products Update

The Group has been enhancing its BankWORKS® platform by adding additional capabilities and products in order to provide a variety of services to its clients and business partners. RS2 continues to add more Application Programming Interface (“APIs”) to allow easy and quick integration with the BankWORKS® platform, thereby successfully increasing its service offering and capabilities.

Having a newly developed reconciliation product will provide customers with a powerful, fully digitalised tool, which will enable customers to reconcile their business and eliminate any manual operations, thereby improving efficiency as well as profitability.

RS2 will be launching a new generation of its Merchant Portal in the coming months. This new generation portal will include more capabilities to enable the Group to provide merchants with access to their data, together with digitalising their chargeback, reporting and service management.

Meanwhile, RS2 has successfully improved the processing capacity of its platform to a level of 33 million clearing transactions per hour (or 31 billion transactions per year and 4,200 authorisations per second). This achievement will lower the requirement of infrastructure costs per transaction which will benefit the Group’s profit as the number of processed transactions continues to increase. Moreover, RS2’s security team continues to actively improve the security of network and infrastructure which is necessary in order to mitigate any cyber threats and ensure secure transactions for all clients.

Other Updates

Across Europe, technology companies and financial firms are divesting their workforce amid the prevailing global economic growth challenges. In contrast, RS2 continues with its drive to recruit new resources, including high profile professionals, in line with its ambitious growth strategy.

The Group’s increase in marketing expenses over prior years are reflective of the ongoing efforts and initiatives where RS2 is placing particular focus on widening the base of its US and European clients.

While the Group continues to grow, it is expecting lower revenue than that previously anticipated. Reasons for this, other than those directly correlated to the market instability, include: (i) a long-standing client deciding to take the development of its licensed software in-house; (ii) slower ramp up of business in the US ISO market; and (iii) delays in the full launch of RS2 Financial Services which will now take place in Q3 2022.

While revenue generated might be lower than that originally anticipated, results from operating activities are strong despite the unprecedented events that have been shaking financial markets and economies. Moreover, costs are being managed tightly and wisely, ensuring that funds spent improve all aspects of the business operations.

Overall, RS2 is now expecting to generate revenues of approximately €41 million for the 2022 financial year compared to the original forecast of €68.4 million. Furthermore, EBITDA is now anticipated to amount to €6.8 million (earlier projection of €11.1 million) whilst profit before tax has also been revised lower to €3.9 million compared to €7.6 million at the time of the issuance of the preference shares.

Despite the negative market developments and respective impact on the Group’s performance and profitability, RS2 noted that it continues to develop positively and will be in an excellent position to outperform the market once the health of the global economy recovers.