Jabu Mabuza - Chairman Alex Smith - Chief Financial Officer Ali Mazanderani - Non-Executive Director Dhruv Chopra - Investor Relations

Good day ladies and gentlemen and welcome to Net 1 UEPS Technologies Incorporated, Quarter Four of 2020 Earnings Call. All participants will be in listen-only mode. [Operator Instructions]. Please note that this conference is being recorded. I’d like to hand the conference over to Mr. Dhruv Chopra. Please proceed sir.

Thank you, Judith. Welcome to our fourth quarter 2020 earnings call. With me today is our Chairman, Jabu Mabuza; our CFO, Alex Smith; and our Non-Executive Director, Ali Mazanderani. Our press release and supplementary investor presentation are available on our Investor Relations website, ir.net1.com. We will be referring to certain slides in the presentation during our prepared remarks. 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. 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 understanding the underlying trends of our business. As you know, the company’s results can be significantly affected 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 Jabu.

Thank you, Dhruv. Welcome to the Net 1 results presentation for the quarter and financial year ended June 30, 2020. This being my first results as Chairman since taking on the role in July, the last quarter has been a time of change and renewal at Net 1. On the Board, Net 1 welcomes three new Directors in May being Antony Ball, Ali Mazanderani, and myself. That was followed in June by the appointment of Mr. Kuben Pillay and the resignation of four long serving directors, being the Former Chairman, Chris Seabrooke, Paul Edwards, Alfred Mockett and Alasdair Pein. Let me take this opportunity to thank them for their service for Net 1 over many years. We have also established a capital allocation committee that will be Chaired by Antony Ball, who is a highly accomplished investor in the private and public market. In addition to the Board changes, we have had a relative change. Herman Kotzé announced that he will be stepping down from the CEO role in September. Herman has spent 22 years with the group. On behalf of the Net 1 Board, I would like to extend our senior well wishes to Herman for his future endeavors. Our CFO, Alex Smith will take over as Interim-CEO until the Board finalizes the appointment of a permanent CEO. To ensure quality during this transition period, I’ve also set up the weekly Chairman’s meeting. Finally on this theme on change and renewal, we have initiated a strategic review process during the last quarter. To ensure independence, the review was led by non-Executive Director, Ali Mazanderani, who is an accomplished investor and operator in the financial technology business globally. During this presentation, Ali will share the key insights from this strategic review. All of this change and renewal has been driven by the goal of unlocking value for shareholder in this deeply undervalued company. Change is a journey rather than a single event. But we have taken the significant initial steps over a very busy last quarter. I am excited to be part of this journey as Chairman. I will now hand over to Alex, to walk you through the Q4 financial and operational results.

Thank you, Jabu, and good day to everyone. I hope that everyone is healthy and safe during these unprecedented times. We’ll follow a slightly different format today, where I will address some of the operational, financial and capital allocation topics, and then Ali will discuss our strategy which was born after the recently concluded strategic review. We will then open up the call to Q&A. Before we dive in, I'd like to echo Jabu’s thanks to Herman. We are very grateful for his significant contribution to Net 1 over the years. During his tenure at Net 1 the company attained a number of significant milestones and he leaves the business well capitalized with a solid platform for growth. While the COVID-19 pandemic is global in nature, given the current mix of our operations, the most relevant and material impacts for Net 1 are experienced in South Africa and therefore limited parallels can be drawn between the trends in the U.S., Europe and many other markets and South Africa. Since the easing of restrictions in South Africa on the 1 June, 2020; however, our ability to operate our business has picked up immediately, though it continues to be affected by the ongoing impact of the pandemic on the wider economy and the ability and willingness of people to move around South Africa freely. Despite these disruptions and restrictions, I am proud of our employees who continue to serve our customers during this unprecedented time, and would like to thank them for their tireless efforts. The key financial highlights for the fourth quarter of 2020 includes, in the fourth quarter total revenue was $26 million, which was a 14% decrease year-over-year in South African Rand, excluding the impact of the SASSA implementation fee reversal in the last quarter of 2019. The decrease…

Thank you, Alex. As is my first time addressing to shareholders of Net 1, it’s probably best to provide you a brief background before we get to the crux of the strategy review. I’ve been appointed to the Board as a Non-Executive Director in May 2020. In addition to my duties as a Director, I’m also consulting to Net 1 on its strategic review, and I’ll continue to be involved in supporting the business through the implementation of that strategy. Prior to my role in Net 1, I spent the last decade investing in financial technology businesses around the world; in Latin America, Africa, The Middle East, India and Southeast Asia. Several of these businesses have grown into $1 billion plus market capitalization companies and I have really seen the power of a strong value proposition that enables under-serviced populations to access digital financial services. The evolution of the business over the past two years and the need to focus on our competencies form a critical influence in the strategic review process. One of the most notable recent developments was the establishment in the capital allocation committee of the Board. I am a member of that committee and we are tasked with ensuring that shareholder funds in the business are allocated prudently. On a housekeeping note, I will refer to certain slides and supplemental investor presentations, which is being posted on Net 1’s Investor Relations site, and will also be available on the webcast. I’ll start with slide seven. What are Net 1’s Core Competencies? When we commenced the strategy review, our first task was to identify Net 1’s core competencies and where it has a clear white right to win. The first to Net 1’s core competencies is the provision of low cost financial services to under-serviced consumers. These…

Thank you very much sir. [Operator Instructions] The first question comes from Raj Sharma of B. Riley.

Hello! Good morning. I have a few questions. Just starting off of Ali’s, talking about the assets and technologies in South Africa between the businesses, are you missing any access of technology? Should we expect the company to make any acquisitions or does network largely have all that you need to grow your core business and then I have a couple of others.

So yes, good morning. I guess I should answer that. So Net 1 largely has all of the assets and technologies required to execute upon the strategy. As I said, there is three areas that it could augment its capabilities in. One of those areas is in the last mile distribution in the micro merchant space. The other one is – there is a pricing benefit if you are able to access the national clearing settlement arenas for acquiring ATM and accept deposits. That would be facilitated by a mutual banking license. I think the further I touch on this is clearly a relevant and fresh brand. I think that each of those, the first two predominantly can be addressed by acquisition, but do not have to be addressed by acquisition.

Right. And then just going off the need for a mutual banking license, does that play into the plan that you have to submit the filing with the SEC. Would that require additional capital? Could you talk a little bit about that? You know if you were to – since your proactively trying to satisfy the requirements of the Investment Act, what would that sort of imply? Would that mean you know you’re going to take on more of a majority stake or is there a plan that you would divest some of the minority investments? How does – can you help us just understand how you foresee that playing out?

Well, I’ll just comment on this Ali. I think in the way the Investment Company Act classification works, obviously the more operating assets that we control, the better in terms of having a clear site of your classification under the Investment Company Act. So if we were to take control of another business for example, it would push us into a better position in terms of that Investment Company Act classification. Obviously it depends on a multitude of variables, so it's not a straightforward calculation necessary, but you know at the moment under the Investment Company Act, cash is regarded as a neutral asset and if you can convert cash into controlled operating assets, then that helps significantly in terms of how you'll lead under the Investment Company Act. Is that alright?

So, does that – does this imply – what does it tell you about your strategic direction? What does that tell us about your strategic direction? Does that mean you are trying to become an investment company, you know do you foresee that classification coming through or – I'm just trying to understand what’s the direction in the specialty if you want to grow your South African business and most likely possibly need a mutual banking license. Would that then fairly put you in the investment company category?

No, it’s more likely to assist us in making sure that we’re not an investment company under the Investment Company Act. So the plan is that you know we regard ourselves as an operational business non-investment company, and investing in our South African business and lifting its fair value would naturally help to fix the Investment Company Act that we have at the moment.

Right. And can you talk about the timelines for this process? Do you think that this – how long do you think this takes, the determination?

It's about – really there’s no fixed timelines unfortunately, so we can't really unfortunately give a lot of clarity on the timelines. As we said, we're in the process of submitting an application and after that, because I understand that it's really a process that the SEC would then run through and as I said, there aren’t any fixed timelines around it.

Right, thank you. And then what my last question is, what did the strategic review – I guess what did the strategic review view yield in terms of the non-strategic assets, you know MobiKwik Bank Frick, Ceevo, the Carbon . If not strategic can investors, assume that they would eventually be divested?

Ali, can you pick that up or do you want me to?

Sure. I’m happy to do it. I mean I think that the most important change for the operations outside of South Africa is that the board has taken a decision on to exit the Ceevo business. The business has been significantly cash flow negative since inception and doesn’t have material operational losses. For the purposes of prudent capital allocation, the board deems next to the business is the obstacle path. We will look at all of our strategic investments in the coming months. We have no specific plans to divest into those. All of the other operations will be assessed on a case-by-case basis.

And on the same token, you might decide to up your state in any specific not-strategic asset. Is that fair that you might increase your investment or divest some.

So, I mean I think that the fact that we are focusing our interests on South Africa and that, that is our strategic priority, which means that surely it will be through that lens that the capital allocation committee will be looking at any potential opportunities.

Yeah, I’ll take my questions – I'll take this offline. Thank you so much.

Thank you. The next question comes from David [inaudible] Southside Capital Management.

Hi! Hope you can hear me?

Yeah, loud and clear.

Okay, great. Yeah, good afternoon and thank you very much for the call. Yup, maybe if I could just try to pry a little bit just from the previous questioner. I mean Finbond is practically disclosed that they are looking to sell the SA operations. You know how is that – I'm kind of drawing the line here to your mutual banking license in here. How is it influencing you know what’s your strategy going forward and you’re thinking going forward? The second question I had is, some of the other bank holdings or holding companies of banks, the regulator has started to impose some extra regulatory burdens and perhaps capital burdens, which is meant – they’ve spun off these banks. Have you had this conversation with the rate, the South African regulator, that’s I guess is also faltering into this investments, holding company criteria for the SEC. Has this also been an issue and has this come up in your thinking. Maybe you could elaborate on that. Thank you.

Maybe just, just framing the question a little bit – the reference to a mutual banking license is not a precondition of the strategies, not a necessary condition. Having a mutual banking license could provide additional strategic benefits, but it’s certainly not the changing item. Just to contextualize that, the path in which they could be pursued, that is the most fairest; there’s no one particular direction of travel. I’ll let Alex make a comment and see if he has anything specific to say with respect to Finbond’s South African regulator.

Yeah, we certainly haven’t had any conversations with the regulator and I think a part of any decision that we make around our mutual banking license would include you know assessment of what are the associated costs and the regulatory requirements with that. So you know at this point it’s really too early to talk about how that might influence the situation. You know we do have a lot of regulated entities within the South African group anyway; we have the insurance company; we have a couple of FSP licenses, so we’re not a stranger to the regulated environment anyway.

Okay, and so if Finbond is looking to sell their South African operations and you're not going to follow on, how does that impact your strategy, them not having that kind of distribution based accredit.

We don't really utilize their distribution base to originate credit at this point anyway. We do have some cooperation and collaboration arrangements, but they're relatively small in terms of – and relatively recent and we really don't see them – see those relationships as critical in terms of you know growing our financial services business.

And sorry, my last question. So then is that, then am I reading you correctly that Finbond doesn't play a funding benefit to you, more a distribution benefit. What – then could you maybe talk about what that benefit is?

Are we talking about Finbond today or…?

Yes, Finbond today.

At the moment we just have – we have an investment into – a successive investment in Finbond. We do collaborate in certain areas as I said, so there is a little bit of cross setting, but it's relatively small. We don't sought any funding from Finbond and we are providing some services and some – particularly IT services to Finbond, but there is no real – what’s the right word, cross benefits at this point with them.

Okay, thank you very much.

[Operator Instructions] The next question comes from Dennis Captain [ph] of Captain Equity Analysts [ph].

[inaudible] Hope you can hear me?

You’re very soft Dennis.

Okay, Alex and Ali thanks for the presentation, I really appreciate it. Two questions from my side. Number one, given that your focusing on South Africa, would you be keeping your NASDAQ listing? And number two, with regards to the ZAR150 billion of TAM, is most of that Greenfield opportunity that hasn’t been tapped or do you have to take market share away from others?

Maybe I’ll, I could start with – this is Alex. So I’ll start with the second question. The TAM that is represented there represents the TAM as it exists today. The green – so if you like, that pie you would be taking from others. However, the total addressable opportunity if you were to include the expected growth of the market as a consequence of digitalization would be a larger TAM. So you could generate revenue both by taking share and also by driving the market. Clearly as Net 1 is also operating with under-serviced customers, there is material opportunity to drive the market, and then a lot of these verticals there is limited competition. In terms of the, first question, Alex I don’t know if you want to have a go.

Yeah, I mean I don’t think the NASDAQ listing is up for discussion at all. I think we don’t see any change in that position at all.

Thanks. I appreciate the answers.

The next question comes from [inaudible].

Hi! Thanks for taking my call. I have some questions on the restructuring of Cell C. Yeah, other investors are optimistic that they can recover some of the value, some of the investment, and I wanted to know how evolved are you in the restructuring process of Cell C? And do you think you can recover some of the investment? And do you have any time lines that you can guide us on when this will be completed?

I could take those questions on Cell C. We are involved to a degree in terms of that we are obviously a 15% shareholder and have board representation of Cell C, but we are not actively driving that recapitalization process from our side. We're always hopeful that we'll be able to recover something out of the original investments, but as you've seen from our financials, we’ve written that investment down to zero. You know we certainly think there is a business there if we get the capital structure right and that would be valued and that would be realizable out of it. In terms of timelines, I’m afraid I can’t shed any further life on timelines other than – and everyone’s working very hard to expedite that process and complete it as quickly as possible.

I appreciate your answer, but I just want to push back a bit. You know everyone is obviously hoping to recovery some money, but how realistic is that hope? Why are you hopeful?

I think, you know as I said there is a strong core business there, and this is more of a balance sheet structuring issue in terms of where Cell C is and if that balance sheet can be right sized in terms of its structure, then there is no reason why the underlying performance can’t come through and deliver some value.

But as an equity holder, I mean obviously we are thinking that the bondholders would take a quite a significant hit, which means that the equity holders will be wiped out. Am I misunderstanding the restructuring process, and why do you think equity will have value?

That will all come out in the detail of recapitalization when its announced in terms of how that is structured. When you bring the investment down to zero, you know there is no doubt that any sort of value would be welcome.

Okay, buy you – have you had any site. The rumors that the term sheets are out. Have you had any site of it?

Nick hi! This – Nick, this is Dhruv. I think we are just clouding up the call for the rest. So I would recommend you you know pointing these questions to either Cell C or to Blue Label, because we would like to address some of the other areas. I think Alex has said what we can, publically.

Yeah, I’m just trying to, you guys are – it’s an important part of the valuation process of the company, so

No, its valued at zero, so...

No, no that’s the accountants’ valuation. I mean I need to determine the value, whether we can recover that valuation and I’m just asking you, other investors are very hopefully and you guys are hopefully. I’m just want to know why are you so hopeful and whether you’ve had site of it, any term sheets or anything?

I think some of that borders on material, non-public information. But I’m happy to have a conversation with you offline and we can facilitate a call with you and the Blue Label and Cell C teams.

Okay, thank you.

The final question comes from P.J. Solit of Potomac Capital Management.

Hi, good morning. Thanks for the strategic plans. Obviously over time, if you're successful in implementing these plans and becoming a profitable fintech company in a large market, you want be valued in terms of half of cash investments at that point. So obviously there should be some urgency to take advantage of the opportunity to implement a buyback and take advantage of that now. I guess can you share any more thoughts on that and any more thoughts on the time line in terms of when was the SEC submission made? Is there any guidance or any dialogue back and forth or do we just need to sit and wait?

Hi P.J., unfortunately there’s very little sort of clarity we can give on timelines. The application has not been formally submitted. I think it’s close, but not actually submitted at this point. But and then once we are in and formally applied, then we don’t really have a great deal of insights into how long it will take to get a resolution on the matter. So it’s very difficult unfortunately to give you any guidance on timelines, but we’ll continue to do all we need to do from our side to expedite the process.

P.J., its Dhruv. Just add to that point – yeah, just to add what Alex was saying, so I mean there is a parallel right. There is, one is the application and clarification from the SEC, which Alex has addressed. But there’s also the other side, that if we build the business operationally, then we could self-cure that problem or drastically improve the ratios, and that is within our control and that is where we're trying to focus on in parallel.

Okay, and is it realistic to think that you could self-cure in the next couple of quarters here in calendar 2020 or is that too aggressive.

I think that’s probably a little.

Is it even possible?

It’s probably a little big aggressive in terms of a self-cure. I think it would probably be into third and fourth quarters of this fiscal.

And the other round of going through the SEC, digital cancelled right into Calendar 2020 resolution could be a possibility in that rout?

I think a remote possibility I think is the advice at this point.

Okay. Is there a scenario in fact a council as well where if you have the pathway and the visibility on one or both of those pathways, that you could start some form of capital return before actually getting entirely there.

We haven’t had that discussion yet with the council.

Got you. Okay, thank you.

Thank you. Ladies and gentlemen, that was the final question. Thank you for joining us on the Net 1 UEPS Technologies Incorporated conference call. You may now disconnect your lines.