Lesaka Technologies, Inc. (LSAK) Q3 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Net 1 Third Quarter 2019 Earnings Call. [Operator Instructions] Please note that this call is being recorded. I would now like to turn the conference over to Dhruv Chopra. Please go ahead, sir.

Thank you, Irene. Welcome to our third quarter 2019 earnings call. With me on the call today is our CEO, Herman Kotzé and our CFO, Alex Smith. Our press release and supplementary financial presentation are available on our Investor Relations website, 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 press release regarding the risks and uncertainties associated with forward-looking statements. In addition, during this call, we will be using certain non-GAAP financial measures. And we have provided a reconciliation of these non-GAAP 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 press release in rand to assist investors in understanding the underlying trends of our business. As you know, the company’s results can be significantly impacted by currency fluctuations between the U.S. dollar and the South African rand. We will have a Q&A session following our prepared remarks. And with that, let me turn the call over to Herman. Herman Kotzé: Thank you, Dhruv and good day to everybody. This morning, I will review our third quarter highlights and specifically the progress on the key focus areas we highlighted on the last call and where we go from here. Following that, Alex will review the third quarter results in more detail, which will be followed by your questions. Net 1 went through transformational changes during Q3 2019 as we implemented a comprehensive restructuring of our business and cost base. We are on target to complete the 2 main objectives we set ourselves, following the mass migration of our EPE cardholder base in Q2. The first being to achieve cash flow breakeven on a monthly basis in our South African operations with effects from June 2019 and going forward; and second, to de-leverage our balance sheet by setting the significant liabilities related to the DNI transaction earn-out payment and to early-settle our long-term loans to RMB, which was accomplished last week through the additional 8% sales of DNI. The major part of our cost reduction initiative was the inevitable retrenchment of a significant component of our South African employee base, approximately 2,500 staff members or 50% of the workforce in total. It is particularly painful to execute such a massive retrenchment program during the difficult economic environment in South Africa, which is also struggling with the persistently high unemployment rates and the negative impact on staff overall has been palpable. We are now hopefully past the darkest times in our recent history, and we are focused on rebuilding the group in all the states. Our remaining transaction-related businesses continue to operate broadly in line with our expectations and provide a substantial source of EBITDA to the group, with the sale of a majority interest in DNI. We now need to exclude its contribution to group EBITDA, though we will continue to receive dividend payments pertaining to our remaining 50% holding, which we believe should also be considered as part of the group’s cash generation. As of March 31, 2019, we had net cash of $24 million and remain comfortable with the group’s liquidity position over the next 12 months. As we announced earlier in the week, we have commenced with various actions to monetize our investment in DNI. It started with a 17% stake in March, followed by a 7.6% sales RMB this week too early-settle our long-term debt. And we have agreed to a call option for our remaining 50% stake. This option is valid until December 31, 2019 and have strike price that values our remaining stake at approximately $59 million. DNI is a great business with a solid management team, and we will continue to work with them on a commercial basis to realize many of the synergies we have identified over the course of our relationship. The settling of our long-term debt removes the covenants that thus far had prevented us from repurchasing shares. Should we be able to monetize our remaining stake in DNI, we would have sufficient liquidity to commence share repurchases under our existing authorization. Selling our stake in DNI is part 1 of our holistic strategic review, where we are looking to monetize non-strategic assets and focus on our core fin-tech business lines. Last quarter, I introduced the four geographic pillars that underpins our strategy. Before I delve into this however, I want to provide some key updates on our South African operations as the stability first and then turnaround is a key component of the near-term earnings power of the company. The notable trends for our South African operations include: first, active EPE accounts remained stable at approximately ZAR1.1 million and has maintained these levels since November 2018. Second, our micro-lending book increased modestly from Q2 2019 and bad debts are closer to the historical levels. Smart Life insurance played catch-up to the EPE auto-migration during Q3 2019, with an increase in downed debit orders. But performance on the running policies has since also returned close to the historical range. Third, we issued our first you UEPS/EMV cards with Finbond early in Q4 2019, and we expect a larger-scale commercial launch in Q1 2020, which is September 2019 and when we expect to see our account-based staff to grow again. Fourth, we continue to see demand for our ATM network, with approximately 1,306 ATMs currently. Third-parties have begun to express interest in us deploying ATMs for them, and could potentially add further 300 plus ATMs to our network. And finally, our EasyPay processing business continues to grow nicely, driven by more payment transactions, all payments, mobile airtime sales and the merchant-acquiring business. As I mentioned earlier, we are on track to be operating at breakeven EBITDA level by the end of Q4 2019 and beyond in the South African business unit. Let me now turn to our four pillars. I have already covered some of the key developments in South Africa, but will highlight additional key developments in our first pillar. Our EPE and its related financial and value-added services businesses includes: EPE consumer bank accounts; Moneyline micro-lending services; Smart Life micro insurance; and our mobile ATM network and its roots stem from the infrastructure we have built out over the last 20 years to deliver the services to the broad beneficiary base. With Finbond, we have stepped up our collaboration efforts with them to address the opportunity of providing banking, financial and other services to the millions of un-banked and under-banked people of South Africa and will not be limited to social grant beneficiaries. We issued our first Finbond UEPS/EMV cards in a pilot in early Q4 2019, and expect a wider commercial launch next quarter. Providing low cost credits is a key differentiator in being able to establish banking relationships with consumers. To that effect, we have also begun discussions with our third-party lenders, including Finbond, to leverage their balance sheet and use our distribution. The return on these loans would be lower for us, but so too would be the risk. We are actively managing our distribution infrastructure, including ATMs. And last quarter, relocated 50 ATMs to higher traffic locations, we have also been able to expand our branch infrastructure by deploying low-cost and movable containers, whose cost is a quarter of that of a fixed branch. Cell C had a challenging second half of 2018 due to a soft macro environment and higher cost for transitioning out of their old network-sharing arrangement with Vodacom through a new one with MTN. The current focus is on managing the short-term liquidity, and the company is actively engaged with The Buffet Consortium to close its proposed investment, which will significantly reduce its Fed-servicing costs. Lastly, on SASSA, when we have not been involved operationally with SASSA since September 2018, there are a few outstanding end-of-contract issues that are yet to be resolved. The two primary areas related to the fees payable to us for the last 6 months of our contract and the legality of the auto-migration of our EPE customers. Both issues are yet unresolved, but we are actively working with SASSA and through the courts to put these issues behind us as soon as we can and focus our energies on our businesses going forward. Moving on to our second pillar, which is Africa. In Africa, depending on the country, only 10% to 30% of the adult populations have access to financial services. And thus the deployment of cloud-based card and mobile-based solutions, together with strong local partners, remains a substantial opportunity for us. Today, we are operational in Namibia and Botswana. We have footholds in 9 other countries through our VTU offering in partnership with MTN. We have are UEPS as a national payment system in Ghana; a rapidly growing consumer finance operation in Nigeria through OneFi and our 6 months old QR-based payment initiatives through Zap Group Africa. We have also actively stepped up the cooperation between our different businesses and investments to maximize the potential and accelerated time to market. Zap Group has made significant strides in the second quarter of existence. During Q2 2019, Zap Group had signed up the largest bank in Ghana and went live with the beta product. During Q3 2019, Zap Group is live with its offering for the bank and has also signed up two of the three largest mobile operators in the country. They have also integrated with the largest merchant network, aligned into each 25,000 merchants. We have also introduced produce them to GIPS, which is the central bank switch and runs UEPS to dramatically increase its involvement in the national payment system. Zap Group has also commenced activities to sign customer contracts in Nigeria and is working closely with us and One Finance. Lastly, given the success of its digital lending products, OneFi has launched an expanded product, now called Carbon, which enhances its offering as a full-fledged digital financial services platform and offers loan payments, fund transfers and savings in addition to loans. OneFi continues to be a market leader in the digital lending space, and disbursed $10 million across 150,000 loans during Q3 and processed 300,000 transactions on the Carbon platform during that period. The third pillar is Europe and Asia, excluding KSNET. This pillar is driven primarily through the International Payments Group, or IPG. The restructuring and reorganization of IPG is now complete, with Malta having become the centralized operation of our international activities. IPG’s new card-issuing and merchant-acquiring platforms have been certified. As part of Visa’s merger with Visa Europe, Bank Frick is required to undergo recertification with Visa, which is currently underway. Once completed by Q1 2020, IPG can begin the deployment of its new projects to the European SME market. During Q3 2019, IPG also secured approval from the Mauritian regulators to become a principal member of China UnionPay for international issuing and acquiring. This approval has been shared with UnionPay, and we are waiting their authorization. We are very excited about the progress made with the development of our revolutionary crypto asset storage product, and we are diligently working on commercializing the technology, scaling up production and finalizing the go-to-market launch strategy. Bank Frick continues to develop its capacity and expertise in relation to cryptocurrency and blockchain technology. It has expanded its headcount over 50% in the last year, and therefore, its calendar 2018 performance was slightly lower than anticipated, which was largely due to investments in expanding headcounts and the improving systems. Bank Frick continues to work closely with IPG, recording or requiring processing and cryptocurrency storage solution initiatives. Our virtual card project with MobiKwik has continued to demonstrate steady growth, given the constraints applied by our current issuing bank partner. However, as a result of new regulatory guidance, MobiKwik has applied for direct membership with Visa. And once finalized, will allow us to expand issuance to its millions of customers. MobiKwik itself has performed well in advance of expectations, driven primarily – due to the successful transition to being a digital financial services provider. During the year ended March 31, 2019, MobiKwik has more than doubled its revenue and has been contribution margin positive since October 2018 and maintains momentum to reach breakeven in its current financial year. MobiKwik disbursed around $17 million across 110,000 loans during Q3 and processed GNV in excess of $700 million for its 79 million users. And digital financial services now account for approximately 25% of its total monthly revenue from zero a year ago. Our fourth pillar is Korea, KSNET specifically. Q3 is additionally KSNET’s weakest quarter. For Q3 KSNET’s revenues declined in constant currency primarily driven by lower values at volumes processed during the quarter. EBITDA margins decreased to 17.3% from 18.2% in Q3 2018, mainly driven by lower margin revenue. However, operating margin during Q3 2019 improved significantly to 4.4% from 2% last year as a result of lower depreciation and amortization as CapEx levels have declined in the last 2 years and certain intangibles have been fully amortized. As we discussed previously, we appointed an external adviser to assist with the acceleration of top line growth and improving profitability. We completed the first phase of this engagement during Q3. And identified several key initiatives, which will now be implemented by the KSNET management team, and we will update you on the progress made as these initiatives start contributing towards our goal of achieving a $40 million EBITDA run rate by Q4 2020. In parallel, the board is engaged with a financial adviser to assist us with the identification of strategic alternatives. These types of activities are complex and time-consuming. And we expect to be in a better position to comment on the potential outcomes when we report our year-end results. Turning to our investment portfolio, I want to highlight that our remaining equity investment in DNI is now also reflected in the value of our investment portfolio, the total of which is recorded at $323 million or $5.68 per share on our balance sheet. Net 1 has already taken a number of steps in its transition to being a leading fintech provider to the underserved individuals and businesses in emerging and developed countries alike. We have undergone an extraordinary period, but we have remained dedicated to our vision and our stakeholders. We expect our operation in Q4 to be relatively stable and return to top and bottom line growth in fiscal 2020. Alex will now go over the financial performance and metrics in more detail, before opening it up for Q&A.

Thank you, Herman, and good day to everybody. I’ll be discussing the key results and trends within our operating segments for the third quarter of fiscal 2019 compared to a year ago. For Q3 of 2019, our average rand dollar exchange rate was ZAR14.17 compared to ZAR11.95 a year ago, which adversely impacted our U.S. dollar-based results by approximately 19%. Our fundamental earnings per share declined to a loss of $0.62, which includes $0.44 of non-cash negative impact from the fair value adjustments of Cell C and the impairment of the Cedar Cellular note. Operationally, the fundamental loss was caused by the losses incurred by our South African operations and at IPG. At the end of the quarter, we disposed of 17% of DNI, which changed DNI from a subsidiary to an equity-accounted investment from that date. The results of DNI have been consolidated into our segment operations for the third quarter, but will move into earnings from equity-accounted investments in the fourth quarter. Given the disposal transactions, which I will discuss later, and the call option that has been granted on our remaining DNI investment, we have classified DNI as a discontinued operation for disclosure purposes to provide shareholders with a view of the performance of the remaining business. By segment, South African transaction processing reported revenue of $17.4 million in the third quarter of 2019, down 72% compared to the third quarter of 2018 on a constant currency basis. The decrease is primarily due to the termination of the SASSA contract and to a lesser extent, the reduction in the number of EPE accounts. Our revenue and operating income was also adversely impacted by the significant reduction in the number of SASSA-grant recipients with SASSA-branded Grindrod cards linked to Grindrod Bank accounts as SASSA completed its position to South African Post Office. These decreases in revenue and operating income were partially offset by higher transaction revenue as a result of increased usage of our ATMs and higher volumes at EasyPay. Our operating margin for the third quarter of 2019 and 2018 was negative 74.6% and 17.3%, respectively. Excluding restructuring costs, the operating loss margin for the third quarter of 2019 was a negative 57.5%. International transaction processing generated revenue of $34.4 million in the third quarter of 2019, which was down 12% compared to – with the third quarter of 2018, primarily due to a contraction in IPG transactions processed, specifically meaningfully lower crypto exchange and China processing and modestly lower KSNET revenue as a result of lower transaction values processed. Operating margin of 5.6% in Q3 2019 was stronger than the reported negative 32.2% margin in the third quarter of 2019. However, excluding the goodwill impairment and ad hoc tax refund, segment operating income and margin for Q3 2018 were $2.4 million and 5.2%, respectively. For the third quarter of 2019, KSNET’s revenue decreased 13% in Korean won to $36.1 million, while EBITDA margin decreased to 17.3% from 18.2% in the third quarter of 2019. The remains of a fluid regulatory environment that the management team are implementing various actions to improve profitability and are progressing and moved to increase the direct distribution channel. KSNET’s cash conversion remains good, with capital investment remaining low. IPG had another very challenging quarter, as transaction volume remains low. Now there was a small reduction in the losses. Included in the loss is $300,000 of development costs in respect of our new crypto asset storage product. We expect a gradual improvement in the performance of IPG over the coming quarters, as it looks to grow the top line particularly against European operations and its various growth initiatives start to materialize. Financial inclusion and applied technologies generated revenue of $36.7 million in the third quarter of 2019, which was down 27% compared with the third quarter of 2018, primarily due to fewer prepaid airtime and value-added services sales, lower lending and insurance revenue and a decrease in inter-segment revenues, partially offset by the inclusion of DNI. Operating margin was 8.8% compared to the 25.1% in the third quarter of 2018. Operating income for this operating segment for the third quarter of fiscal 2019 included retrenchment cost of $1.6 million. Excluding the retrenchment costs, segment operating income and margin for the third quarter of 2019 were $4.8 million and 13.1%, respectively. Active EPE accounts remained steady with $1.1 million through the third quarter, and these numbers have been stable through the April and May payment cycles. As a result of the stability in the EPE account base, we have also seen the performance of our loan book return to more normal levels. Following the substantial write-offs of the last quarter, the book was halved in value. Due to our strict credit criteria, we’re not seeing any real growth in the number of loans over the quarter. Default levels are now broadly in line with historical trends, and we believe we are conservatively provided against the current book. Smart Life has seen a similar trend as Moneyline, both slightly delayed as their policies have a 4-month grace period before lapsing. This meant that a significant portion of the lapse was due to the auto-migration to the South African Post Office, only crystallized during the third quarter of 2019. But the policyholder base is now stabilized at around 230,000 lives. Smart Life is now focused on rebuilding its customer base and is developing new products both for the beneficiary and broader markets in order to achieve growth. Our corporate expenses increased primarily due to a $5.3 million impairment loss related to DNI as well as higher-acquired intangible asset amortization, non-employee direct – non-employee director expenses, transactional-related expenditures and external service provider fees. We carry our investment in Cell C at fair value from fluctuations and its carrying value from reported period to reporting period are expected. During Q3 2019, we recorded a non-cash fair value adjustment of $26.3 million, which adversely impacted our results. Our valuation methodology has remained unchanged and the decline in fair value is attributable to lower EBITDA at Cell C. With the market multiples of the peer group of 8 African and emerging market mobile telecoms operators, broadly similar to what we saw in the last quarter. The weaker trading performance in Cell C reflects the difficult trading conditions in the South African consumer market as well as inflated costs associated with their network-sharing arrangements. We also had to impair the carrying value of the Cedar Cellular notes in line with this reduction in fair value. Our third quarter 2019 net interest expense was $4.5 million compared to net interest income of $2.7 million in the comparative quarter. This movement was due to reduced cash balances in the business compared to a year ago, due to the substantial losses incurred over the last 6 months as well as the cost of funding in our ATMs. We recognized losses from equity-accounted investments of $0.5 million during the third quarter of 2019 compared to earnings of $4 million in the same period last year. The reduction from the comparative period is primarily due to the fact that DNI did not contribute to equity income in this quarter as the business was consolidated for the quarter. Following our recent disposal, which I will discuss in more detail later, DNI will be equity accounted for the fourth quarter 2019. We expect the contribution from our equity-accounted investments to be positive on the annual basis as it is impacted by the timing of reported results by our various investments. At March 31, 2019, our unrestricted cash was approximately $48.8 million compared to $70 million at the end of December. The decrease in our cash balances from the last financial year-end was primarily due to significantly weaker trading activities, scheduled debt repayments, dividend payments to non-controlling interest and capital expenditures. These were partially offset by the contribution from the inclusion of DNI and a decrease in our South African lending book. We had short-term banking facilities available to us in various territories of $32.4 million at 31 March, 2019, $8.9 million of which had been utilized. As of March 31, 2019, we had restricted cash of $74.2 million and associated short-term facilities utilized optimally $4.2 million. We have in place short-term credit facilities on ZAR1.75 billion or $131 million, specifically to fund our ATMs in South Africa, and if presented cash drawn under these facilities and in the processing system as restricted cash on the balance sheet. Free cash flow utilization for the quarter amounted to $15.7 million, which included the $5.3 million investment into working capital. On March 31, we reduced our shareholding in DNI from 55% to 38%, selling a 17% stake to the existing DNI minority shareholders to ZAR400 million. This amount was used to settle the deferred purchase obligation due under the terms of the DNI investment. Subsequent to the balance sheet date, on May 3, 2019, we concluded the sale of a further 7.6% DNI to RMB. ZAR215 million of proceeds we used to settle, along with ZAR15 million of cash resources, long-term debt of ZAR230 million that was outstanding as of March 31, 2019. Following the second transaction, there is no term debt left on the group’s balance sheet. While we are now debt-free from a term debt perspective and have $24 million of net cash on the balance sheet, we have liquidity requirements in the short term that constrain our ability to commit resources to share buybacks. In particular, there are working capital funding requirements in respect to future amount of cash flows in all of the businesses, we need to continue funding the international operations and the South African operations as they return to profitability. And we have some new product launches and some operational requirements on growth opportunities in some of the South African business units. However, on the occurrence of a liquidity event, such as the disposal of the remaining DNI investment, this will create capacity for share buybacks. Our third quarter 2019 tax benefit was $2.5 million compared to an expense of $19.4 million in the third quarter of 2018. Our effective tax rate for the third quarter of 2019 has been significantly impacted by impairments and the losses incurred by certain South African businesses, as we have effectively not recorded the deferred tax asset benefits related to these net operating losses. Our effective tax rate will continue to be heavily distorted by losses, incurred by certain of our businesses until we return the affected operations to at least a breakeven position. Our actual and weighted average share count for each of March of 31, 2019, and Q2 2019 was 56.8 million shares. Looking forward to Q4, we have to note DNI will no longer be consolidated into our results and will, therefore, not contribute to reported EBITDA in Q4. Excluding DNI, we expect an adjusted EBITDA loss of $3 million in the fourth quarter, which would continue to show sequential improvements in DNI’s contribution as excluded from the third quarter. We feel we have made significant progress in the last quarter towards achieving our aim of eliminating the significant EBITDA losses in the South African operations by the end of the fourth quarter of 2019. And once this is achieved, we can change our focus to rebuilding the business off a stable base, particularly if we also have available capital to exploit opportunities that have already been identified. Internationally, we are excited by some of the product launches and initiatives that should materialize over the coming months, which we expect to result in IPG returning to profitability during the next fiscal year, while KSNET should start to see some benefits from the current business and strategic review. These factors should combine to provide a positive outlook for the 2020 fiscal year. We can now open up the call for Q&A.

[Operator Instructions] Our first question is from Allen Klee of Maxim Group.

So, hello, for your South Africa businesses, there is a lot of moving parts, can you give us a sense of where you feel once it stabilizes kind of what a run-rate we are on potentially revenue and profitability? And to what extent, in terms of the EPE-related and the network fees that you do believe you can grow those businesses or more specifically on the EPE that you can do that without getting impacted negatively at all by anything related to SASSA? Thank you. Herman Kotzé: Thanks, Allen. A multifaceted question, I will comment on a part it and I’ll let Alex comment on the numeric aspects of it. I think it’s important to recognize that going forward, towards sort of the end of Q4 and bearing in mind that we are already half way through the fourth quarter, we certainly see a stabilization of the core South African businesses. We certainly do not expect any further major fluctuations, other than the remaining issues that we have with SASSA, and we’ll deal with those as and when they take place. There are some legal processes in place, there are some negotiations in place, but as and when those are concluded, we’ll obviously keep you up-to-date. So the focus going forward for us in South Africa is really to continue with the build-out over EasyPay Everywhere account holder base. And that we want to do in conjunction with Finbond, which is one of our portfolio companies. We obviously in conjunction with Net 1 to focus on the rollout of our financial services offerings, including the micro-lending part of things, the insurance part of things and other value-added services and of course, connected to all of that is the continued rollout and utilization of our point of sale in ATM networks. And so if you put all of these things together we are certainly aiming to stabilize the business and to return it to the kind of utilization levels and growth levels that we had seen prior to the whole story saga with the EPE accounts. But I think the other important part of it that I would like you to note is that the offering that we’re putting together from a financial services point of view for our EPE account holders, both current and looking forward, is not only limited to what used to be our target base of grant recipients. Our products are now targeted to a much broader base of South Africans. We see significant opportunities in also addressing the needs of the so-called underserved or under-banked markets. So, these are people who are employed and have bank accounts, but who are probably not too happy with the service that they have or access to financial services that they received given that those accounts are normally highly restricted in terms of access to financial services and the cost of the financial services that is made available to those people. So, those are the key focus areas for us going forward. Alex, if you want to give an indication of where we think a sustainable revenue flow is, please?

I don’t know. It’s certainly in terms of if you look at the third quarter numbers and strip out the effect of DNI, we have certainly seen revenue on a monthly basis fairly stable, so for the next quarter as that would be approximately about $70 million. As we said that, we are trying to stabilize to a neutral breakeven EBITDA position of that level. So we would look to be seeing growth into 2020, which would move the revenue line with a drop-down into the EBITDA number, given quite a substantial fixed cost base. So a lot of contribution will drop directly to bottom line.

Okay, thank you. And then moving to your international area, two things, one on KSNET, the revenues are down 13% constant currency or 12% in U.S. dollars. So it seems like there’s things going on there, I guess it’s the regulatory side, but it doesn’t seem like it’s turned around yet. I’m not really sure what this review is doing or that’s changing that, but at one point you thought you could get to $40 million EBITDA next fiscal year that seems quite a stretch at this point. But maybe if you could give us something on to understand that a little better. And then the rest of IPG, it sounds like because you are waiting for Bank Frick to get approval for related SME lending, that maybe we don’t think that, that can become potentially turning around until calendar 2020. Let me know if those things – if that’s a true statement or if I am thinking about that right? Thank you. Herman Kotzé: Okay. So, let’s start with the KSNET side of things. Allen, so I think from the outset, Q3 is a notoriously difficult quarter historically as well as this year from a seasonality point of view to use as an actual benchmark. There is a lot of things happening during the third quarter of every fiscal year. We have a number of holidays. There are all sorts of extraneous factors like the weather that plays a role, the timing of the Lunar New Year holidays etcetera. So just keep that at the back of your mind when looking at Q3 specifically, but I think the key takeaways for us from the last quarter is yes, there was a reduction in the values and the volumes processed. There is some impact if you do the year-on-year comparison in terms of how the fees are now calculated, where some of it was previously done on a volume basis that it’s changed over to a value basis. But I think the important element to bear in mind is that there was actual growth in the operating margin levels of the business for the quarter. And second if we look at the initiatives that are currently underway, following this fairly exhaustive review of the current business and the opportunities that have presented themselves to us. There are, I think, 3 or 4 main areas that we will be focusing on in the next couple of quarters going forward, and some of these have a shorter-term impact than others. But I think the key takeaways for us without giving away too much of our business strategy, we obviously want an extensive review of the current customer base. It’s no secret that following the fee cuts over the last 2 years and the changes in the way that our revenues are calculated, there certain aspects or pockets of the business that are not necessarily as profitable as they could be. And we are looking to right size those by doing the appropriate analysis. So, bearing in mind that we do have 250,000 merchants as customers, this is, obviously, quite an intensive exercise to run through. We are then looking at specific direct marketing initiatives. KSNET, historically, has been very reliant on an agent network, that in itself has some cost implications that we are addressing. Then we are focusing on growing our niche businesses in KSNET, those are banking then payment gateway. And finally, the working capital finance businesses. So those will form the basis of our focus and activities going forward and will in the end result in what we believe is still an achievable EBITDA run rate of around $40 million towards the end of calendar 2020. So that’s the run rate that we have placed in our proceeds. So that’s the target where we want to end up towards the end of fiscal 2020. In terms of IPG, important to note, as you’ve mentioned, that a lot of what has been done and all the preparation and all of the sales pipeline that has been built is absolutely dependent on the ability for Bank Frick to be recertified by Visa. In order for IPG to operate as a payment facilitator, we need to get that audit and that process out of the way. We believe that that process will be done in the next few months. It’s literally a matter of just getting the Visa guys to do the work and to give us a certification. So as soon as that is done, we will be able to onboard our first merchants. We will be able to issue cost. And we’ll be able to execute and implement the entire business plan, which is focused on the SME business segment within the European space. And so, we expect to see a rapid improvement in the contribution and the overall revenues on profitability as soon as we can get that certification out of the way. Having said that, I also need to just tell you that there is obviously not a single point of failure, we are also exploring and initiating other banks as potential gateways or partners for our European issuing and acquiring strategy. And so, if you bundle all of that together with, obviously, the new product launches that we have targeted for the next 3 to 6 months, we believe that there will be a major improvement in IPG during already during calendar 2019, but specifically, for its contribution during fiscal 2020.

Can I ask another question? Herman Kotzé: Yes. Sure.

Oh, great. What was what would have the EBITDA loss then in the quarter if you excluded the DNI contribution? Herman Kotzé: Alex?

If you excluded the DNI contribution of timing...

Well, I think because you said that you the loss would be $3 million next quarter, and you said that, that would be an improvement over what it was. So, this quarter, it was $1 million loss. But what would it have been if it – if you’d – so we can look at like apples to apples.

Yes, sure. So, if so DNI basically contributed EBITDA of $8.4 million in the quarter. So, the loss would have been $9.4 million. Herman Kotzé: 100%.

Yes. And that’s based on 100% with DNI. The guidance we gave in the for this quarter, the $5 million loss, basically included 55% of DNI’s EBITDA. So, we were basically directly in line with what with where we guided on the EBITDA line.

Okay thank you very much.

Our next question is from Scott Buck, B. Riley FBR.

First, congrats on the progress to date. I was hoping you might be able to provide some sort of color around what’s your view as strategic or I know you used the term core fintech business on the announcement earlier in the week, I just want to get a sense of rather than trying to read the tea leaves what maybe this business looks like once you shed some of these additional investments and nonstrategic business lines? Herman Kotzé: Okay Scott. I’ve got the strategic review is a process that’s obviously quite complex and time-consuming and it’s one that is currently underway. As we indicated, the core focus for us is really the fintech side of our business. In the South African environment, that really revolves around our EPE offering and the related financial services around that. So, the technology, the tech part of fintech would be the rollout of our UEPS/EMV platform. And the fin part of the fintech would be the offering of financial services. So that includes loans, insurance in and value-added services, prepaid, airtime, utilities, et cetera, et cetera. The same thing, I think, would apply to the IPG business. Obviously, a key part of what we need to consider as part of this review is what the market ability value of any of the potential non-core assets would be. And so that is an exercise that we are currently doing. It is we are assisted by some very capable and competent advisors in this regard. But I think as a key takeaway, the financial technology elements of the business are the ones that we consider core and the others are probably on the list of non-core assets. And once we made our final decisions and we’ve mapped out a plan in terms of how we potentially could realize some of the non-core assets, we will let you know. But this is by no means a fire sale or a dissolving of the company. We want to do this very properly. And we want to make sure that we end up with what we believe is going to be the absolute core focus of the business going forward.

Great. I appreciate the color there. Second, how confident are you in that DNI will exercise the call option? Herman Kotzé: Well, obviously, we would not have granted the, this option for the period that we have unless we had some, I think, indication that the likelihood or the probability of the exercise was something that could happen. Structuring these options and putting together all the legals is also fairly complex and quite time-consuming. And the fact that we went through the effort of doing so, I think indicates that there’s a reasonable possibility that the option will be exercised. I know for a fact that there are number of interested parties. The business is a fantastic cash-generative business. It is highly attractive to any potential investor in the in that market space. And we’ve given ourselves and we’ve given the other side until December to do so, so I wouldn’t want to stick my neck out on exactly what the timing would be. But I do think that it’s highly likely that the option will be exercised.

Great. Last one. What kind of time line can we expect in terms of additional announcements like this? Are we talking months, quarters, years or probably all of the above? Herman Kotzé: Probably all of the above. Some of these are shorter-term initiatives and some of them are a lot easier to execute. Again, it’s all a function of when you look at the strategic review, there’s a function of marketability, valuation and interested parties. When you look at the product side of things, I think that there will be a lot more being announced rather in a matter of months than years. But we will, obviously, keep you fully abreast of any developments, and we will announce any of these transactions as and when they take place.

Perfect. One more, I lied, guys. Are there any additional significant cash outlays in regards to further retrenchment costs expected during the fourth quarter? I know you’ve kind of laid out what some of the cash requirements are for the business. But kind of outside of that, any outsized cash requirements during Q4?

There may be a few more restructuring costs, but we’re not talking about outsized ones more than we think. Herman Kotzé: Yes. I think we’re largely complete. It’s tying up all the loose ends up. But by and large, I think, we know we’re close to expecting what we’ve seen in Q3, which was the absolute sort of water-shaped quarter as far as those costs were concerned.

Perfect thank you guys.

Our next question is from Josh Rosen of Peter Street.

Hi, thank you for taking my question and congratulations on the process that you have made. You went through a pretty rapid shift between finding majority position in DNI, and now you’re looking to sell that entire position. Could you talk about the strategic shift there? How does it affect the strategy to bundle financial products with South East starter packs? And what does it imply for the investment in Cell C? Thanks. Herman Kotzé: Sure. Josh, we obviously went through the initial acquisition, as you say, of DNI, that then was increased to a control position towards the end of last year. I think squarely as a result of the events that took place over the October to February period and the dramatic impact that it had on the South African business, we obviously had to take a long and hot and fresh look at exactly what we needed to focus on. We needed to understand what we could do to resolve the pretty dire situation that we have found ourselves in. And obviously, as I said before, exactly what the core focus of the business will be going forward. DNI is a fantastic business as I’ve said from a profitability and a cash generation point of view. We’ve got a fabulous management team. And it is very much involved on the telecom side of things. It has a distribution network, that we believe is complementary to the one that we have built up. But also, we get the full analysis of where we wanted to go and how we could rapidly resolve the situation that we could that we found ourselves in. We also looking took into account which businesses we would be able to work together with, without necessarily being a majority shareholder in that specific business. And so DNI fell squarely in that bracket. We know that we have the ability to continue to work with the management team in DNI to rollout the products and services that we’ve identified. As far as Cell C is concerned, DNI obviously remains an important distribution through our shareholder in Cell C we also remained close to the DNI business as a natural progression of our ownership there. I think Cell C is a slightly more complicated investment to deal with. We are a 15% shareholder in that specific business. And over the last couple of months or quarters, we have been giving you an indication of the kinds of issues that Cell C is facing, Cell C itself obviously produces some public results from time to time. And given that the current space of the favored Cell C and the current transactions that are underway, I think it would not be appropriate for us at this point in time to talk about any potential exit of that investment. We have always spoken about the liquidity event or the exit event being an IPO or an, a strategic sale of the business. And so, although that’s not something that is in the pipeline in the short term, obviously as that progresses over the medium-term, the Cell C management team is on record by stating that they are targeting an IPO towards 2021 or in roughly 3 years’ time. That’s when we will probably consider the alternatives that we have as far as the Cell C investment is concerned.

Great. Thank you. And just as a secondary question. I know there was talk of re-segmenting the business. Now that you no longer have the SASSA contract, is that still something that you are looking at? And if so, when will we expect you to implement it? Thank you.

Yes. We are still looking at it. We’re, obviously and as we’ve indicated, we’re going through this strategic review. And we think it’s appropriate to finalize that first and then look at re-segmentation at that point in time. We’re still looking at the business as we have done historically at the moment. So, it will be driven by this strategic review process.

Our last question is from Allen Klee.

Sorry, I have two questions that don’t have anything to do with each other. The first one is could you give us what the EBITDA would have been in the quarter from the not – kind of what you said last quarter, they’re annualized. If you excluded the trouble businesses, what that would be? And then second, could you talk a little bit more about how you think about the value of the network you have in South Africa and the processing fees you get from that? Maybe we can understand the value of that? Thank you.

So, I think just on the first question, the EBITDA run rate of the so transaction-type businesses, so that’s KSNET, EasyPay, first in the ATM business, would be in the region of $25 million to $30 million. And then I think as Herman mentioned, we would also be looking at receiving dividend from DNI going forward based on the 30% holding. And that’s probably about $4 million of dividend flow annually out of the remaining 30% investment that we have now. So that’s all based on Q3 run rate in terms of those 4 operations that I discussed. So, in particular, the KSNET run rate for Q3. So that’s kind of the EBITDA sense in terms of how we look at the value of the infrastructure. We obviously see that as critical for the future of the South African business. But there’s a strong infrastructure that’s being built out over the last 20 years as part of servicing the SASSA contract. We’ve got a significant reach into the South African population. And in particular into that un-banked and under-serviced population, we think we’re probably within 3 miles of most of the South African population. And it’s really around leveraging that infrastructure. And from that, we can generate a combination of ATM fees, interchange fees, issuing fees and then the related financial services, particularly the loans and the insurance products. And then on top of that I mean having worked about the fact that we can look to continue working with DNI regardless of the state of the size of our stake. And so there is also opportunities in terms of leveraging telecoms and lifestyle type products into that mix into that infrastructure. And all of that with the cost of a strong network effect should leave the higher incremental margins as we grow the customer base again.

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