Good day, ladies and gentlemen, and welcome to Net 1 UEPS Q1 2021 Earnings Call. All participants will be in listen-only mode. [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, Claudia. Welcome to our first 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 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 financial 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 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. So with that, let me turn the call over to Alex.

Thanks, Dara, and good morning to everyone. And thank you all for joining us on our first quarter earnings call. We hope everyone’s staying healthy and safe during these difficult times. On today’s call, we will run through the following. We’ll review some of the financial and operational highlights from the quarter. Then discuss our short-term initiatives, which will include some more insight into our Investment Company Act issue and provide a progress report on resolving the matter, which will lead into our related capital allocation plans. Finally, I’ll review our long-term initiatives relative to our new strategic focus before opening it up for questions. First, I would like to say we’ve seen some encouraging signs in our operational and financial results this quarter as the business return to relative normality, following the lift in various lockdown restrictions that began in early June. We were fortunate as a group that in the easing in June allowed almost all of our operations to return to full activity whilst maintaining all the necessary precautions in terms of social distancing, and provision of sanitizer and personal protective equipment. We are extremely grateful to all our employees for the dedication that they’ve shown during these times in continuing to deliver services to our customers, many of whom are among the most vulnerable in our society. Their commitment to ensuring the safety of all our customers and colleagues has been unwavering. With the return to full operations, we have seen increased transaction processing volumes, loan originations and the significant increase in the utilization of our ATM infrastructure over the last quarter. In addition, while relatively small in number to date, we saw increased demand for our consumer bank accounts, EasyPay Everywhere or EPE in September, and this has grown further in October. Indeed, October will…

Thank you. [Operator Instructions] The first question comes from P.J. Solit from Potomac Capital Management. Please go ahead P.J.

Hi, good morning. Hi, P.J. Thanks for the the transparency in some of these issues. It’s good to see the – some of the metrics in South Africa coming back with transactions and loan growth. I guess, in terms of capital return a few questions there, the $50 million, is it still a possibility that that could be in an ongoing buyback or a tender?

Yeah, thanks, P.J. I think there are a couple of aspects to this. So, I mean, first of all, just to reiterate, we see an enormous opportunity in South Africa, which is experiencing an acceleration from a cash economy to digital and plastic-card transactions. And so, M&A opportunities are a big portion of what we would be looking at to establish profitable sustainable business. In terms of the $50 million, we’ve earmarked near-term for capital return, I think we really don’t think it’s feasible to try to buy back more stock than that unless we’re looking at that over a longer time period. We obviously think the stock is inexpensive at these levels. We want to be opportunistic while simultaneously addressing the wishes and concerns of all our stakeholders. I suppose this number could grow as and when we sell other non-strategic assets, and if the opportunity to repurchase stock at attractive levels persists. Look, we do have $100 million repurchase plan approved by the Board in case things change. So that’s something that was will stay under review as we move forward through the implementation of the strategy.

Okay, great. Now on the topic of acquisition, I guess, what does the pipeline look like? I guess, with in terms of size, would you guys spend $100 million or are probably unlikely and you filling some pieces with smaller amounts?

Yeah, look, it’s a little bit early to really start giving any sort of guidance around what the M&A activity might look like. I mean, we – and I think we’re still a little way off in terms of being able to land any M&A activity. I think we would probably look at with the intention to scale that, we’d look at, reasonably sized transactions. But we want to be very strategic in our allocation of capital, make sure that those acquisitions align. And I’d be surprised that we can complete anything before the fourth quarter or so of this fiscal year.

Okay. All right, lastly, it’s good to see you continue to target breakeven in South Africa by the end of your fiscal year. I guess aside from any acquisitions that might accelerate that or help you get there is the biggest step function between where we are today in terms of run rate losses to getting there just continued growth in the loan book or removal of IPG losses or what are the big levers there?

So removal IPG losses is one of the leavers. I think the bigger one is the growth in their loan book and really the development of the number of EPE customers. And I think our focus has probably shifted a little bit towards the development of the EPE customers, which will naturally lead into the growth in the loan book. Well, then perhaps with a little bit of a lag. We have seen, I think I mentioned on the call that, in the prepared remarks that we’ve seen renewed interest in the product from our target base. And in October, it should be the first month in sometime where we’ll see positive net additions to the customer base. And these customers, once they have bought onto the base, they also buy insurance, they take out loans and they utilize our ATM network. So grading these accounts is really key. And, we’re feeling confident that we can do that. Just to give you some flavor around that. I mean, we think that for every 100,000 accounts, that we add, we would probably add about $3 million of annual revenue. And that’s based on our expectations of about $2.50 per month of ARPU or average revenue per user or per account. So talking about the breakeven, if we were to add, say, 400,000 accounts before year end, that would give us a run rate of $12 million dollars annually of additional revenue that would fundamentally lift the performance of the South African business.

Yeah, the incremental on that is very high, right? Is that like a…

Yeah, absolutely.

...probably 50%.

Yeah, if not more, the benefit of having a largely sort of fixed cost base in terms of the provision of those accounts is that a lot of that revenue just flows through the bottom-line. The incremental costs are provisioning, some insurance claims and the cost of putting the cash into the ATM network, so not substantial in the context of the revenue line.

Okay, great. Thanks a lot.

Thank you. The next question comes from Raj Sharma from B. Riley Securities. Please go ahead, Raj.

Hello, good morning.

Hi, Raj.

Thank you for the additional clarity and visibility. I wanted to understand your – I wanted to go back and get some – probably get some more color on the breakeven and wanted to understand the cost base. How do we look at – how do you look at the gross margin of the existing business and the G&A line? Should we see that as increasing or staying stable, because that’s what plays into getting to breakeven and getting higher incremental revenues? Could you please highlight some color there?

Sure. I mean, I think just sort of from a high level, you need to look at the segments that we’ve now produced on the technology side, that’s largely hardware and software type sales, which would have quite a high degree of variable cost associated with it, so direct cost and sales type cost. And then the other areas, the processing and the financial services are more, I guess, fixed cost in nature with much smaller component of variable costs. So when we talk about the stability in the South African cost base, it’s around, we’re really referring to that fixed cost basis sets in services, the processing and financial services side of the business. And that has shown pretty consistent stability over the last couple of quarters. And as I was mentioning, in terms of the last question, the operational leverage effectively in that part of the business is very strong in the – a lot of the revenue that you can add in drops to the bottom line. You might have picked up that cost base has moved up quite a bit in this quarter, if you compare it with the last quarter. There are some disruptions in there related to some pandemic effects in the last quarter. But probably 80% of the growth in that cost base is coming out of that variable cost that I’m talking about in terms of some of the lower contribution side of the business, the hardware and software sales and some of the associated revenue streams.

Right. And then, so the way I’m understanding, it is basically your plan to get to breakeven by – on a monthly basis by the fourth quarter that implies adding accounts.

Absolutely, yeah. That’s going be the primary aim. Yeah.

Right. And the rate, at which you think you can add accounts, as you just indicated to 400,000, new accounts by year end, should get you to a breakeven – easily get you to a breakeven status.

Yeah, we think that would largely get us to the breakeven point, and – that’s certainly of the order of number of accounts that we’re targeting to be at by the end of Q4 2021.

Great. And in the past, you talked about an eventual level of 2-plus million in a few years. Is that the right way to look at? I know the overall opportunities much bigger.

Yeah.

But you could get to 2 million in a year or 2 years time.

Yeah, look, we – that’s still the target into the level we were at before some events that happened at 18 months ago, 2 years ago. So we know the customer base out there that’s had experience of us previously that if they’re approached in the right way would, I’m sure come back to us. And so then the 2 million is still very much a targeted level of accounts. And yeah, if we can add the 400,000 odd additional accounts this year, we would certainly look to continue to grow at that sort of pace going forward. So I would hope that we could get there within the space of 18 months following the end of this fiscal year.

Okay. And then, I just have 1 more question, and then I’ll get off line. So you had talked a lot about last quarter about substantial under-banked merchant effort, merchant category, how is that? Can you add some color? Are you seeing traction in that? Or is it just additional costs right now?

It’s – there is some traction in terms of we have basically entered into an arrangement with, so one of the large banks here in terms of around trying to facilitate the access to point-of-sale devices. But it’s at a very early stage at this point. I don’t think it’s not contributing any sort of significant revenue at this point or really any significant cost at this point. So it’s an area that where the M&A activity is probably the most relevant. And we’ll be looking to exploit that over the coming quarters. But at this point, there’s not a huge amount of tangible progress to report other than that we are starting to implement that strategy.

Great. Yeah. And thank you again for the clarity and the streamlining of the reporting. Yeah, I’ll take it offline now. Thank you.

Yeah. Thanks, Raj.

Thank you very much. We have no further questions in the queue. Ladies and gentlemen, that concludes today’s conference. Thank you for joining us. You may now disconnect your lines.