Lesaka Technologies Inc (LSAK) 2010 Q3 法說會逐字稿

Good afternoon and welcome to the NET1 Third Quarter Results Review. All participants are now in listen-only mode. (Operator Instructions). Please also note that this conference is being recorded. I would now like to hand the conference over to Dhruv Chopra, please go ahead sir.

Thank you Dylan. Good morning and good afternoon to our investors around the world. Thank you for joining us on our Third Quarter 2010 Earnings Call. On the call with me today are Dr. Serge Belamant, Chairman and CEO and Herman Kotze, CFO.

Both our press release and Form 10-Q are available on our website on www.net1.com. As a reminder, during this call, we will be making forward-looking statements and I request you to look at our cautionary language contained in our press release and Form 10-Q regarding the risks and uncertainties associated with forward-looking statements. In addition, during this call we will be using certain non-GAPP financial measures and we have provided a reconciliation of these non-GAPP measures to the most directly comparable GAAP measures.

We will discuss our results in South African rand, which is a non-GAAP measure. We analyze our results of operations in our latest 10-Q and in our press release in South African rand to assist investors in understanding the changes in the underlying changes of our business. As you know, the company's results can be significantly affected by currency fluctuations between the dollar and the rand.

Before I hand the call over to Serge, I just want to let investors know, that given the delicate nature and timing of our current discussions with SASSA, and the limitations on what we can say, pertaining to a contract and it's integral role in our overall business, it is not appropriate for us to host a Q&A session at the end of our prepared remarks.

We have tried to anticipate some of the questions that you may have and will provide additional details to the extent possible, in our remarks as well as frequently asked questions posted on our website. For any remaining questions, please contact me directly. Thank you, Serge.

Thank you very much Drew. Just to add to Dhruv's comments. We are more than aware of the critical importance of providing transparency and disclosure around our welfare business and we will update investors as soon as we have completed any concrete agreement. I will begin with the strategic discussion followed by an update on the key trends in the business before handing over to Herman who will discuss our financial performance in more detail.

To summarize our third quarter 2010 results, we reported revenues of US$72 million, for year-over-year increase of 29% in US dollar terms, but the decline of 2% in constant currency terms. While our core transaction businesses continued to grow, economic and business transformation pressure continued to weigh on our hardware and software segments.

Fundamental EPS for the third quarter 2010, was US$0.51, an increase of 50% in US dollars, over 13% -- and 13% in constant currency. As of March 31st, 2010, we had US$184 million in cash, on the balance sheet. Having generated US$32 million in operating cash flow during the quarter.

Given our commitment to driving long-term shareholder value, our board has expended our share repurchase authorization from US$50 million to US$100 million. Our long term growth strategy involves three key areas. First, pursuing opportunities within South Africa by leveraging our infrastructure to penetrate new and adjacent markets, such as our wage payment, payroll processing, healthcare claim processing, et cetera.

Second, globalizing out technology by pursuing a discipline approach to new markets through careful evaluation of new geographies. And finally, commercialize our newer technologies and products such as our mobile banking and virtual credit card.

We recognize that the pace at which we have delivered on some of these growth objectives has been slower than expected thus far. For too long, we have focused on creating the best possible technology and perhaps not enough time have we spent on selling it.

Net1's management is focused on driving accelerating growth in these key areas and we will invest in building business development resources for the geographies that we are not serving currently. We will continue to look for acquisitions that will help penetrate a segment or geography and we will increasingly look to partner with -- to partner with global companies in order to drive higher penetration.

On our last call, I highlighted some potential opportunity that we're close to fruition. Getting certain approvals and fulfilling certain regulatory requirements have taken somewhat longer than anticipated. But it is also fairly common practice in most emerging markets, we have continued to push forward in the number of the initiatives, both in South Africa and globally, and we are confident of converting at least one or two of these opportunities in the pipeline within the next six months including some potential transaction based deals by NET1 UEPS and well as NET1 Austria.

Let me spend a few minutes now, on our South African pension and welfare business. As you are aware, our one-year contract with SASSA was scheduled to expire on March 31st, 2010 but was extended to June 30, 2010 under provisionally the same terms and conditions. The bottom line is that following a broad government directive, SASSA is seeking a reduction in pricing from all of their suppliers including NET1, while we are trying to obtain a longer-term contract.

We have a number of proposals under consideration including further extensions of the contract, new longer duration contracts and the commencement of a new tender process. We expect to conclude our discussions and negotiations with SASSA over the next four to six weeks. We are and expect to remain an integral supplier to the South African government. Further updates on the contract will be provided as soon as our negotiations are concluded.

There has been much public reference to governments seeking banks in the South African post office to play an increasing role in a distribution of welfare grants. Our net beneficiary numbers, as you are well aware, has been declining for the past five quarters. While a material portion of the decline is due to our own efforts to help government identify and remove fraudulent beneficiaries from the system. Some of those beneficiaries were also transferred from our paypoints to the post office.

We believe that such transfers were and are unlawful and we approached the South African high court, during January 2010 for a ruling on this matter. The high court ruled in our favor and instructed SASSA to terminate this transfer practice. SASSA has decided to appeal against the ruling and we are awaiting a court date from the South African appeals court.

Our competitive advantages over the banks and organizations such as the post office revolve around our technology and infrastructure particularly in rural areas which accounts for over 80% of our beneficiary base. In addition, we have now migrated over 40% of our beneficiary to an electronic model thereby reducing the amount of cash in the system.

Conversely using the banks or post office would reintroduce cash by making ATM withdrawal the primary source of accessing funds, would require pensioners to travel significant distances at their own expense and would potentially transfer the cost of distribution of grants from government to the pensioners themselves.

Moving to our other South African initiatives, EasyPay continues to gain market share in the merchant processing industry while driving greater efficiencies of scale and therefore profitability. We possess in excess of 60% of all retail transactions in the country. We are offering additional value added services such as bill payments, insurance, loans, prepaid utilities, and airtime driving higher revenue higher revenue and profitability going forward.

EasyPay volumes grew 13% year-over-year in the first quarter of 2010, generating transaction volumes of approximately ZAR35 billion. We continue to drive the further penetration of value added services and have identified additional opportunities for growth at EasyPay including penetrating further downstream to the second-tier retailers, targeting additional municipalities to provide pre-paid electricity and bill payments, and the provision of a payment mechanism that would allow us to participate in the financial benefits of MediKredit's claim processing solution.

Turning to our wage payment initiative, since our appointment of a new general manager for financial services, we have begun the recruitment and training additional business development staff, identified synergies with the acquisition of FIHRST, grown our UPES base microlending book and are awaiting the final approval for an insurance license. Our project with one of our large corporate customers, with in excess of 30,000 is progressing well and we have added another customer with 5,000 employees.

In early January of 2010, we closed the acquisition of MediKredit, a private South African company that offers a unique real-time claims assessment system, a transaction switching system as well as financial and clinical risk management solutions to both funders and providers of the health care.

We intend to overlay a timing component through EasyPay to MediKredit's claim processing operations, providing the industry with and end-to-end solution. MediKredit has also identified a number of other initiatives both in South Africa, as well as internationally, including in the US given the substantial reform likely to take place in that market.

On March 31st, 2010, we also closed the acquisition of FIHRST, a South African payroll processor. Over 1,100 companies with more than 750,000 employees process their payroll through FIHRST, which is approximately 10% of the country's formal labor force. We expect FIHRST to generate at least mid-teens transaction growth going forward, but luckily payroll processor, its results are impacted by interest rates where raising rates help, but falling rates hurt.

Moving to our international businesses, our NET1 UEPS subsidiary continues to make excellent progress in Iraq, Ghana, and other African territories. And the business development pipeline remains (inaudible) in the [out fee]. In Iraq, UEPS has developed -- delivered over 1.8 million cards of the 2.2 million cards ordered. And our local partners have enrolled over 1.34 million war victim, women (inaudible) pensions and wage recipients as of April 2010.

Between 5,000 and 6,000 new customers have been enrolled every single day and we expect to deliver the remaining orders in fiscal 2010 and insurance of the other cards should be concluded by the end of the calendar year 2010.

Our transaction fees in Iraq, while still relatively small, grew 27% quarter-over-quarter in the first quarter of 2010 as more people enroll and as they perform more transactions. As mentioned previously, our partners have launched the merchant acquiring system with an initial 663 merchants at which our full UPES functionality such as sales, money transfer, bill payments and cash advances has been activated.

UEPS activities in Ghana continue to gain traction in addition to the 41 financial institutions rolled out 125 Apex Community banks have begun to be added to the system. New business development is currently under way to introduce mobile banking and our transportation wallet is to be launched in calendar 2010. Additionally Newage will work with MediKredit to propose a comprehensive health insurance solution for Ghana's national health care programs.

In Malawi, UEPS has been used as a national payment system since 2001, with almost 700,000 cards delivered to the central bank over that period. In fiscal 2010 UEPS signed an agreement with a large microfinance company focused on providing affordable micro loans in rural areas and is expected to result in growing our Malawi footprint by almost 15% over the next 12 months.

UEPS continues its marketing driving to Africa and the Middle East and specific territories as a result of the encouraging result achieved in both Iraq and Ghana. Numerous potential customers have visited UEPS to date and further visits are planned with a number of representatives from central banks, large financial organizations and government officials.

The business model for new countries going forward has been refined and is a combination of both the Ghanaian and Iraqi models, which delivers to NET1 upfront payments, license fees as well as more importantly ongoing transaction based revenue streams. From time to time, we might also have to consider joint venture approach, which is sometimes a requirement in specific countries.

NET1 Austria, formerly BGS, continues to move forward with its business model restructuring and its pursuit of new business development activities with a transactionary intake model. We expect the transition to a transaction model to take another 12 to 18 months and expect operating performance as we begin signing new clients on a transaction basis. In the interim, we have taken some action to eliminate redundant cost until we return the division to growth mode.

Net1 Austria's business development pipeline is growing and we expect them to sign their first transaction-based transaction in the fourth quarter fiscal 2010. Cross-selling efforts of Net1 Austria are also gathering momentum with a number of identifiable opportunities we introduced at VCC, MediKredit and [Adver] services to its targeted markets.

Uzbekistan remains one of Net1 Austria's fastest growing markets. In Russia, the significant legislative analysis has been performed around the country's national payment system initiative. As mentioned before, we are actively involved in a technical evaluation of any proposals but do not anticipate any conclusion to the process during calendar 2010.

Finally, in terms of new technologies, our virtual card division made significant progress during quart -- third quarter of 2010, and we have begun adding technical and operational side in our Dallas, Texas offices to meet the anticipated climb demand. While we have not signed any formal contracts yet, we now have the banking, processing and regulatory building blocks in place to roll out that solution as soon as our testing of the system is complete.

Overall, the progress made by our business development teams in UEPS, Net1 Austria and VCC is very encouraging and provides a clearer road map towards further globalization of Net1's technology. Across our divisions, we expect to convert at least one or two of the opportunities in the pipeline over the next 6 months.

In summary, we are pleased with the performance of the group during the third quarter of fiscal 2010. We expect to conclude our discussions with the South African government over the next 4 to 6 weeks, and we are well positioned to drive long-term growth given our pipeline of opportunities. With that, let me turn to our CFO, or my CFO, Herman. Herman, over to you.

Thank you, Serge. I will discuss key results and trends for the third quarter of 2010 compared to the third quarter of 2009. My discussion will be based on our results in South African rand as this provides the best indicator of the group's actual operating performance. In order to review our results in US dollars and US GAAP, please review our form 10-Q and our press release filed yesterday evening.

For Q3 of 2010, our average rand/dollar exchange rate was ZAR7.54 to the dollar compared to ZAR9.96 to the dollar a year ago, and this positively impacted our US-dollar-based results. Any fluctuation in the rand obviously influences the dollar-equivalent results of our operation, which is why we provide you with constant currency information in our press release as a clearer indicator of our operating drivers.

I am pleased to report another quarter that reflects solid fundamentals of our core businesses. During Q3 of 2010, in addition to favorable currency movements, the comparability of our results to Q3 of 2009 were affected by transaction-related costs of US$300,000 during 2010 and a US$700,000 loss on the sale of our traditional microlending business in 2009 as well as increased intangible amortization expenses related to the Net1 Austria, MediKredit and RMT acquisition.

We use a non-GAAP measure called fundamental earnings per share, which eliminates some of these one-off items that impact year-over-year comparisons. We typically exclude the effects of irregular tax changes, amortization of intangibles, stock compensation charges and unusual non-operating or non-cash-flow items when we calculate this measure.

On a consolidated basis for the third quarter of 2010, we reported revenue of US$72 million, a decline of 2% in constant currency, but an increase of 29% in US dollars. Similarly, fundamental EPS of US$0.51 in the third quarter of 2010 grew 13% in constant currency and 50% in US dollar terms.

We measure the group's profitability by looking at operating income and margin by segment. On a consolidated basis, operating margin adjusting for one-time items and intangible amortization declined 200 basis points to 42% during the third quarter, primarily due to lower margins in our transaction-based activities and hardware segments.

Let me now spend a few minutes on our segments. Transaction-based activities posted revenue of US$51 million during Q3 of 2010, up 7% in local currency and 41% in dollars and includes revenues from MediKredit from the 1st of January 2010.

Our core welfare business, including MediKredit and merchant acquiring increased 6% year-over-year in rand while the number of EasyPay transactions posted increased 13% to US$162 million. In constant currency, segment operating income decreased by 6% from the third quarter of 2009 while operating margin decreased 700 basis points to 53%. Excluding amortization of intangibles, segment margin decreased to 55% in Q3 2010 from 61% last year.

Due to the lower profit margin of MediKredit's business, the overall operating margin of this segment was 300 to 400 basis points lower. Growth in revenue and profitability was driven by the inclusion of MediKredit and the increased contribution from EasyPay and Iraq. MediKredit's activities for the next 12 months will result in further margin and operating profit pressure in this segment.

Moving to our operating metrics during Q3 of 2010, the number of beneficiaries paid was 10% lower year-over-year and 2% sequentially while pricing remained consistent with the prior 3 quarters. The decline in the number of beneficiaries appears to have peaked in October 2009 and while still declining is doing so at a much lower rate.

In the third quarter, we posted is a total of ZAR2.9 billion through our network on a completed pay cycle basis, representing 4% year-over-year growth. The productivity of our 4,700 in-store terminals declined to 1,003 transactions posted per POS device during a completed pay cycle from 1,129 transactions during Q3 of 2009 due to the addition of nearly 500 more POS terminals over the past year, in line with the increased amount from merchants to offer this important service to their customers.

In Q3 of 2010, EasyPay posted 162 million transactions with an approximate value of ZAR55 billion, an increase of 15% compared to 143 million transactions worth ZAR51 billion posted a year ago. The increase is primarily due to an increase in value-added transactions in the quarter. The average fee per transaction during Q3 of 2010 was ZAR0.21, consistent with our prior-year period. During Q3 of 2010, we incurred ad hoc one-time maintenance expenses at EasyPay.

Our smart card account segment posted revenue of US$8 million in Q3 of 2010, a 10% year-over-year decline in constant currency. The total number of active smart card accounts was 3.6 million, a decrease of 10% from last year. Operating margin for the segment remained consistent at 45%.

Turning to our financial services segment, revenue in Q3 of 2010 declined 56% year-over-year in constant currency to US$1.1 million, primarily due to the sale of our traditional microlending business to Finbond in March 2009.

Segment operating margin, excluding the impact of the loss on the sale of the traditional microlending business in 2009 for Q3 of 2010 improved to 72% from 55% in Q3 2009, mainly due to the elimination of the low-margin traditional microlending business and higher underlying profitability in our UEPS-based lending activities.

Our final operating segment is hardware and software, which traditionally includes Net1 Austria and revenues that occur on an irregular once-off basis, which makes it difficult to predict sales and margins from year to year.

Segment revenue in Q3 of 2010 was US$12 million, representing a 21% year-over-year decline in constant currency. The decrease was due primarily to cyclical pressure on certain commodity hardware products we sell, non-recurring revenues from Ghana during 2009 and lower revenues from Net1 Austria.

The ever-changing contributors to the segment cause volatility in operating margin from quarter to quarter. Operating margin for the segment decreased to minus 15% or minus 12% in Q3 2009, mainly due to seasonality in Net1 Austria's profitability, amortization of intangibles and pressure on certain hardware commodity products. Excluding the amortization of intangibles, segment operating margin declined to 5% in Q3 of 2010 from 12% a year ago.

During Q3 of 2010, we generated cash from operating activities of US$32 million, and we incurred capital expenditures of US$1 million and we purchased MediKredit after cash acquired for US$1 million. Subsequent to quarter-end, we closed the acquisition of FIHRST, paying approximately US$9 million for the transaction.

Year to date, we have generated US$82 million in cash flow from operations while incurring US$2.3 million in CapEx. As of March 31, 2010, we had US$184 million of cash and cash equivalents on our balance sheet. The business remains very cash-generative, and I remain comfortable that we have sufficient liquidity between our cash and short-term facilities to fund our working capital requirements.

On May 5th, 2010, our Board of Directors approved a further US$50 million under our share repurchase program, bringing our total authorization to US$100 million. During Q3, we did not repurchase any shares. Our fully distributed share counts for Q3 of 2010 was 45.6 million shares, down from 55.8 million shares a year ago.

In conclusion, we remain excited about our technologies and about the future opportunities and prospects for our business, both in South Africa and internationally. The current contract negotiation process with SASSA may result in new terms that may be respectively applied to April 1 in order to coincide with the government's fiscal year. Therefore, until discussions are complete we believe that it would not be prudent to issue or confirm guidance. Thank you for your attention and I will now pass onto Serge for some closing remarks.

Thank you, Herman. I would simply like to conclude by reiterating management's commitment to drive sustainability and future growth for the company. I'd also like to thank our shareholders for their support and understanding during this period of uncertainty and look forward to communicating with you in the next couple of weeks. Thank you, very much.

On behalf of Net1, that concludes this conference. Thank you, for joining us. You may now disconnect your lines.