RS2 reports lower sales as banks postpone projects

RS2, the Malta-based payment software provider, has reported annual revenues falling 3% in 2022 to €38m. In common with many businesses selling to banks, the company says the Ukraine invasion and the general macro conditions have delayed contracted development projects.

RS2 competes with ACI, BCP, and others to supply banks and other financial institutions with software that processes acquirer and issuer card payments. RS2 is quoted on the Malta Stock market with a market capitalisation of €240m. It is controlled by its CEO, Radi Abd El Haj. Barclays Bank holds 17.5%, which it purchased in 2013 as part of a deal that saw the bank commit £8.5m to buying software from RS2.

Although RS2 has over 250 customers, management is conscious of the company’s reliance on two top clients that together generated 47% of total revenue in 2022. As a result, the company has diversified by founding a new business in Germany, selling payment acceptance products directly to merchants. RS2 is now a principal member of the card schemes and has become a licensed EMI.

This new direct acquiring business in Germany was launched in Q3 2022 and initially focused on migrating the 4,000 merchants inherited with the acquisition of Kalicom Zahlungssysteme, a Frankfurt-based NSP in 2020. Kalicom specializes in bakeries, butchers, and food stores. It supplies rental terminals, Girocard processing, and Vectron ECR systems. Persuading German bakeries to accept international cards is harder than it sounds, and RS2 will need to find other distribution channels. As a first step, it has launched a new brand called Beyond by RS2 (below), which sells a range of terminals starting at €9.90/month and an eCommerce gateway from €19/month.

Meanwhile, Bankworks, RS2’s flagship product, is migrating slowly from licensed software to a managed service. The logic behind this move was underlined when one large software client took development in-house, resulting in a €3m revenue loss in 2022, with a further €5m shortfall forecasted in 2024.

The loss of this customer saw sales from licensed software solutions falling 21% to €14.1m in 2022. This decline was only partially offset by an 11% increase in processing solutions revenue to €20.8m, boosted by managed service wins in Singapore, Malaysia, Mexico, Chile, and Peru. Sales at the new merchant solutions business in Germany grew 24% to €2.6m.

The same story was reflected in the geographical breakdown of sales, with revenue falling in RS2’s largest licensed software markets – down 9% in the US and 10% in the UK & Ireland – but growing 23% in other countries, including Germany.

In total, RS2 processed 1.25 billion transactions in 2022, which works out to 3 cents per transaction, but management says technical capacity is now over 25 billion. This gives plenty of room for growth.

Cost of sales rose by 18%, resulting in gross profits falling 30% to €11.8m. Personnel costs (partly included in cost of sales) were up 14% to €22.7m. The average cost of RS2’s 480 employees is €47K. Administrative expenses increased by 22% to €10.3m.

Despite a favourable €1.5m FX gain, operating income was down 72% to €1.8m. Operating margins fell from a very healthy 17% to a disappointing 5%. Looking ahead, management is optimistic for 2023, saying that the demand is coming back with several large strategic projects in the pipeline, as well as likely strong growth in Germany.