Analysing RS2’s strategy for venture into US market

Source: Times of Malta

Date: 28.06.2018

RS2 Software plc held its annual general meeting last week for the tenth time and apart from speeches from chairman Mario Schembri and CEO Radi El Haj, another two speakers addressed shareholders, namely Daniela Mielke and Raša Karapandža.

Both the chairman and the CEO explained that following the successful change in the business model from one which primarily focused on the sale of licences to managed services, where the processing of transactions generates a recurring level of income, the next step for RS2 is to speed up the company’s expansion strategy in selected markets since there is a demand for the company’s BankWorks product and transaction processing services.

The senior executives informed shareholders that the company’s board of directors have agreed on an investment programme to recruit a number of internationally recognised industry specialists mainly in the areas of sales and business development in order to expedite the entry into selected geographic regions.

The highlight of last week’s AGM was undoubtedly the intervention by Ms Mielke regarding the company’s plans for achieving a successful breakthrough in the North American market.

RS2 had been earmarking penetration into the US market for several years following the company’s acquisition of a 26 per cent stake in Transworks LLC in 2009 and the purchaseof an additional 38.2 per cent shareholding in 2014. Transworks was then renamed RS2 Software LLC and on February 16, 2018, a new company called RS2 Software Inc was formed in the US and was subsequently merged with RS2 Software LLC on 28 March 2018.

Ms Mielke was just recently appointed as CEO of RS2’s subsidiary in the US – RS2 Software Inc. This was announced via the Malta Stock Exchange last February 28 and few shareholders may appreciate the vast experience in the field and the significance that a person of this high calibre agreed to join RS2.

Ms Mielke was previously chief strategy and product officer at Vantiv (now WorldPay) which is the largest US merchant acquirer and also a client of RS2. Moreover, in the past, she held senior positions with PayPal and Visa Inc. Ms Mielke explained to the shareholders that her work in the past involved the repositioning of companies and developing innovation initiatives.

In her address to all shareholders in last week’s AGM, Ms Mielke touched upon three vital aspects regarding RS2’s strategy for the US market.

Firstly, she claimed that the North American market is by far the largest payment market in the world with the value of transactions already exceeding $600 billion annually, which is growing at a significant pace.

Secondly, she explained that despite the sheer size of the US market, there were only a handful of new entrants similar to RS2 who penetrated the market in recent years and created tremendous value for their shareholders. Ms Mielke mentioned PayPal, Stripe and Adyen compared to the traditional players such as FirstData and WorldPay – the latter two incidentally are both existing clients of RS2. Many shareholders of RS2 may not be familiar with the names of most of the new entrants.

However, it is possibly worth highlighting that Adyen made international business headlines recently following its successful Initial Public Offering in the Netherlands, to which its share price more than doubled on the first day of trading, reaching a market capitalisation of over €12 billion.

Ms Mielke then explained the plans for what she described as “RS2’s very distinctive entry strategy” for the US market. The strategy will revolve around providing outsourcing and the acquisition of services to Independent Sales Organisations (ISO’s), banks and merchants. MS Mielke also explained that RS2 will not only be working with existing distribution channels that traditional players (such as FirstData and WorldPay) are using to compete with new entrants but they are also in the process of developing partnerships with leading financial players in the US market.

Industry veterans also recognise the potential of RS2’s ability to penetrate the US market

Ms Mielke was visibly excited at the prospect of managing to penetrate the North American markets (the United States and Canada) with RS2’s platform and expressed her optimism that “this will be a very exciting story for shareholders”.

This is possibly as a result of RS2’s BankWorks platform which she described as being “very unique” with a high degree of flexibility allowing the company to address different value propositions since it can be easily configured to meet various customer needs. Ms Mielke labelled RS2’s platform as a “very distinctive product” and she opined that its unique characteristics fit in well with the current trends in the payments industry.

Although RS2 is naturally a minnow compared to the other more established new entrants such as Stripe and Adyen, Ms Mielke also explained that there is no other platform available with the features and functionalities of RS2’s product.

In order to better address the needs of the US market, other software modules within BankWorks are currently being implemented and RS2 is also in the process of obtaining certification from VISA and Mastercard before going live with the first client in the US.

The 2017 annual report states that RS2 Software Inc is in “implementation mode for the provision of managed services for its first client in the US and in the process of securing further business”.

Ms Mielke confirmed this at last week’s AGM and indicated that the first client will start processing transactions in a limited capacity as from August 2018.

A new board of directors for RS2’s subsidiary in the US market is currently being composed and Ms Mielke hinted that some highly influential persons in the industry are in the process of joining the board which also reinforces the belief that these industry veterans also recognise the potential of RS2’s ability to penetrate the US market.

The appointment of Ms Mielke comes after another two other high-profile additions to RS2’s board and senior management team in recent years.

In August 2015, John Elkins was appointed as non-executive director of RS2 Software plc following a highly successful career with First Data (a global leader in electronic payments with operations in 35 countries) as well as with Visa Inc. In addition to this, in May 2017, Patrick Clarke was appointed as the chief technical officer after an esteemed career as CEO and co-founder of a global acquirer processing company, which today is considered as a market leader in payment and processing solutions.

These three important additions to the team at RS2 which will include several other industry specialists in the months ahead, encapsulate the company’s vision to accelerate its plans for regional expansion. Incidentally, the 2017 Annual Report discloses that over a period of three years, Ms Mielke will be allocated a shareholding in the US subsidiary, which will dilute the company’s stake from 64.2 per cent to 57.07 per cent. This is an admirable initiative which could motivate Ms Mielke to strive even harder to ensure that RS2 succeeds in winning new business in the US.

While the high level of conviction evident during the interventions at last week’s meeting, on the potential of a successful entry into the North American market may not translate into an immediate positive impact on the company’s financial performance, RS2 has taken a bold move to drive its expansion strategy in selected markets which may hopefully create added shareholder value in future years.

Meanwhile, RS2  must now dedicate additional resources  in communicating more regularly and effectively with its stakeholders, along with the progress being achieved in winning new managed services and how this will translate into an improved financial performance.

Rizzo, Farrugia & Co. (Stockbrokers) Ltd (Rizzo Farrugia) 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. Rizzo Farrugia, its directors, the author of this report, other employees or Rizzo Farrugia 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 Rizzo Farrugia, 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.