The NAGA Group — Broadening portfolio stimulates profitability

NAGA’s FY17 annual report (not yet approved by the auditor) is the first one covering the period from 1 January to 31 December, with the comparative period presented in the report as the six months from 1 July to 31 December 2016 (ie H216). Group revenues reached €12.8m (vs €2.0m in H216), of which €6.5m was related to the brokerage business (€2.0m in H216), assisted by the growing customer base and higher trading volumes. After accounting for commission expenses of €3.4m (which do not yet reflect the recent acquisition of Hanseatic Brokerhouse Securities), this translates into net commission income of c €3.1m (€1.3m in H216). The remaining revenues of €6.3m represent income from commissions (€4.36m), advisory services and trademark rights (€1.96m) received from Naga Development Association (NDA) in conjunction with the NAGA token sale, which should be considered as one-off events.

Earnings from activated programming services amounted to €1.3m and in particular reflected development costs of SwipeStox (NAGA Trader) and to a lesser extent (€0.3m) investments in SWITEX. Overall programming expenses stood at €2.0m in FY17 (mainly attributable to SwipeStox). Other operating income amounted to €3.5m and included predominantly one-off income from the transfer of expenses to Naga Development Association in conjunction with the NAGA token sale. The corresponding one-time expenses were recognised in the marketing and advertising (€1.5m) as well as other operating expense (€1.7m) lines, with a 5% margin applied to the former. Earnings were also influenced by the legal and advisory costs associated with the IPO (€0.5m).

As a result of the above, the company recorded positive EBITDA of €2.9m, compared with negative €1.4m in H216. Amortisation stood at €4.8m and was twice as high as in H216, thus remaining at comparable levels on an annualised basis, and was largely attributable to Swipy Technology (€4.0m). Consequently, the company reported a negative pre-tax profit and a net loss of €2.2m.

NAGA recorded positive cash flow before taking into account changes in working capital (which was affected by the increase in receivables from Naga Development Association related to the ICO), in line with the positive EBITDA developments. Operating cash flow after working capital changes was a negative €4.2m. Investment cash outflows were -€1.6m. Offsetting these were positive cash flows from financing activity of €9.9m including €2.5m IPO proceeds (completed in July 2017). As a result, the net cash balance at end-2017 improved to €8.7m.

The NAGA Group posted a solid start to the year. It recorded its best results to date in the first two months of 2018 with positive EBITDA from the core business activity. The social trading app NAGA Trader (previously SwipeStox) remains the key revenue growth driver. The number of live trading accounts in NAGA Trader more than quadrupled, resulting in a trading volume upswing of 42%. The average monthly trading volume exceeded €5bn (vs an aggregate €42bn in FY17) and translated into total revenues of around €2.7m in the period. This trend needs to be monitored in the forthcoming months as it could have been a positive effect of high market volatility, which usually results in higher trade volume in the CFD market. An additional driver for NAGA Trader may come from the recent acquisition of a 25% stake in easyfolio GmbH, which adds ETF products to the platform. Moreover, the recently introduced NAGA Wallet has already recorded over 100k registrations in the first two months after launch. The app brings all of NAGA’s products and services together and is available across the globe. The same global marketing strategy has been applied to NAGA Markets (online broker), which is now available in 180 countries. The next app in NAGA’s portfolio will be NAGA Academy (Q318), a tool designed to provide education on financial market concepts, which may help users benefit from the NAGA Ecosystem.

In Q417 the company conducted an ICO of NAGA Coin (NGC), which will be the main currency of NAGA’s ecosystem. It raised US$50m from 63,000 investors, exceeding the initial goal of US$30m. Although it was lower than the total number of available tokens (US$220m), it still ranks in the top 5% of all ICOs completed in 2017 and the second largest of those conducted by financial entities (source: coinschedule.com). NGC differs from most of the other cryptocurrencies, not only because it has been released by a publicly traded company, but also because it has a capped supply, given that the coin is not minable and that unsold tokens have been burned. Importantly, having an independent management board and the participation of FOSUN, a foreign institutional fund, should have a positive impact on the transparency and credibility of NGC.

The proceeds collected by NDA will be used mainly for marketing, NAGA Ecosystem growth and tech development projects. The ICO was completed on 15 December 2017 and the NAGA Coin was listed on the HitBTC exchange on 22 December 2017. It is now listed on nine crypto exchanges. On 29 March 2018, NGC was introduced to NAGA Trader as its base currency and funding method. It is supported by NAGA Wallet, a fully automated tool acting as a digital wallet and simple exchange for cryptocurrencies, which went live on 15 March this year.

NAGA Virtual (previously SWITEX, NAGA’s subsidiary) recently announced the launch of a co-operation with Asobimo Inc, one of the leading providers of online games for smartphones in Japan, which will result in a Japan-based joint venture. The Japanese gaming market is the third largest in the world with more than US$12.4bn in total revenues, 52% of which were generated by mobile games. The company is yet to benefit from the agreement, as the integration of the first game (Petit Chronicles) has just been completed. NAGA Virtual expected the first live virtual goods transaction to take place in Q118, but the official go-live took place on 26 April 2018.

Furthermore, NAGA has announced a strategic partnership with MyBucks, a digital banking group providing financial services in high-growth emerging markets. Both companies are targeting significant share of the remittance market in sub-Saharan Africa, which amounts to US$34bn annually. MyBucks will implement NAGA Wallet into its client interface for over 1.5 million customers, who will gain fast and affordable access to crypto assets based on real-time transactions and lowered transaction fees. These features will also be available for money transfers. MyBucks will be the exclusive business partner for NAGA Wallet in these countries.

Finally, on 3 May 2018, NAGA and Ontology announced a long-term strategic co-operation aimed at building and developing a new generation of public blockchain infrastructure. Ontology is a high-performance public blockchain project with the ability to customise different blockchains for different applications. NAGA, on the other hand, runs a fintech ecosystem based on the same technology. As Ontology’s main focus is on trust, identity, data exchange and authorisation, it is a good fit, extending its reach into the European markets where NAGA operates and opening Chinese and global opportunities for NAGA if it migrates its ecosystem to the Ontology network.

Since November 2017, NAGA’s share price has been on a downward trend. After almost quadrupling in value in the first four months after the July 2017 IPO, it has reverted to almost the IPO level.

Given NAGA’s short-term operating history and blockchain focus, blockchain companies such as Digital X may be suitable comparators in the near term. These companies are still young, small in scale and are often listed on exchanges with lighter regulatory burdens (such as OTC markets in the US). Fintech companies still in the ramp-up phase may also be appropriate comparators.