During 2014, RS2 generated revenue of €15.24 million (+7.9 per cent) and EBITDA of €6.13 (+7.0 per cent) but pre-tax profits dropped by 1.5 per cent to €4.19 million largely due to the incidence of higher finance costs. This may seem surprising given the decline in borrowings during the year.

At a meeting for financial analysts last week, chief financial officer Fiona Ciappara Cascun explained that the increase in finance costs relates to the discounting to present value of long-term receivables, namely licences that are booked but not yet invoiced. She noted that these will be reversed once payment takes place in the years ahead.

Another factor that negatively impacted the 2014 financial performance was the increase in other expenses to €0.99 million from only €0.1 million in 2013. The CFO revealed that this relates to an impairment provision on one of its receivables and although the entire licence was booked upon signing some years back, the scope of work may be reduced due to strategic changes at client level which may lead to lower income.

On the other hand, RS2 benefited from the weakness of the euro against the US dollar and sterling. In 2014, other income surged to €0.73 million (2013: €0.01 million), reflecting realised and unrealised gains on exchange rate movements since income received from two of its major clients is denominated in US dollars and sterling.

RS2’s CFO also gave a detailed account of the changes in revenue streams over the past three years. Overall revenue grew by 7.9 per cent following a surge in service fee income by 84 per cent to almost €8 million, largely due to implementation and consultancy services provided to the two new major clients.

CEO Radi El Haj confirmed that RS2 expanded its service offering over recent years which should help this line of business to grow further in 2015 and future years, especially due to the global reach of Barclays and the global processing company signed up last year. The surge in service fee income helped offset the 46 per cent drop in income from licence fees. Ms Ciappara Cascun explained the different accounting treatments adopted for perpetual licences as opposed to term licences which would need to be renewed upon expiry. Perpetual licences –the core business of RS2 in the past – are recognised immediately upon confirmation and the licence signed with OK-Q8 in February 2014 was fully recognised in the first half of last year.

The drop in licence fees compared to 2013 was due to the recognition of €5.5 million in 2013 related to the agreement with Barclays for the Bank Works software which was not repeated in 2014. The CFO also added that although this licence agreement was a perpetual one, the balance will only be recognised upon other milestones being achieved in the future.

Mr El Haj confirmed that the timing of the recognition of the balance of circa €4.5 million was not yet known, although discussions take place regularly with Barclays on the possible implementation of Bank Works in other geographical regions.

The company may resort to debt funding in the future to accelerate growth by conducting an acquisition

Moreover, the CFO clarified that the licence agreement of €12 million signed last year with one of the largest global payment processing companies is a term licence and, as such, the 2014 financial statements only reflect circa €2.2 million of this. Similar amounts will be booked in the next four years with an additional amount in the final year should the client opt to convert the licence to perpetual use.

In November 2014, RS2 announced it was negotiating a new licence deal with a client in Europe, to be concluded during the first quarter of 2015. During last week’s meeting, the CEO did not provide details on either the size of this agreement or the timing, but he expressed confidence that this will be among the company’s achievements during 2015.

The revenue breakdown also reveals that processing fee income via the fully-owned subsidiary RS2 Smart Processing Ltd increased by 26 per cent to over €1 million and this should continue to grow in 2015 and beyond following the addition of new clients in 2014 which will start contributing to the performance in 2015. Furthermore, the directors also reported last week that the pipeline is very healthy and further contracts are being negotiated.

Despite the slight decline in profits, shareholders may be surprised that the final net dividend of €0.044 per share being recommended for approval at the upcoming annual general meeting on June 9 is double that of the previous year.

This is probably due to the very healthy cash balance of €4.5 million as at December 31, 2014, as well as the low leverage of the company with borrowings of only €3.4 million compared to an equity base of just under €23 million.

The CEO touched upon this point and mentioned that the company may resort to debt funding in the future to accelerate growth through an acquisition. Mr El Haj confirmed that this scenario was catered for in the company’s three-year business plan. While no concrete developments may take place in the months ahead, the CEO reiterated that the strategic focus was to immediately expand in the US and Asia by setting up regional offices to win more business and support, both existing as well as new clients. Mr El Haj singled out the huge potential in Asia since many banks require new card management software in view of upcoming new regulation in the region.

Chairman Mario Schembri revealed that during 2014 RS2 increased its equity stake in the US company Transworks from 25 per cent to 64 per cent for a cost of $0.5 million. This subsidiary will be used to expand in the US. The remaining 36 per cent is held by ITM Holding, the majority shareholder of RS2 which is owned by the CEO and his wife. Mr Schembri explained that the imminent expansion in the US and Asia will be financed from internal cash flow and no additional debt funding would be required.

RS2’s CEO concluded by mentioning that in the coming years the company would regularly guide the market on earnings expectations. However, he believes that currently the timing is not ideal since other changes need to take place.

In the interim, the company needs to keep the market regularly informed of its business pipeline and new client additions, and guide the market on the timing of the revenue recognition to assess the impact on the immediate financial performance.

Rizzo, Farrugia & Co. (Stockbrokers) Ltd (RFC) is a member of the Malta Stock Exchange and licensed by the Malta Financial Services Authority. This report has been prepared in accordance with legal requirements. It has not been disclosed to the company/s herein mentioned before its publication. It is based on public information only and is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The author and other relevant persons may not trade in the securities to which this report relates (other than executing unsolicited client orders) until such time as the recipients of this report have had a reasonable opportunity to act thereon. RFC, its directors, the author of this report, other employees or RFC on behalf of its clients, have holdings in the securities herein mentioned and may at any time make purchases and/or sales in them as principal or agent, and may also have other business relationships with the company/s. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen. Past performance is not necessarily indicative of future results. Neither RFC, nor any of its directors or employees accept any liability for any loss or damage arising out of the use of all or any part thereof and no representation or warranty is provided in respect of the reliability of the information contained in this report.

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Edward Rizzo is a director at Rizzo, Farrugia & Co. (Stockbrokers) Ltd.