Wirecard AG: Some Lessons Are Learned – Yet There Is Room For Further Improvement – Wirecard AG (OTCMKTS:WCAGY)


Wirecard AG (OTCPK:WRCDF;OTCPK:WCAGY) has recently published its annual report for the FY 2018. The publication had been delayed due to the duration of an investigation into the potential irregularities in connection with the company’s Asian operations in Singapore. After surviving the scandal in better shape than many (including myself) believed to be likely, the company must now prove that it learnt from its mistakes and is able to improve in order to prevent something similar from occurring in the future. The performance of the stock seems to send positive signals. Despite the end of the BaFin ban on short selling it is relatively robust and could recover further ground.

Convincing Growth Numbers

The growth of the company was rapid in both revenue (€2,016.2 million; +35.4 percent) and profitability (EBITDA of €560.5 million; +36.6 percent). The same was true for the processed transaction volume (€124.9 billion; +37.3 percent). Free cash flow even increased by 50 percent to €423.9 million. Then again such numbers had been expected. In order to fully convince investors, factors besides the raw numbers are as important in the case of Wirecard.

SoftBank Investment

One large investor who seems convinced of Wirecard’s potential is SoftBank Group Corp. (OTCPK:SFTBF;OTCPK:SFTBY). The Japanese network operator turned technology conglomerate (for lack of a better description) recently announced it is investing $1 billion in the company. This is not only a sign of confidence but also offers a huge chance at additional growth and profit for Wirecard (I previously wrote about that in more detail).

Improvements in Communication and Compliance?

But is the new strategic investor the sole positive news for the company? Or have there been improvements apart from the SoftBank partnership? As I have written previously, improvements regarding communication will be of crucial importance for Wirecard. So what has improved in that regard? Of foremost interest is of course whether and how the problems that have been highlighted by the independent investigation are addressed in Wirecard’s annual report and the corresponding presentation.

First of all, there is no mention of the matter in the investor presentation whatsoever. However, Wirecard addresses the matter in the annual report.

According to the report, Wirecard has already begun to implement compliance improvements recommended by Rajah & Tann,

In conjunction with its investigations, the law firm Rajah &Tann has already formulated initial recommendations, some of which the Company has already put into practice, such as e.g. stepping up internal controls with greater involvement of the group head office, and introducing more extensive training for members of staff. In addition, Wirecard has also defined further measures in consultation with the Supervisory Board, which are being implemented along with Rajah & Tann’s recommendations as part of the continuous improvements that are made to Wirecard’s Compliance Management System.

-Wirecard AG annual report

For my personal taste, Wirecard could have been more specific and put more emphasize on what exactly has been improved. However, I do understand that the available time frame was rather short, especially given that the presentation of the annual report had already been delayed. So while the company did not provide all the information that I would have liked to see, it seems to at least be addressing the matter.

Accounting Transparency

Unfortunately, with regard to the accounting itself, I cannot really see much change compared with previous years (which notably does not necessarily mean that there are no improvements). Again, one should keep in mind the time constraints. Nonetheless, I will continue to have a closer look here in upcoming reports from the company. As I have written before, this is one of the key areas in which visible improvements would be important to strengthen investor confidence.

EY Clearance

Auditor Ernst & Young (“EY”) has signed off Wirecard’s 2018 report. Thus it can be assumed that apart from the accounting irregularities that have already been published in the conclusion of Rajah & Tann’s findings – which have already been corrected – there are no further irregularities. The auditors also confirmed that there are no signs of round tripping or corruption on a corporate level. I can see no reason to doubt the auditors or their diligence in this case. After all, they would have their reputation on the line and are certainly aware that given the recent history of Wirecard there will be an extra amount of scrutiny into their work here.

Notably, EY will be replaced as Wirecard’s auditor in the coming reporting period (a rotation required by German law) which further increases the credibility of its statement.

Website Overhaul

Wirecard has also recently changed the design of its web presence. This could very well be nothing more than purely a coincidence. However, I personally think that the new design is easier to navigate and creates a greater sense of transparency. While this might be seen as of little importance (which it probably is), I still mention it as a company web presence is a part of that company’s appearance and therefore the change could (and I am not saying that necessarily is the case) be a – if admittedly minimal – sign of improvements in corporate culture.

Imminent Change To The Supervisory Board

The chairman of Wirecard’s supervisory board, Wulf Matthias, will not be available for a new term after its current term expires in 2020. It will be interesting to see who will succeed him. In my opinion, this offers the unique chance to install a person with a background in compliance management in order to further strengthen that field. Notably, Wirecard’s supervisory board is smaller in size than that of other DAX members (although to be fair it must be pointed out that unlike other companies Wirecard is not required to have employee representatives on its board). It is also considered less “high profile” than the boards of other companies, as it consists primarily of entrepreneurs and consultants rather than current or former senior executives of large corporations. I do only share these concerns in so far as I would like to see someone with a legal or compliance background on the board. However, I do not necessarily believe that a (former) senior executive at a large public company is automatically a better board member than an entrepreneur.

Conclusion

All in all, I believe that Wirecard certainly has learned some lessons from the last few months. There is certainly still room to improve and in my opinion Wirecard would be well advised to do so. Nonetheless, the company does show clear signs of awareness and at least pledges to implement further measures. I will continue to look for more detailed explanations and evidence of progress in upcoming reports but I believe Wirecard is on the right way, if maybe not (yet) at the right pace.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: All research contained in this article was done with utmost care. However, I cannot guarantee accuracy. Every reader is advised to conduct his own due diligence and research.





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