Lesaka Technologies Inc (LSAK) 2021 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Net 1 Q3 2021 earnings call. (Operator Instructions) Please note that this call is being recorded.

I'd now like to turn the conference over to Dara Dierks. Please go ahead, ma'am.

Thank you, operator. Welcome to our third quarter 2021 earnings call. With me today is CFO and Interim CEO, Alex Smith. Our press release and supplementary investor presentation are available on our Investor Relations website at ir.net1.com.

As a reminder, during this call, we will be making forward-looking statements, and I ask you to look at the cautionary language contained in our Form 10-K regarding the risks and uncertainties associated with forward-looking statements. Also, we will discuss our results in South African rand, which is non-GAAP. We analyze our results of operations in our press release in rand to assist investors understanding the underlying trends of our business. As you know, the company's results can be significantly affected by the currency fluctuations between the U.S. dollar and the South African rand.

We will have a Q&A session following the prepared remarks. So, with that, let me turn the call over to Alex.

Thanks, Dara, and good day to everyone, and thank you all for joining us on our third quarter earnings call. We hope everyone's staying healthy and safe during these difficult times.

On today's call, we'll run through the following. First, we will review some of the financial and operational highlights from the quarter, then review our short-term initiatives. Finally, I'll review our longer-term initiatives relative to our new strategic focus before opening the call up for questions.

To bring everyone up-to-date on the latest COVID-19 situation in South Africa, we are currently in lockdown Level 1, which is the least restrictive of the 5 lockdown levels used in South Africa. The data on new infections has been relatively stable and at a low level through April, but there are concerns over a third wave hitting the country as we approach the Southern Hemisphere's winter months. The South African government is rolling out its vaccination program, but it is at a relatively early stage and has suffered from some delays. Nevertheless, we are hopeful the time will be made up, and -- but we continue to expect uncertainty in the environment.

It's now been about 8 months since we announced Net 1's new strategy, on which we are currently executing. Having been with the company for several years prior, as well as during this transition, I can say, undoubtedly, that this is a new enterprise, focused and strategic in our mission to become a major fintech player in South Africa, focused on financial inclusion for underserved consumers and merchants. To help anchor and drive the strategy, we have recently hired a dynamic new CEO for our Southern Africa business, Lincoln Mali, who is a well-respected and experienced executive in the South African financial services and banking industry. This has also enabled us to attract some amazing new talent among the executive ranks, and I -- along with our ambitious goals, will make Net 1 a very desirable place to work and grow. Lincoln only took up office on Monday, but we can already feel the excitement and revitalize energy in the business for the tasks ahead.

During these 8 months, we have operationally streamlined the business, selling our stake in Bank Frick, collected the final proceeds on the sale of our stake in DNI, substantially closed down IPG, our European payments venture, thereby reducing cash burn and preserving our ample cash position for more strategic opportunities. We've also been preparing for a relaunch of our financial inclusion products here in South Africa, which will be the key focus for us over the next 12 months.

So, in summary, while it may not be obvious to our investors, who rarely get a glimpse beyond the quarterly financials, much less of the inner workings of the company, we definitely believe we are well positioned with talent, energy, and strategy to scale the business meaningfully and create the standout financial inclusion in fintech in South Africa.

Now on to the financial and operational highlights from the third quarter. The key theme for this quarter has been in progress, as the board and exec team continues to be very busy with scaling the current business as well as pursuing our strategic initiatives. While the financial results have been disappointing, and we've have been able to start building meaningful, tangible momentum in our customer acquisition project, we have made good progress operationally.

Total revenue was $29 million, which was a 17% decline year-over-year in U.S. dollar terms and a 19% decrease in rand terms, primarily due to fewer prepaid airtime and POS sales, as well as lower account fee revenues. The U.S. dollar was 3% weaker against the rand during the third quarter of fiscal 2021 compared to the third quarter of fiscal 2020, which also impacted our reported results.

We reported an adjusted EBITDA loss of $12.8 million, which was comparable to the $12.8 million loss reported for the second quarter of 2021. The core South African operations saw EBITDA losses of $8.5 million, reflecting the weaker revenue in the quarter. However, the cost base remains stable, and we have significant available capacity.

The third quarter 2021 fundamental loss per share was $0.24 compared to an $0.11 fundamental loss per share a year ago. Corporate costs were $1.5 million, returning to a more normal run rate from the inflated amount of the previous quarter.

In South Africa, our consumer bank accounts, EasyPay Everywhere, or EPE, increased by about 52,000 gross accounts and 28,000 net accounts during the quarter. This reflects further progress, but does fall short of the expectations we set out in the last quarter. We have been expecting to see a meaningful acceleration in customer acquisition from March, which we have not achieved, and we believe this pushes our expectations of reaching 1.4 million EPE accounts back by several months. This delay is being caused by a number of factors, some internal and some external.

Internally, we've had several management changes, with several high-caliber additions to the team and the departure of a number of long-serving executives. But from an external perspective, we have not seen the regulatory changes we had expected pushed through. The proposed changes have clearly been drafted to make it a much easier process for grant recipients to open and designate the bank account into which they receive their monthly SASSA grant. As we've discussed previously, the existing process is pretty onerous and involves printing and filling out a form, which the recipient then has to deliver -- has to hand deliver to a SASSA office for processing.

These draft regulation changes are yet to be gazetted, which would result in them passing into law. However, we're not sitting idly, waiting for regulation changes. We've put together a comprehensive marketing plan to communicate to our target market. In the last 2.5 years, we have not made any significant investment into our marketing campaign, and we feel the time is now right to lift our profile again in the communities we serve and embark on a nationwide customer acquisition campaign.

Our cost base in South Africa remained stable and at a level where we can support significant growth in business activity. As a result, a relatively large percentage of any revenue growth in the coming quarters should drop to the profit line, providing a clear path to reaching breakeven in South Africa, and then to achieving profitability at the corporate level. Our plan continues to be to reach breakeven in South Africa on a monthly basis during the first half of next fiscal year, with the caveat that we may be impacted by future COVID-related lockdown restrictions that may adversely affect this plan.

The total number of active bank accounts is a little over 1 million. While our net increases to date have been encouraging and achieved without proactive marketing or customer acquisition initiatives, we continue to see ongoing delays in these accounts becoming active and revenue-generating. This seems to be primarily because of the regulatory process I referred to earlier and emphasizes why we believe that the proposed regulatory change is so important in respect of our growth initiatives.

Our ATM network utilization has continued to trend in the right direction, though transaction volumes reduced slightly and total withdrawal values, which affects fees, were lower this quarter. For the quarter, transactions were down 5% compared to the prior quarter and 9% higher than the same quarter in fiscal 2020. The number of unique customers using our infrastructure was up 1% on the prior quarter and up 14% on the same quarter last year.

The loan book finished March 2021 at ZAR 305 million versus ZAR 278 million on March 31, 2020, and ZAR 327 million at December 31, 2020. There's been limited loan growth over the last 2 quarters, indicating that there is little room for higher penetration into the existing customer base. Future growth in the loan book is, therefore, expected to come from the expansion of the EPE customer base. We currently see around about 40% penetration of loans into this customer base, and any growth in our loan book will likely lag any customer growth by around 3 months, due to the lending requirements we apply to new customers.

Transaction volumes through our EasyPay switch continued to trend stronger, though they were affected by normal seasonality in this quarter. Compared to the same period last year, we did see reductions in the volume of low-margin airtime and electricity recharges, but an encouraging 13% growth in transactions in the more important bill payment space. We also have some high-volume new relationships coming into the ecosystem in the next few months, which should result in good growth in the short term.

In terms of IPG, we recorded a loss of $3.3 million for the quarter. As we indicated last quarter, this is expected to be the last quarter with any significant costs in respect of IPG, as the operational closure of the business is largely complete, and we are now entering the liquidation process for the various entities that formed as part of that business unit. Included in the loss for the quarter was the profit and loss account impact of the settlement we reached with Bank Frick. This settlement accounted for around $2.1 million of the loss for the quarter, with the balance of the $3.6 million settlement having already been provided for in creditors. The balance of the $1.2 million loss for the quarter represents the cost of closure for all the IPG operations in this quarter.

Now just a few minutes to review various investments. First, for Bank Frick. As you're aware, we sold our remaining interest back to the Kuno Frick Family Foundation for $30 million in the quarter. As a reminder, $18.6 million of that purchase price was received on completion, with the balance due over 2 further payments due in October 2021 and July 2022. Only $15 million of the initial installment of the purchase price was received on completion, as $3.6 million was used to settle all in any outstanding liabilities between the group and Bank Frick. We believe this was the final major cost in the IPG closure process.

We continue to carry Finbond at the same value recorded in December 2020, which equates to around $0.84 per share. During the quarter, we saw some recovery in the Finbond share price, and over the last month, it has been trading around ZAR 1.5. As an equity accounted investment, we're not able to write the value of our stake up to the market price. We will only have visibility of Finbond's trading performance for the latest fiscal year, which is to the end of February, towards the end of May, and this will be incorporated into our fourth quarter results.

In mid-March 2021, MobiKwik raised additional capital through the issuance of shares to new shareholders at a pre-money valuation of $480 million. We used this March 2021 valuation as the basis for our adjustment to increase the carrying value of our investment in MobiKwik by $10.8 million from $42.1 to $52.9 million as of March 31, 2021. Their financial performance continues to improve, despite some of the challenges India is facing due to the pandemic. In particular, they are achieving rapid growth in their buy now, pay later product and are positioning themselves as the leading player in India in that market.

We continue to carry the value of our Cell C investment at 0 as of March 31. Cell C continues to make slow but steady progress on its recapitalization plan, but it is delivering improved operational results. While the slow progress is frustrating, this is a highly complex, multiparty restructuring. If the capital structure can be rightsized, we are confident there is a sustainable business that can emerge. And once again, I would just like to highlight that we currently hold about $16 million of Cell C airtime on our balance sheet, which is only likely to be realized after the recapitalization is concluded.

We did not have anything new to report this quarter in terms of clarifying our status under the Investment Company Act, but we will continue to keep our investors updated on our progress for this matter, and we can assure you it remains a top priority for us. The clearest way out of the uncertainty is through either acquisitions or the recovery of our core South African operations, both of which are focus areas for the team.

At March 31, 2021, we had unrestricted cash of $208 million and no debt. U.S. dollar-denominated balances were $171 million out of that total. As soon as our Investment Company Act status is clarified, we will review the most effective use of the remaining capital, which may include a capital return to shareholders. What that allocation of capital will look at will be governed by the circumstances at the time and where our capital is likely to generate the best possible return for our shareholders.

Finally, to spend a few minutes on the future of Net 1, as I mentioned earlier, we announced the appointment of Lincoln Mali as Southern African CEO in February. He officially joined us on May 1 and has certainly hit the ground running. This is a new position for the company, and we believe that Lincoln is the perfect candidate for the position. He is a highly accomplished financial services executive with over 25 years in the industry. He was most recently head of group card and payments at Standard Bank Group, and he chairs the board of directors of Diners Club South Africa and is a member of the Central and Eastern Europe, Middle East, and Africa Business Council for Visa. His strong trade record in consumer and merchant financial services across South Africa and 16 other African countries, will be invaluable as we look to expand our consumer banking and merchant financial services businesses.

As a reminder, the consumer banking and financial services TAM, or addressable market, is estimated at approximately ZAR 57 billion, or $3.8 billion annually, and our merchant's financial services TAM is estimated at approximately ZAR 104 billion, or $6.9 billion annually. Our primary product offering, coupled with our superior distribution channels, provide for an exceptionally competitive offering for those categories and markets wishing to process cash and/or transition to electronic or digital payment platforms.

With the streamlining of the business that we've achieved over the last 3 quarters, we are able to dedicate more and more resources to focus on our activities in South Africa. As a result, our corporate activity, as well as our M&A activity, is fully focused on South Africa and is currently in progress to drive our strategy, alongside our stated organic initiatives. We are continuing with our search for a group CEO and will communicate progress on that process in due course.

Wrapping up, I'd just like to reiterate that, while the financial results for this quarter have been disappointing, we have made good progress operationally, which has laid the groundwork for improved financial performance going forward. We continue to engage in seeking to formally clarify our Investment Company Act status, and we are fully focused on exploiting the huge opportunity to grow Net 1 into the leading fintech business in South Africa.

Before taking any questions, I'd just like to extend my appreciation to the entire Net 1 team, and specifically to our customer-facing employees, who have continued to provide an excellent service to our customers during an unprecedented and uncertain time. With some of the developments in the last quarter, it really feels like we are at the start of an exciting new journey that can provide significant opportunities and returns for all of our stakeholders.

Claudia, if I can hand it back to you now for questions.

(Operator Instructions) The first question comes from Raj Sharma from B. Riley.

So if you could give a little bit -- my questions are related to the net account additions. Clearly, they were lower than we expected. And what changes that, given the South Africa was not necessarily in a very restrictive lockdown level? And you're saying that the -- I think you said that the target of the 400,000 net new adds has been pushed out a few quarters or a few months. But what changes that going forward? How do you -- how would you see this pickup happening from 27,000 accounts a quarter to significantly higher?

I think we see the key catalyst here is becoming much more proactive in terms of our marketing of the product and a much more, I guess, public engagement with our target market. Really, the customer base that we're acquiring at the moment comes out of people that are starting to access grants, so it's people that are opening bank accounts because they are now entitled to a grant from the government. That's a relatively small portion of the target customer base. And, as I said in the prepared remarks, I think we have been -- we've never really -- well, not never, but we've done very limited marketing over the last 2.5 years. And we spent much of the last quarter really preparing what we believe is a very compelling marketing campaign, and we are going through the process now of lining up the start of that process. So we see that as a major catalyst. And I think we're also planning on various stakeholder engagements that we believe can also assist in that process of enabling us to start ramping up customer acquisition at a faster level.

So the sequential -- there was a sequential decline in the net new adds, and what would explain that. Was it a COVID-related lockdown or restricted levels, or what changed?

There hasn't really been any impact from COVID in terms of trading in this last quarter. As I mentioned, these numbers are primarily coming out of people starting to access grants. And seasonally, we have seen that that's typically quite slow in the first quarter of the calendar year, in that we're coming to the end of government's fiscal year. But that -- apart from that sort of seasonality dynamic, there's nothing else that would have led to the drop, and so we think it's around starting up this marketing campaign. That's how we change the direction and the momentum is the start of the marketing campaign and a really focused effort from, really, the whole company around driving the increase in this customer base.

So -- and what is the new sort of target now? We'll add the -- we'll get to 1.4 million accounts, you think, by the end of the year or...

Yes, so we're looking at during the first half of the next fiscal year is our target to get to the 1.4 million. We're going to be going -- with the initiation of the various initiatives, we'll be really targeting to ramp that up as quickly as possible, but our guidance is within the first half of the next fiscal year.

Great. And when do you also expect the data sort of things to get net -- to get mandated and how -- when do you think that opens up? And does that contribute to the new account adds.

So it would definitely make the process easier, but like I've tried to indicate in the remarks is that we need to own the process and drive the customer acquisition process, almost regardless of what happens in the SASSA environment. So we'll obviously work with engaging with them. They're a key stakeholder in this whole environment. And if we can improve -- get the regulation -- if the regulations do start to change and some other dynamics change, then that will obviously just help in terms of the process of signing up new customers.

Great. And just got a couple more questions. Any timeline on the resolution of the SEC investment issue. You had indicated earlier it would be by the end of May. That has been pushed out, or is that still sort of a possibility?

Yes, that's effectively being pushed out. I don't see it being resolved by the end of May. But -- so we continue to work on it. Unfortunately, there's not much that we can share in terms of tangible progress. But we do continue to work on it, but we don't have any clear timelines for resolution at this point.

Okay. And then I have a question on number. If we were -- a just hypothetical question, maybe you can maybe give us a sense of what the operating leverage here is. If we were to get to, call it 3 million EPE accounts, what would -- would we be able to do that on the same cost base? In other words, what would the EBITDA levels look like at that sort of EPE account level?

At 3 million EPE accounts, it would obviously be a very different environment. So do we have the infrastructure in place to service 3 million people? Absolutely. This infrastructure base was originally built for 10 million people. We did cut it back a bit with all the changes, but there's a substantial fixed cost sort of component to it. So the $3 million, we believe, could be serviced quite comfortably out of the existing infrastructure. There are, though, some variable costs in terms of servicing that quantum. So we would currently estimate that probably between 65% and 70% of revenue would fall to the bottom line in terms of the operational leverage. So a very significant portion of that -- of revenue growth would drop to EBITDA.

Right. And so, are the assumptions still the same as they've been in the past of how much we can get out of -- in terms of inclusion products and in terms of the processing, how much you can get out of each EPE account? Or have moves come down?

No. We're still -- those numbers are still solid in terms of how we see the business. I think in the past, we've talked about like an average -- an ARPU of approximately $2.50 per month of revenue per user. I think that's probably -- it's probably a little bit more than that, probably closer to $3 in terms of -- look, it is affected a bit by exchange rates, so somewhere ZAR 45, ZAR 50 per month per account is kind of the number that we work on. And that would -- if you then apply that sort of gross margin percentage to that number, then you get a good sense of where 3 million EPE accounts would take you.

Right. So it's still -- it's actually better than what we've talked in the past, which is about -- it's not this now, but $3 per account per month, total of processing and financial services.

Yes. In respect to the EPE. So really the business, the consumer side of the business, yes.

Yes. Yes. Okay. Well, thank you. I'll take my questions off-line.

(Operator Instructions) The next question comes from [Nick Kreffeur] from [Signal AM].

I have a lot of questions on Cell C, and I'll just ask them one at a time. So my first question is, do you think you'll cover any of the ZAR 2 billion that was spent on Cell C?

Nick, we -- I think we've been pretty clear on Cell C in terms of the carrying value that we applied to it, which is 0. So we -- our position is that that's where we pin the fair value at the moment. If we get anything out of the investment in terms of, once the recap process is concluded, then that will obviously be upside for us, but it's not a key feature of -- for the group. That investment is something from the past. We're not focused on it. We're focused on building our operational business. We will keep an eye on Cell C, but quite frankly, where the management team is focused is entirely on rebuilding our operational business, our core competencies and that's where it should be focused.

I mean, we're talking about ZAR 2 billion here that was thrown away on Cell C. No one seems to want to take responsibility or account for it. And then, at the same time, you want to use the cash on the balance sheet to make more acquisitions, or other acquisitions. And so, I feel very uncomfortable that you are not prepared to account for what happened at Cell C and that you want to -- in the same breath, our shareholders to allow you to invest the money in other assets. I'm very uncomfortable with this. And I'm uncomfortable because of your position that you're taking, and you're saying there's 0 value that you can recover. Meantime, the other shareholder is publicly saying they will recover value. But can you reconcile that for me, please?

Look, Nick, I think we can certainly take this discussion offline, because I'm not sure it's a key focus area for most of the shareholders on the call. But the -- there has been a fundamental sort of change in this business over the last 12 months. We are a completely new board. We've got a largely new management team. I don't think there's anybody that remains, on either the management team or the board, who were involved in that Cell C investment. So, as I said, we are very much focused on the way forward. We will do what's necessary in terms of good governance and an appropriate level of supervision of Cell C, given our limited involvement. And we don't want the current management, or the board, for that part, distracted from the aim of rebuilding the South African -- the core South African business, which is where our core competency lies. Cell C was far outside of that. We're focused on financial inclusion and in the financial services space for consumers and merchants. And I think if you want a more detailed discussion around where things lie in respect to Cell C, then we're very happy to engage you off-line on that.

Thank you very much. Ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect your lines.