Goldmoney Inc. Q2 2018 Earnings Conference Call Transcript

November 14, 2018 11:00 AM ET

Executives

Roy Sebag – Chief Executive Officer and Director

Analysts

Nikhil Thadani – Mackie Research

Mark Kearns – GMP Securities

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Operator: Hello everyone. Welcome to the Goldmoney Second Quarter 2018 Conference call. Turning it over to CEO Roy Sebag.

Roy Sebag: Hello everyone. Good morning. Thanks for joining us for our second quarter 2018 fiscal results.

Just to start, I’ll go over some of the results in our press release reported this morning. This quarter saw consolidated revenue of 126.3 million dollars. An increase of 1.1 million dollars quarter over quarter. Group gross operating profit of 1.6 million dollars. An increase of about 400,000 dollars or 29% quarter over quarter. We saw client metal under custody grow in all four precious metals. Basic and diluted net loss per share of 0.1 cent, non-IFRS adjusted gain of about 40,000 dollars. Non-IFRS cash and tangible common equity exactly the same as last quarter. Cryptocurrency current position at quarter end of about 1.3 million dollars, primarily in the Bitcoin cash and our currency loan book has grown to around 14 million dollars of balance sheet capital expended against customer metal.

Moving on to some of the operational highlights: This quarter saw us launch the consolidated Goldmoney holding account with combined wealth and network features. We’ve integrated a very deep payment offering that includes 20 new global deposit methods including WeChat, Alipay, SEPA UnionPay, and 16 additional methods. We’ve completed the buildout and launch of our first brick-and-mortar branch in Toronto at 38 Avenue Road. We’ve initiated a New York Stock Exchange listing which I’ll discuss further in the call. We’ve completed our investment in Menē 24 karat jewelry subsidiary which has already launched in private beta and is now generating revenue, and we launched our BlockVault subsidiary and ColdBlocks custodial cold storage standard of cryptocurrency assets. We also completed a 30-million-dollar private placement in a subsequent period to the quarter end.

Going over some of our figures specifically, if we just look at sequential quarter over quarter results, we can see that in what was a pretty difficult quarter for most precious metal dealers, we saw revenue growth. This revenue growth is further exasperated if you adjust for the decline in the Canadian dollar gold price quarter over quarter. Fee revenue was about flat. The gross margin was down from about 1.3 million dollars last quarter from 958,000 dollars. This is attributed to that error that I’ve mentioned in the press release. I’m personally very disappointed in this error. What essentially happened was that, when we reduce our fees by 50% in June, we gave clear instructions to the trading desk in Jersey to adjust each corresponding feed from each counterparty which feeds into our Aurum system. Unfortunately, one of the feeds with one major counterparty was not adjusted so as a result, as we were accumulating spot transactions on Aurum in three precious metals; silver, palladium and platinum, we were essentially losing money each time Aurum would go and execute against the client view opposition. We caught this when we completed our financials and adjusted it.

So, the margin is normalized, because what should’ve happened was, the revenue growth if you break it down between Schiff Gold and the Holding actually went up this quarter. So, the margins have sort of actually gone up. By our estimation it should’ve been around 1.4, 1.5 million dollars at least. So, we’re very disappointed in that but we’ve resolved it. Again, I think the most important thing I guess I’d like to talk about just this quarter is, it’s clearly a transition quarter from the perspective that we have made a very big decision to enter the cryptocurrency space aggressively. But if you look at sort of how we were operating the business before we made that decision, I think the quarter was fair. We had client assets under custody growth. We kept our capital an all-time high position, but within our OpEx this quarter, it’s probably around 1.5, 1.3 million dollars of expenses related to Menē and the branch and other things that are not non-core OpEx.

So, all in all, before the cryptocurrency launch, I’d say it was a fair quarter, especially in light of the backdrop of the precious metal industry and some of the things that we’re seeing reported. Some of the competitors that we’re seeing even come to us and look to do deals. Then if you if you look at what we’ve done sort of post that announcement, then it’s even better. Because we’re now going to add an entirely new business line which will launch within days on the crypto buy/sale and that business line will allow us to generate significant additional margin. We’re going to be targeting about two and a half percent on the buy and two and a half percent on the sale on cryptocurrency.

So, if you take a step back and look at where our business could be in 6 to 12 months, we’ve got the core Goldmoney business, which is a low margin business but where we have a lot of assets under custody, recurring revenue, recurring free cash flow. We have the jewelry business which is a little higher margin which can be very interesting in terms of what it does to the bottom line for Goldmoney both as an equity investor and as the primary provider of precious metals. Then we’ve got the cryptocurrencies which will generate significant additional margin. With that, I think I’ll turn it over to Q&A and we do have Josh Crumb on the line as well. So, if you have any questions, we will both be answering.

 

Nikhil: Hey, guys this Nik from Mackie Research I’m not sure if you’re calling for questions or if you’re lined up already.

 

Roy:  No, you can go for it.

 

Nikhil: Okay, thanks, Roy. So, I just wanted to go back to the gross margin question and maybe discuss steps that have been taken to correct the issue that happened in Q2.

 

Roy:  Yeah, so I think when we give a directive to an employee and they don’t follow it and it’s almost impossible to know until the financial results are analyzed. But once we saw what was wrong and fixed the feed, we no longer had this issue. So, the feed has now been fixed and at this point, we’re generating the same margins we were generating before accounting for the reduction of the fee. But like I said, we’ve seen an increase in velocity and we’ve also seen all that network volume that used to be our network now transitioning to the holding. So hopefully that answers your question.

 

Nikhil: Yes. Thanks. Moving on to the crypto rollout. It sounds like the ability to buy and sell Bitcoin is perhaps the first feature that’s on your roadmap which we should perhaps expect in a few days. Any more colour that you can provide beyond that in terms of what the roadmap might include and what some of these milestones might be in late ’17 and early ’18?

 

Roy: Yes. So, I think if you look at our conference call last time when you asked this question, we’re confident about how we felt that the whole industry was in a bubble and it was going to pop and we were sort of happy about making money on our crypto position, but didn’t really believe in it. I think what’s happened since then probably about seven months ago, six months ago, is that we’ve learned to become a little bit humbler about what we’re seeing with cryptocurrency. We’re respecting it a lot more. We’ve made a lot of money. We could’ve made even more and I think that when we look at sort of what’s happening in that industry of digital markets, we think we’re seeing a lot of folly and we’re seeing a lot of misallocation of capital, and we believe we can do a better job and we believe that all the infrastructure and all the experience that we’ve gained in building this vaulted precious metal system, especially with the ColdBlocks innovation can be used to build a world-class cryptocurrency custodian that appeals to high net worth investors and institutional investors alike. So, the answer is that there’s been a very important psychological shift. Because our view is that we have a low margin business where the primary value proposition is the assurances of integrity that we give our clients, so we shouldn’t be running massive operating losses to grow if you focus on generating free cash flow and growing from there.

We never wanted to enter crypto. Now we’re saying okay, we actually want to enter crypto and we want to aggressively compete. And guess what? It’s a really high margin business. Two and a half per cent bid and offer spread. For us, that’s a crazy business. So, we want to compete and we have a lot of capital. So, we’re going to hire engineers. We’re going to hire customer service reps. And it’s so compatible with what we’ve already built. Just like you walk into our branch and you learn about Goldmoney and you’re buying decentralized precious metals, well, now you can buy decentralized cryptocurrency.

So, we’re still cautious about what’s going to happen with this industry, but the one thing that I sort of can’t refute that’s been positive to me by Josh and I think Josh is offline now because he’s in Dubai at the Economist Conference. But he said to me, show me one bubble that was this big that ever went to zero. I think that’s an important observation. You can really sit there and just think that whole thing’s a bubble or you can recognize that, even if the bubble pops, it’s still going to be some sort of an asset class. So, if we can move the industry in the right direction and if we can be the most regulated and transparent custodian of cryptocurrency, that’s where we want to go. So, you’ll see us focus more on that and I think it’s very complimentary with our kind of long-term strategy building our branches and marketing and continuing to build the brand.

 

Nikhil: Great. I just have a couple more quick questions here. So, on the Bitcoin cash position, has that been liquidated or not? Because by my math, it sounds like there is a two and a half million dollar gain just based on the price of that cryptocurrency.

 

Roy: Yes. Just from that last conference call, you’re correct. There’s a very nice gain this quarter from Bitcoin Cash. We still have a little bit, but we still have most of it and I think we have one of the top positions right now in Bitcoin Cash in the world in terms of the top 1,000 wallet. So, I’m very excited about that and hopefully, that will continue to add value to our company.

 

Nikhil: Got it. Then how should we think about the OpEx and CapEx profile going forward? You previously said that in this quarter there were about a million and a half dollars related to cost pertaining to the branches in Menē. So how do we think about that in calendar ’18 and what are the normalized expenses run rate for this business?

 

Roy:  I continue to believe that the normalized expenses for this business before we entered crypto was around 250,000 dollars a month. So, 750 grand a quarter. I know it’s difficult to believe that when you look at our financial statements, but I really believe that. I stand behind that number and I’ve worked on this with our CFO before and with our director of finance and we see the numbers. We see what we spend on. The other thing is, we see the chronology of how we make money. We charge 1.8 billion dollars of assets in storage at the beginning of every month. So, we get that money first – that 500,000 dollars, 200,000 dollars a month – and then we decide how we want to spend it.

The trading revenue we earn first. So, when you look at a stale financial statement, you sort of…you can’t determine the chronology – what’s happening first. You’re earning revenue first then you’re spending it. So, I genuinely believe that’s our OpEx and so anything above that is cash flow margin. Going forward, I think that the good thing is there are no more Menē investments. So that’s going to be severed from the balance sheets shortly. You won’t see any of that OpEx running. On crypto, we’re looking to spend a lot of money.

So how we allocate that and delineate that, we will be very transparent and we’ll disclose it. But I think you can expect us to probably run IFRS losses in the next few quarters as we’re going to ramp this up because again, there’s a reason to. There’s a really good business model so long as the volatility of crypto is as high as it is. We can charge two and a half percent, two percent and that’s considered still a great service because we’re offering people the safest place to store their crypto.

 

Nikhil: Any changes to the CapEx profile guidance that you’ve given in the past?

 

Roy:  No, there are no changes to that.

 

Nikhil: Just lastly, any sort of timelines for the NYSE listing? Thanks, Roy.

 

Roy: Thank you. We believe that the NYSE listing would happen very soon within eight weeks. We’ve been working on it for a while. We haven’t disclosed it until now, but we’ve been working on it for a while and there’s a clear timetable for it. We’ve met with the NYSE. Everything is ready to go. So, I think it’s going to be a pretty quick process. Again, we’ve made that decision. We’re not looking to over hype it. But it’s an important decision and we’re very excited for that as well. Any other questions?

 

Mark: Hey Roy. It’s Mark Kerns from GNP. Maybe just you can talk a little bit about M&A opportunities. I think you touched on it in your prepared remarks what you’re seeing out there and possibilities to use the balance sheet.

 

Roy: Yeah, there are a lot of M&A opportunities and it’s a very fertile…it’s fertile ground right now because the industry is going through this secular headwind and even the largest company in the industry is being sold right now – ScotiaMocatta – and then you’ve got other companies that have literally billions of dollars in revenue that are looking to sale. So, because we have a background of capital allocators, if you look at everything in terms of internal rate of return and return on equity capital and that’s going to continue to guide us.

But I can tell you that a lot of people don’t believe in the gold industry today, especially when it comes to things like coins and just direct to consumer precious metal sales. If one were to take a contrarian view that, that infrastructure and supply chain is valuable, one could probably consolidate the industry very nicely. Now I don’t know if that’s the right play for us. I don’t know yet. But I know that sort of sitting there and waiting for those fast pitches and they’re coming. We’re very close to seeing some of them I think.

 

Mark: Okay, thanks for that. Second question would just be on maybe if you could comment a little on the lending product uptake and also possibly the funding side and what size you need to get to before that shifts maybe and you bring in some liquidity as well and not just fund on your own balance sheet.

 

Roy:  Yeah, so that’s been a really good business for us. I’m sure you saw there was good interest margin reported this quarter as well. Some of that was not entirely from the loan book. But we could probably deploy about 15 million more in loans. I think we’re doing one for 6 million dollars now this week and the loan book will be at around 20 million. It’s really, really good margin. It’s really good business because it’s not just the net interest margin we generate, but it’s also the fact that the client is being serviced and the assets under custody state within the company. In some cases, they might even buy more metal. So, we love that business and I think again, we’re not even as aggressive as we can be.

On the second part of your question, we have the infrastructure today to syndicate these test metal loans through LBT. The company we invested in which is STA regulated. So, whenever we desire more liquidity which again, we’re nowhere near now over 90 million dollars of tangible capital. Probably 92 or something right now. We don’t really have a need to syndicate yet, but when we do, what you’re going to see us do initially is just get people into the LBT platform with cash and provide peer-to-peer. The other thing we’re working on actually is to allow the Goldmoney clients with cash balance to lend into these syndicated pools. So, true peer-to-peer lending. There’s like 65 million dollars of customer cash that is held segregated from our own balance sheet cash. I think you’ll see us offer that to our clients as an additional feature.

 

Mark: Okay, interesting. Then last one if I can sneak it in here. Just maybe an update on where you’re at with Menē. I think the soft launch and just what you’re seeing there with early traction.

 

Roy:  Yeah, so Menē is going really well. It’s going much better than I even imagined. We launched as an invitation-only service two weeks ago. We’ve already seen people find their way in and buy products. We are really behind on manufacturing with Menē. So, we only have bands right now, gold and platinum bands on the website, and we’ve already sold these bands to people in Argentina, Germany, Canada, Australia, and the U.K. This is a really good business. It’s a business where the gross margin is between 15 and 20%. We own our manufacturing operation, so we control our costs. Sort of on the branding and fashion side, we’ve seen really incredible reception from the leading fashion names and people in the industry.

So, we have a firm called Karla Otto which is a legendary fashion consultancy which has agreed to take us on as a client and is doing our branding and our messaging. Most recently we’ve had a very famous top five supermodel join…express her desire to join the team which will be announced soon. So, what’s interesting about Menē is that, I’m building it along with my business partner Diana Picasso in a way that it could be sold as a high margin luxury good, but then it’s really like a very disruptive concept. It’s investment jewelry that has never been…what we’re doing with Menē has never been done before in the west and it’s never been done before in the east so transparently.

So, you’re buying 24-karat gold or platinum jewelry at the weight, closed weight plus a small design premium. Once you buy it, you can sell the jewelry whenever you want. You can sell it back to us. We have a real state-of-the-art facility in New Jersey in a joint venture with Brink’s. It’s vaulted. We do all of our picking and packing and shipping there. Like I said, we have our own manufacturing operation. So, a lot of thought has been put into Menē over the last two years and I’m really proud of it and I think that now it’s really just a function of Menē investing significant capital in marketing and branding and growing revenue.

Goldmoney’s investment I think is going to pay off in many ways than one. The first way is through the equity ownership that Goldmoney has in Menē which I think is going to be worth a lot more than what Goldmoney paid. The second is that every time Menē sells an item, Goldmoney generates half a percent of revenue. Sorry. Half a percent of gross margin but also a dollar of revenue. Because Menē has to purchase the metal from Goldmoney. So, there are basically three levers where Menē adds value to Goldmoney. I think it also shows that this management team – whether it’s BlockVault that Josh is building out, or Menē that I’ve built out with Diana, or LBT – is really entrepreneurial and passionate, and we’re really gritty.

We know how to use a small amount of capital to create a lot of value and I think that…I don’t think I’m ever going to have an idea like Menē again. I think that was sort of a columniation of all of my kind of journey of learning about gold and jewelry, and the industry. But I do think that we have shown to be opportunistic and entrepreneurial and we know how to create value for shareholders. I think a great way to summarize Menē is that it’s an asymmetric lever for the company. Very minimal investment. If it works out the way I think, it’s going to be worth probably as much as Goldmoney if not more. If it doesn’t, I think it’s going to still sell 30, 40, 50 million dollars a year of jewelry and generate 5 or 6 million dollars of EBIT. So, I think that’s sort of where we are with EBIT.

 

Mark: Okay, thanks for that Roy. I appreciate it. I’ll let anyone else jump in. Thanks.

 

Roy:  Are there any other questions? If not, we’ve received some questions via email, which I will read out and then subsequently answer. First question came from an individual shareholder and he asked, could you share a bit about your current and future forecast of new Goldmoney clients funding their Holding with cryptocurrency. So, we allow clients to fund their holding with cryptocurrency today. For AML – anti-money laundering – purposes we don’t allow clients to hold the cryptocurrency they send in. It has to be liquidated into cash. We use a processor to do that. So that way only bank system flow of funds cash is coming into our system. So, you can deposit crypto, but you have to sell it. It’s a taxable event. We’re not dealing with deferring of taxes and things like that.

Then once you have the cash, you can purchase or sell all of these cryptos we’re going to be offering. But you can’t transfer them out. So, this is another example of how we take an approach with cryptocurrency where some cryptocurrency community members might say that’s not good – you don’t let people spend out your crypto – but from our perspective, the primary motivation is security and safety. This is a very way to create an offline airgap. So, we know that no crypto ever leaves and that way it makes hacking very difficult. So, you can buy and sell the crypto and transfer it out. I think there’s another question here. The early market feedback on BlockVault and the specs needed to bring that product to market. I think that Josh is doing some incredible work on BlockVault. We’re setting everything up in Switzerland where Glencore is based and a lot of the large commodity traders. There’s a big cryptocurrency community there.

We see the opportunity. There’s a very, very big opportunity to create an institutional custodian for cryptocurrencies that is qualified under FCC law and also provides the assurance of integrity we’re already used to doing. So just like with Menē and these other businesses we’ve incubated, you’re going to see BlockVault being built up over the next few quarters. It’s 100% owned by Goldmoney right now, so there isn’t any other arrangement at this point. But we believe we’re going to need to invest a lot of capital in BlockVault and build it up, and we think the opportunity is tremendous. I think with that, I’m going to end the call. Thank you, everyone, for your continued support and confidence in our management team and for your share ownership in this company, and I look forward to delivering a solid third quarter in 2018 with all of these exciting things that we’re working on.                     

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