Lesaka Technologies, Inc. (LSAK) Q2 2021 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the Net1 Q2 2021 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] Please note that this call is being recorded. I'd like to turn the conference over to Dara Dierks. Please go ahead ma'am.

Thank you operator. Welcome to our second 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 will -- and we have provided the reconciliations 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 and rand to assist investors in understanding the underlying trends of our business. As you know the company's results can be significantly affected by the currency fluctuations between the US dollar and the South African rand. We will have Q&A session following our 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 second quarter earnings call. We hope everyone is 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 shorter 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, the President announced a return to Level 3 restrictions on December 28th and these are expected to remain enforced until at least February 15th. This level isn't as severe as we experienced in April and May of 2020 and we are able to fully operate our business, but it does constrain some economic activity and so is likely to have an indirect effect on performance. Sadly, South Africa, like many countries around the world, have seen a higher incidence of cases and deaths recently than during the first wave. Infection rates do seem to be dropping, so there is hope that the restrictions will be eased in the short-term as we eagerly await widespread vaccinations in South Africa. Now, to move on to the financial and operational highlights from the second quarter. The key theme for this quarter has been strong operational progress, which should result in improved financial performance going forward. In South Africa, our consumer Bank accounts, EasyPay Everywhere or EPE increased by about 62,000 gross accounts and 44,000 net accounts during the quarter. This is the first quarter of net positive additions to EPE in eight quarters. Our primary operational focus over the next two quarters is on continuing to rebuild our customer base in this area. We want to reiterate our goal of reaching 1.4 million EPE accounts by the end of our fiscal year in June. I do want to point out that there is a delay between the time we sign up a new account and when we expect to generate any economics from that account. This is due to both the time taken to process the required documentation by the regulatory authority and our internal requirements for new account holders to receive three consecutive months of income before we offer additional financial services. Around half of the gross additions in the last quarter are still pending processing. Importantly, our cost base in South Africa remains stable and at a level 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 us 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 as we exit this fiscal year with the caveat that we may be impacted by future COVID-related lockdown restrictions that may adversely affect this plan. Regardless, we are confident we have turned the corner in our operations and expect meaningful growth from here. Internationally, we have made significant progress in the exit of IPG. While this resulted in various ones-off closure costs for this quarter's result, the decisive actions taken this quarter should lead to materially reduced operational losses and cash burn going forward. Now, to provide a bit more color on the operational performance in South Africa. The total number of active bank accounts is about one million. And once the backlog of new accounts is processed will result in a net increase versus the last quarter. Our ATM network utilization has continued to see a meaningful recovery since June. For the quarter, transactions were up 4.4% compared to the prior quarter and 14.8% higher than the same quarter in fiscal 2020. The loan book finished December 2020 at ZAR317 million versus ZAR327 million at December 31, 2019 and ZAR345 million at September 30th, 2020. Loan growth was a little bit disappointing in October and November, but December was strong. We believe this is due to the six-month duration of these products, typically a high proportion of our customers take out a new loan as soon as the previous loan is fully repaid. We had very low originations right at the beginning of lockdown in April and May 2020. And so there was a knock-on effect in October and November, as there were much fewer loans being settled in those months. Transaction volumes through our EasyPay switch continued to be strong, despite normal seasonality. Compared to the same period last year, we saw reductions in the volume of low-margin airtime and electricity recharges but an encouraging 8% growth in transactions in the more important bill payment space. Before I review a few other key financial highlights for the quarter, I'd like to further comment on our revenue restatement noted in our press release. We recently discovered that we had been duplicating our processing revenue and an equal cost of sales amount in respect of customers using our ATM network that has switched over to the new SASSA – SAPO issued cards. This has happened over the past eight quarters since our SASSA contract expired. To be clear, we included this revenue as both processing and acquiring services within our processing segment. This had no impact on our bottom line, our balance sheet or any cash balances, as there was an equal and offsetting expense booked in the process. It's an unfortunate mistake but again it had no material effect on the financial results or the business and certainly doesn't impact our enthusiasm on our future prospects. We've identified the root cause of the issue and amended our processes accordingly. With that out of the way, our second quarter total revenue was $32.3 million, which was an 18% decline year-over-year in US dollar terms and a 12% decrease in rand terms, primarily due to fewer prepaid airtime sales and lower account fee revenues. Importantly, when you adjust for the closure of IPG and the decline in both hardware sales and airtime revenues, our core revenues were up 6% sequentially. US dollar was 6% stronger against the rand during the second quarter of fiscal 2021 compared to the second quarter of fiscal 2020, which adversely impacted our reported results. We reported an adjusted EBITDA loss of $12.8 million, which was markedly higher than the $9.8 million loss reported for the first quarter of 2021. The core South African operations saw EBITDA losses increased slightly from $4.2 million in Q1 to $4.6 million in Q2. And so most of the higher loss can be attributed to increased losses in the IPG operation as we go through the process of closing it down as well as items that are really once-off in nature. The international operations remain a significant contributor to the loss, partially due to those non-recurring closure costs. The operating loss and cash burn of the international operations should reduce in the third quarter of 2021 and be largely eliminated in the fourth quarter. In particular, the majority of staff in the international operations left during the quarter and processing activity was largely curtailed. We are now going through the administrative process of fully closing these operations and expect this to be substantially complete by the end of the current fiscal year. Second quarter 2021 fundamental loss per share was $0.24 compared to a $0.10 fundamental loss per share a year ago. Corporate costs were $4.8 million, inflated by the impairment of loans – our equity method investments of $0.7 million and various ones-off transaction costs of about $1.2 million. Adjusting for these items, costs in the corporate area was similar to the first quarter of this year. We wrote up the carrying value of our investment in MobiKwik, as a result of an external capital raise that MobiKwik closed in November and December 2020 of $7 million. This raise was done at a valuation of $375 million on a fully diluted basis and resulted us in a $15 million write-up in the value of our investment. This also resulted in a $3 million deferred tax charge and is the reason for the inflated tax expense for the quarter. Net interest was negligible for the quarter reflecting the cash in our balance sheet. While the associated interest income is relatively low in the current environment, it is sufficient to largely offset the interest expense associated with funding our ATM infrastructure in South Africa. Our equity accounted investments generated losses of $1 million for the quarter as a result of impairments principally related to a further decline in Finbond's market price. But this was partially offset by a positive earnings contribution from Bank Frick. We'll provide more detail on the performance of these investments in just a moment. At December 31, 2020, we had unrestricted cash of $206.3 million and no debt. U.S. dollar-denominated balances were $156.8 million out of that total. Our weighted average share count has remained relatively constant at 56.3 million shares in the second quarter of 2021. Now I'd also like to give some feedback on developments in our various investments in the quarter, where we are able to do so. Starting with Bank Frick. As we announced yesterday, we sold our remaining interest back to the Kuno Frick Family Foundation to $30 million. This is further solidifying our focus on South Africa. $18.6 million of that purchase price was received on completion with the balance due over two further payments due on October 21 and July 22. An amount of $3.6 million was deducted from the initial payment in respect to the settlement of various liabilities arising out of the relationship between Bank Frick and various IPG entities, so the net cash inflow on completion was $15 million with a further $11.4 million to be received over the next 18 months. Meanwhile in Nigeria, carbon has started to increase loan disbursements after the tightening of credit criteria in response to the effects of the pandemic. They are benefiting from a lower interest rate environment in Nigeria in terms of their cost of funds and have recently received the microfinance banking license, which enables them to take deposits. They recently released their statistics for the year, which show encouraging trends even in the face of the pandemic. MobiKwik continues to show good progress in developing their business. Last year they launched a new buy now pay later product called Zip. They originated approximately 50,000 of those buy now pay later loans in July 2020 and exited December 2020 with in excess of 500,000 loans issued, so a very successful start with that program. They also launched their Blue AmEx prepaid card and in five months have issued nearly 500,000 AmEx prepaid cards, making it one of the largest AmEx prepaid programs in Asia. As for recent results their net revenues in the December 2020 quarter grew more than 10% compared to the September quarter but are still impacted by the effects of COVID, but showing sequential improvement. Cash EBITDA loss for the December 2020 quarter remains below $1 million similar to the September quarter. And MobiKwik is clearly doing well in the -- despite the current environment and they have a stated goal of going public sometime in 2022. We continue to carry the value of our Cell C investment at zero as of December 31 2020. Cell C continues to make slow progress on its recapitalization plan, but is delivering improved operational results, which should assess that process. If the capital structure could be right-sized, we are confident there is a sustainable business that can emerge. I would just like to highlight that we currently hold about $60 million of Cell C airtime on our balance sheet, which is only likely to be realized after recapitalization is concluded. I know all of you are very interested in an update on our Investment Company Act status and capital allocation plans. First, on our Investment Company Act status. We continue to engage with a top law firm who specializes in this field as the legislation is somewhat offhand and complex. Given the complexity of the application and that it is somewhat outside of the ordinary course, as well as the evolving nature of our corporate structure there is no fixed period of time established for this process to conclude and there is no assurance that we can achieve a favorable outcome. However, based on current assessments this can take months that it could be concluded sooner or later. While this is progressing we continue to pursue our strategic aims in South Africa and this could naturally cure or assist in the resolution of the current uncertainty over our status. 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. As soon as our Investment Company Act status is clarified, we will look to allocate approximately $50 million of capital for return to shareholders most likely in the form of a buyback. The balance of approximately $150 million will be available to fund the organic and acquisitive growth we have targeted in our new strategy. Speaking of our new strategy that's where I want to spend the remainder of my time on prepared remarks. As we've mentioned previously, we've identified a significant opportunity to build a unique and sustainable fintech business in South Africa and we plan to implement this strategy through a combination of organic growth and strategic acquisitions. We'll continue to focus on two broad categories; consumer banking and financial services TAM or Total Addressable Market, which is estimated at approximately ZAR57 billion or approximately $3.8 billion annually. And a merchants financial services TAM, which is estimated at approximately ZAR104 billion or $6.9 million annually. In addition to the substantial size of these markets, the South African market is primarily a cash based economy with approximately 60% of consumer retail transactions still being conducted in cash. Our primary product offering coupled with our superior distribution channels provide for an exceptionally competitive offering for both categories of markets wishing to process cash and/or transition to electronic or digital payment platforms. This involves the provision of financial inclusion to under-serviced consumers, which includes unsecured credit, transactional banking, micro insurance, as well as revenue-generating value-added services offered through our EasyPay switch. Our independent switching business EasyPay is the market leader in terms of prepaid and postpaid services including bill payment and electricity. Through our deployed infrastructure we have the ability to own the last mile thereby providing us with a perfect opportunity to penetrate these largely untapped markets and provide secure payment methodologies as well as to provide a comprehensive ecosystem. Our strategic review identified our strengths, as well as the requirements to substantially scale our business model on an incremental basis. While we're in a very strong position in respect of distribution, infrastructure, technology and licenses we've identified the following areas that require focus: Firstly the distribution of EMV compliant point-of-sale terminals into the SMME market that will facilitate card processing and acquiring as well as value-added services. We have concluded an agreement with a large South African bank to bridge this gap and have commenced the pilot project. Secondly whilst the 10-year banking license is preferable and will result in better economics in our business model, as well as facilitate an efficient response to market it is not a prerequisite for the successful implementation of our strategic intent. Our corporate activity, as well as our M&A activity is focused on South Africa and is currently in progress to drive our strategy alongside our stated organic initiatives. Finally another key initiative for the Board is the appointment of the new CEO. The Board is very engaged and we have a great shortlist of very impressive candidates. We will be keeping our investors updated on this process. Wrapping up, I'd just like to reiterate, this quarter we made good progress operationally which has laid the groundwork for improved financial performance going forward. We are engaged in seeking to formally clarify our Investment Company Act status which will lead to a return of capital and we are fully focused on exploiting the huge opportunity to grow this Net1 into the leading fintech business in South Africa. Before taking any questions, I'd like to extend my appreciation to the entire Net1 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. In particular we would like to pay tribute to three of our colleagues who sadly lost their lives to the pandemic. Their contribution and dedication to the group will be remembered. Claudia, if I can hand it back to you for questions now.

[Operator Instructions] The first question comes from Raj Sharma from B. Riley. Please go ahead, Raj.

Hi, good morning. I wanted to ask you about how are you progressing on your plan of being at 1.4 million users by the end of this year? You were looking to add 400,000 new customers and you did 44,000. How does the plan look? And are you -- could you talk about that? A – AlexSmith: Sure. Thanks Raj. Look we thought we made good progress in the last quarter. We were targeting net -- gross additions of about 50,000 for the quarter and we came a little bit above that at 62,000. And then in terms of moving forward we're obviously looking to accelerate that rate of sign up through these next two quarters. And there are several reasons why we think that target is achievable. Firstly there's been some recently published draft regulation changes that we expect to be enacted relatively soon that we believe would make it easier for ground recipients to open and designate the bank account in which they receive their monthly grant. The existing process is pretty onerous and involves spinning out a form the recipient then has to go and hand deliver in order to get it processed. And the proposed change really appears to make this process much simpler. And we expect this to have a significant effect on the willingness of the recipients to move to a private sector bank account. And that's obviously a change that will benefit the whole financial services industry. Secondly, we currently interact with a very large group of non-EPE account holders that are utilizing our ATM network. So we're touching those people at least once a month. And we are basically looking at initiatives to offer the EPE product to them. And finally, when we were at our peak probably back in 2018, we had just over three million EPE accounts. Then we certainly felt we had happy customers that know us and our brand. And so we hope that we can really look to that group of the target base to basically attract them back into the EPE fold. And a lot of our marketing efforts are really targeted around those opportunities. So with those initiatives and some of those dynamics we feel -- we remain confident around the guidance of the 1.4 million EPE accounts by the end of June.

Got it. So also, just following up slightly related to that. The SASSA recently, I think, stated the users need to upgrade their cards at some point right? They will not be forced to, but how do you view this development or opportunity -- I mean do you take this as an opportunity of gaining more accounts?

Yes, I think, that's part of the wider opportunity. So as we understand it, the SASSA has put an announcement that the cards will need to be upgraded, but they -- and they will continue to operate past March 31. But, I think, there's maybe a little bit of uncertainty that's created in the market, in terms of those cards and with the provision of any EPE accounts, that uncertainty can be removed. So we'll look at that as an opportunity to attract, in particular, those two sort of target areas back to us with that as one of the catalysts.

Right. And lastly, on the sale of the remaining stake in Bank Frick. Could you talk about the motivation there? Was it just wanting to refocus on South Africa operations, or was it a good price? Or how are you sort of thinking about your private investments in that regard?

Yes. I mean, we've stated that our aim is to devote all our capital and resources and management time to South Africa. So the opportunity came around in discussions with the Frick family, to basically complete the disposal and this takes away the time that's involved in our involvement there. And with the closure of the IPG operations, a lot of the strategic rationale behind the original investment have disappeared. And so, we saw the -- saw it as preferable to realize the capital and devote all of our time and attention to the South African opportunity.

Right. Does this imply that you're also looking to sell the other stakes? I mean, would MobiKwik would be a consideration? Or do you intend on holding that for a while?

We -- like I said, with all the focus on South Africa, we're not actively looking to do anything around the other investments. If an opportunity arises, we would certainly take it seriously. But you've seen from the progress that MobiKwik's made in the last year or so that things are looking very good at MobiKwik. So we're not in any rush to exit out of that one. And I think we'll -- our focus is very much on South Africa and anything we do would be more opportunistic than anything else.

Okay, great. Thank you. I’ll take my questions offline.

Thanks, Raj.

Thank you. [Operator Instructions] The next question comes from Bill Gordon from GC. Please go ahead, Bill.

I’ve got a quick question. We've been concerned with the money that we have in the bank. We had to go and getting liquidation to shareholders, et cetera. If Africa is as exciting as you people seem to suggest, certainly, the economy says that by year 2025 Africa will be bigger than China. If that's the case and we're into fintech, and India has done so well, why not focus purely on Africa. Don't give us back any of the money. Grow Africa, grow the fintech in Africa and take the bull and run with it.

Thanks, Bill. I mean, we see plenty of opportunities in Africa. We always felt there was a bit of balance to be struck between what we're hearing from our shareholders and where we see the opportunities. Obviously, we've had this uncertainty around our status under the Investment Company Act. And once that resolved, I'm sure, we will engage and there'll be a discussion around the capital return. But at the moment that's the current thinking of the Board, is that we have made a commitment in the past around the capital return and we need to honor that, unless the circumstances have fundamentally changed.

Okay.

Thank you. The next question comes from Jeff Yokuty from Capital Uni [ph]. Please go ahead, Jeff.

Hi, Alex. It’s Jeff Yokuty. I was just curious whether the sale of Frick helps at all in clearing up the Investment Company Act, as you remove an equity investment and raise cash? Thanks.

Yes. Thanks, Jeff. Look, we are hopeful there will be another step towards addressing the issue. The [Indiscernible] closed the transaction yesterday and so we haven't really had the opportunity to discuss its impact with our counsel, but we believe it should help with the metrics that you used to assess the situation. However, the -- ironically the increase in the carrying value of our MobiKwik investment in the quarter does work against it slightly. So there are constantly shifting dynamics here. I mean, we see probably the best opportunity is our focus on growing our business in South Africa organically and acquisitively, to strengthen our offerings here. And we think that, if we progress on each or either of those fronts that certainly may also be a fast route to resolving the issue.

Okay. Thank you. We have no further questions in the queue. Alex, do you have anything you want to add? Or can we conclude?

No, I think, we can conclude now, Claudia.

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