Lesaka Technologies Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 10, 2023

There are 4 speakers on the call.

Operator

Fiscal Q3 2023 webcast and conference call. As a reminder, the webcast is being recorded and the presentation can be accessed through the webcast link as well as dialing into the Zoom conference call dial in numbers provided. Management will address any questions you may have at the end of the presentation. For those joining us via webcast, you can ask your question by using the Raise your hand button in Zoom. And for those joining via the Zoom conference line, you cannot ask your questions live today.

Operator

The webcast link, Zoom conference call dial in numbers as well as our press release and supplementary investor presentation are available on the Investor Relations website at ir.lisakatech.com. Additionally, LASAKA filed its Form 10 Q after the U. S. Market closed yesterday, Tuesday, May 9, 2023, which is also available on the Investor Relations website. 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 Q regarding the risks and uncertainties associated with forward looking statements.

Operator

Also as a domestic filer in the United States, We report results in U. S. Dollars under U. S. GAAP.

Operator

However, it is important to note that our operational currency is South African rand and as such, We analyze our performance in South Africa land. In this presentation, we will discuss our results in South Africa land, which is non GAAP. This assists investors' understanding of the underlying trends in our business. As you know, the company's results can be significantly affected by currency fluctuations between the U. In our outlook and the South African landscape.

Operator

Taking a quick look at today's agenda, Chris Meyer, Group CEO of Osaka, will start with performance highlights of the Q3 of fiscal year 2023 and a review of LASATA's progress against its key strategic objectives. Steve Hellbrun, CEO, Connect and Head, Merchant Division, will provide an update on the Merchant Division, which produced a stellar set of results. Lincoln Volley, CEO of Southern Africa, will provide an update on the Consumer division, which has passed another key milestone this quarter. And then, Payne Kola, Group CFO, will present an overview of our financial performance for the 3 months ended March 31, 2023. Chris will then conclude the results presentation with a discussion on the outlook for LASAKA before the team opens up for Q and A, where we welcome any questions you may have.

Operator

With that, Chris, the call is yours.

Speaker 1

Good morning, good afternoon, and welcome to our Q3 earnings webcast and conference call. I am pleased to report that Q3 represents another excellent quarter. We are excited by the Merchant division's outperformance, driven by the Connect Group and another quarter of continued improvement in profitability in the Consumer division, where we have delivered on our turnaround strategy and are moving strongly onto the fund fit. Our mission at LASAKA if you enable small merchants to compete and grow and to improve the lives of South Africa's grant beneficiaries by providing access to innovative financial technology and value creating solutions. We will achieve this through our vision to build and operate the leading full service fintech platform in Southern Africa offering cash management, payment processing, value added services, Capital and Financial Services to Small Merchants and Understood Consumers.

Speaker 1

We have a comprehensive product and service offering tailored for the markets in which we operate. The target strategy is supported by the secular trends, which support Fintech disruption. South Africa's economy is dominated by cash, especially in the informal MSME market and the consumer space, where our operations are focused with up to 90% of transactions still being cash based. Globally, digitalization is advancing at a rapid pace and South Africa is also experiencing the secular shift. The market opportunity to extend digitalization to the informal economy is exponential as it is both under serviced and untapped and the Sarca is uniquely positioned with our comprehensive product offering and deep national footprint with over 80,000 points of presence across to Consumer and Merchant divisions.

Speaker 1

With our portfolio of cash and digital solutions, serving both merchants and consumers, We believe Nosaka is well positioned for significant growth. In the Merchant Division or B2B sector, We offer innovative solutions to both informal and formal business owners to go, manage and digitalize their operations. In the formal sector, operating at CashConnect, we initially relied heavily on product innovation using technology to disrupt and secure our position in the market. When Connect moved into the informal sector through the acquisition of Gxang, We've used this technology to quickly grow from a traditional VAS offering into merchant credits, card acquiring, on cash digitalization and supplier payments. We now have a network of over 70,000 merchants in the informal markets using our products and services.

Speaker 1

In the B2C or consumer division, our products and services are specifically designed to enable access to financial services and cash for individuals who receive government grants and social welfare support. To Easy Pay Everywhere or EPE, we are providing regulated and affordable banking, lending and insurance products to 1,300,000 active consumers each month. Across the merchant and consumer markets, our network and product relevance give us broad reach into what has traditionally been seen as difficult environments for the banks and financial services providers to operate in. It is the opportunity to continue expanding our reach and relevance into these environments that present us with exciting growth potential as we pursue our purpose of enabling small merchants to compete and grow and improving the lives of South Africa's grant beneficiaries. As a management team, our journey of transforming the Saka into a leading Southern African FinTech began in mid-twenty 21.

Speaker 1

And throughout this time, we have been clear and consistent around how we intend to build our merchants offering and transform the consumer division. The acquisition of the Connect Group closed in April last year and the rebranding of the combined business as LASAKA was only announced in May of last year, almost 12 months ago to the day. We are tremendously proud of the progress made since then and hugely appreciative for the unwavering dedication and resilience displayed by each one of our Lusaka colleagues We have made the journey thus far such a success. Returning to the progress made against our strategic objectives. In our B2B or Merchant division, we said that we would expand our offering and complete the dual sided platform through acquisitions.

Speaker 1

And the acquisition and integration of the CNECT Group appear nothing short of transformational for Lusaka. The safety of growth trends underpinning the acquisition remain firmly intact. And the integration of the Connect Group into the Osaka and the performance delivered to date has exceeded the expectations at the time of the acquisition just over a year ago. In our Consumer division, we committed to transforming the division from a significant loss making business into a positive adjusted EBITDA contributor to the group. And I am pleased to report a 2nd consecutive quarter of segment adjusted EBITDA profitability, which was sharply up on quarter 2.

Speaker 1

The Consumer division is now well positioned for growth and Lincoln will go into more detail on this later, covering some of our specific initiatives and our consumer value proposition. Masaka is well positioned to offer competitive tailored and cost effective solutions to South Africa's social grant recipients and improved the lives of South African grant beneficiaries and their families. Thirdly, With the outperformance of the Merchant division and the greatly improved operating results from the consumer business, our liquidity and debt position has continued to improve as the group generates positive cash from operating activities excluding the impact of bulk purchases of airtime in our VAS and Card division. Our lenders demonstrated a significant vertical confidence in Osaka by increasing and extending our borrowing facilities and providing us with greater flexibility in managing cash balances and increasing our capacity for growth. So turning to our performance for quarter 3, I am pleased to report we achieved our profitability guidance with a group adjusted EBITDA of ZAR137 1,000,000 for the quarter, which is an annualized increase of 22% over quarter 2 FY23.

Speaker 1

And this was achieved despite lower contribution from parts of our pre existing merchant division, which Steve will go into later and represents a significant turnaround on the loss of ZAR113 1,000,000 recorded in Q3 FY 2022. Our guidance was for group revenue to be in the range of ZAR2.5 billion to ZAR2.8 billion for FY2023, Q3. And we reported group revenue of ZAR2.4 billion, which is marginally lower than our guidance. However, this is due to the mix of airtime products sold in the quarter, which Naheem will explain in more detail. The important point, however, is that both the gross profit contribution on airtime and the contribution of Airtime to group adjusted EBITDA was in line with guidance.

Speaker 1

And so overall, I'm very pleased to report yet another quarter of continued growth in group adjusted EBITDA. Our business is on an exciting trajectory supported by secular growth trends that remain firmly intact. And as a management team, we remain laser focused on delivering to our strategy and continuing to execute on the growth opportunity. And with that, I will hand you over to Steve, who will provide an update on the performance of our merchant division. Thanks, Chris.

Speaker 1

As Chris touched on in his opening remarks, South Africa's evolution from a cash base to a digital payment economy It has a relatively early stage and there is a significant growth opportunity as digitization gains momentum. This creates space for disruption, which was Sockings well placed to achieve. In our Merchant division, we offer innovative solutions focused on thermal and in for more merchants and we continue to build a leading position in a growing and underserved market. We often get asked how large do we think this opportunity is. The following high level data points provide guidance in answer to this question.

Speaker 1

Like many developing economies, some 60% of total transactions in South Africa are cash based. Less than 8% of merchants with access to promo credits and less than 4% of informal merchants can accept digital payments. South Africa's future prosperity lies with small business. Our focus is to resolve the pain points that both formal merchants and primarily informal merchants experience by using financial technology as an enabler. Experts agree that cash will remain a key component in the terms of payment in the South African economy, particularly in the informal sector, and that's why it's important to have a holistic offering that spans across both cash and digital.

Speaker 1

Many players in this market by either focused on cash or digital, not both. In summary, the market opportunity attempting to the digitization of South Africa's informal economy is significant and untapped, made up of merchants and consumers underserved by incumbents and with limited access to judicial financial services, this sector is large with an estimated GDP of well above $300,000,000,000 Within the informal sector, 90% of transactions are cash based and only 10% of the informal sector flows are digital payments. We are excited about our holistic offering, positioned across cash and digital and suited to the transformation of commerce in the informal market, a market that is vibrant, untapped and growing. This was another solid quarter for our merchant division, driven by the Connect Group. We reported revenue of ZAR2.1 billion and $148,000,000 of Merchant segment adjusted EBITDA, exceeding guidance during the 3rd fiscal quarter.

Speaker 1

As evident on this slide, the relative contribution to revenue and EBITDA from our in merchant division, comprising of Newitz being our legacy terminal business and EasyPay, our bill payments business has declined as the Connect Group of businesses continue to grow at a quicker pace and ahead of expectations. We are pleased that the Connect Group continues to outperform the acquisition business case despite macroeconomic and sociopolitical challenges, highlighting the resilience of our business model and value proposition to merchants. The Connect Group's revenue grew 25% year on year from FY 2022 Q3 to FY 2023 Q3. Revenue grew 4% compared to Q2 despite the seasonality of prior quarter, which included the December holiday period, where trading activity is higher than in other months and the fact that this current quarter, including February, which is the 28th month. We have included a graph that shows this quarterly seasonality over the past 3 years.

Speaker 1

We often get asked why we are not significantly impacted by the current levels of load shedding. Our client base is well diversified across South Africa, making load shedding a localized phenomenon and the period of downtime

Operator

thus far has been manageable.

Speaker 1

It's also important to stress that we have significantly grown our merchant base from approximately 35,000 merchants in February 2020 to approximately 44,000 by February 2022 and approximately 71,800 merchants at the end of March 2023, which represents a 3 year compound annual growth rate of 27% per year and 63% growth rate over the past 12 months. As is evident, rapid growth in the national footprint of our merchant base, coupled with the continued broadening of our product offering accounts for robust growth. I will now move to discussing our offering and revenue drivers in more detail. Our bouquet of products results in increased consumer adoption, driving higher volumes of sales for merchants. We utilize our proprietary infrastructure to offer our merchants and their customers what they need.

Speaker 1

We provide merchants with a point of sale device linked to from which they can pay suppliers, sell many products like airtime, electricity and bill payments, take customer payments via card swipes or tap and pay whilst providing instant settlement. Merchants are also able to access funding and the smart vault via the device. For us, the partnership with the merchants usually starts with a VAAS device. This drives growth in all products, more merchants, more devices, more wallets, more product flow. By way of example, more than 60% of merchants that have our VAS device in store convert to also utilizing our Kazzang Pay offering, followed by Kazan's pay advance.

Speaker 1

The Kazan's BaaS merchant estate closed Q3 at approximately 71,800 merchants, up 52% year on year from FY 2022 Q3 and up by approximately 7,300 merchants on Q2. Kavan Var's throughput for the quarter was $7,300,000,000 up 28% year on year and up 7.5% compared to Q2. Kazan BaaS volumes are now consistently averaging close to $2,500,000,000 per month with a more diversified product range. Supplier payments in our Kazzang BaaS business continue to grow and are becoming a larger composition of the Kazzang Barre throughput. This proposition supports customer acquisition as we expand our ecosystem and provide additional value to our merchants.

Speaker 1

Supplier payments is safer and more efficient for the suppliers and merchants who utilize this platform. This offering allows merchants to pay suppliers at their own convenience, reducing the need to hold cash, lowering transport costs, as well as the time taken to execute supplier payments. The combined CardConnect and PizanPay Merchants Estate closed Q3 at approximately 42,000 merchants. This is up 107% year on year and up by 22% on Q2. In our cards acquiring business, cards connect and Kazanx paid throughput for the quarter was ZAR3.2 billion, up 93% year on year from FY 2022 Q3.

Speaker 1

This performance is almost entirely attributable to the incredible growth achieved by our Kazanx Pay solution. To provide some perspective, the average monthly throughput volumes for Q3 2023 for $770,000,000 per month compared to an on average $72,000,000 per month in Q3 2021. This represents a greater than 10 fold increase over the 24 month period. In our merchant credit business, Capital Connect and Kazan Pay Advance. Credit disbursed for the quarter of $280,000,000 is up 40% year on year.

Speaker 1

We have become a key provider of capital to the vital MSME merchant segment and have grown the receivables book from $238,000,000 to $343,000,000 representing a 44% growth year on year. We are experiencing great momentum in the Kazan Pay Advance and Capital Connect businesses, evidenced by strong uptake from our merchants. To date, we have created value in advancing over R2.2 billion to merchants in support of their prosperity and growing their small businesses. We are uniquely positioned to serve these merchants given the basis sets available to us. These merchants transact with consumers utilizing our holistic merchant offering, which provides us with a view into the flows and throughput of each of their businesses.

Speaker 1

Loss rates remain low and we are conservatively provided in these businesses. The formal market is more competitive, but our leading cash digitization offering, which is essentially placing the bank in the merchant store, means we are deeply embedded in their businesses and as a result are well placed to grow our offering through innovating and solving pain points. An example of this is Capital Connect. The Cash Connect business throughput for the quarter of $26,200,000,000 is up 2% year on year, partially affected by load shedding and other seasonal implications. However, we believe the annual run rate trajectory for this business to be in the order of 8% to 10% for the fiscal year ended June 24.

Speaker 1

The Merchants Estate closed Q3 at circa 4,370 cash flows. This is up 8% year on year. As previously discussed, we have integrated the ATM business into Cash Connect. This has served to enhance our focus on the ATM offering as a standalone ATM acquiring business with a heightened focus on achieving scale and efficiencies. We continue innovating in the cash recycling space and launched our ATM Recycler in the Q3 and are progressing with expansion to our merchant clients.

Speaker 1

The ATM business has been transformed into a profit taker. In servicing our consumer business, our strategy of moving ATMs away from branches and into retailers and is proving to be successful. The focus for ATMs is profitability, not growth. We are downsizing the ATM network by removing unprofitable sites to drive incremental profitability into FY 2024. EasyPay is a strategic asset in our merchant offering.

Speaker 1

We have identified that this business requires some additional investment for growth over the near term, which will position us well for growth and profitability in years to come. We are having success at signing up new billings and new collectors. We have added Kazanx top up through EasyPay. We have also transitioned our EasyPay money market from pilot phase to rollout phase since Q3 2023 and are optimistic about its prospects. In conclusion, This was an excellent quarter for the merchant business.

Speaker 1

We continue to grow across all products with standout performances in our Kazanbaaz in Kazan Pay business units as well as notable performances in both the merchant credit businesses Capital Connect and Kazan Pay Advance. A key highlight of this quarter is that Kazan, across all products and services, delivered the best quarter in the business' history. The Kazan brand is increasingly recognized and respected across the South African economy. We remain excited about the opportunities in the Merchant division and are encouraged by our ability to

Speaker 2

and we expect to sell our

Speaker 1

product sets within the respective target markets. This is evident from our historical performance as reported over the past 4 quarters since the acquisition of Connect and our growth rates achieved pre acquisition. We are focused on and are achieving our objective of providing a growing merchant base with relevant solutions. I would now like to hand over to Lincoln, CEO of Southern Africa to discuss the performance of the Consumer division. Our quarter 2, 2023, as reported in February 2023 marked a watershed moment for LIFACA.

Speaker 1

With the successful transformation of the Consumer division into a positive segment adjusted EBITDA contributor. And we feel through the efforts of our staff and leadership team's focus to deliver on our commitments. Today, I'm so proud to present a further improvement in segment adjusted EBITDA for quarter 3 to 13 year range. This represents a 192% improvement from the last quarter and $167,000,000 positive turnaround from last year. I'm hugely encouraged by the continued solid positive trend in segment adjusted EBITDA performance and pleased and January, February March were all strongly positive.

Speaker 1

Our consumer division is starting to normalize. It's starting to be a positive contributor to the LIFASA Group. And importantly, there is an increasing consistency and predictability in the numbers being reported. Our improved performance has been driven largely by our 3 pronged strategy, namely: 1, the rightsizing of the business 2, increasing ARPU from cross selling and 3, growth in active EBITDA accounts, particularly in the permanent grant recipient space. I would like to address each of these levers.

Speaker 1

Firstly, on rightsizing, We identified opportunities that would result in cost savings of approximately ZAR 350,000,000 per annum for the financial year 2023. I'm pleased to say that we have completed about 90% of the work that will allow us to deliver on these savings. There are, however, some optimization initiatives where we have experienced delays, especially in the restructuring of the branch network through exiting some leases and the repositioning of our branch ATM estate. These rightsizing initiatives have been very difficult and delicate as we have had to sensitively balance the needs of our customers with the long term sustainability of our business. Yet, we remain proud of the progress made so far and about what is possible going forward.

Speaker 1

Proud as I am about this turnaround, I recognize that it is slightly below guidance for the consumer business, primarily due to lower AP accounts and no growth than expected. I will address how we want to focus on this when I speak about our growth strategy later. Secondly, I'd like to focus on our cost saving initiatives. We have managed to further improve our ARPU in quarter 3, which has increased from approximately ZAR70 to ZAR 78 per month over the last 12 months. We achieved this through the restructuring of the sales force, sizable investment and focus on training as well as disciplined performance management across our teams.

Speaker 1

We've also invested in our technology platform, which has enhanced the ease with which our teams can involve customers using our digital tablet capability as well as give them the opportunity to co sell other products like insurance and credit to our customer base. Our loan book is up 11% year on year to ZAR397,000,000 and our loan loss ratio is also stable at below 4% per annum. Our insurance sales have been very encouraging, having exceeded our expectations this year. Our penetration into the EPE account holder base is now at 28%, up from 18% last year. We now have approximating 309,000 in force policies, which represents a 25% increase year on year.

Speaker 1

We are very pleased with the quality of the insurance clients we are onboarding, and we have consistently been achieving collection rates at approximately 98% compared to industry averages for this market, we tried 60%. In the past 12 months, We have paid out more than ZAR100 1,000,000 in insurance claim to clients, with 90% of these claims being paid within 24 hours. We have always stressed that we see social ground recipients as viable and valuable customers. Our data is starting to show us the loyalty and stickiness of our customers. Our high collection rates on insurance of approximately 98% as mentioned earlier, our low loss ratio on loans below 4% ANAM as mentioned earlier and the high number of repeat borrowers of more than 90% are starting to show that our customers Truly appreciate the products and solutions we offer.

Speaker 1

These data points are direct evidence of the fact that our products as seen as essential by our customers and as a result, we are truly committed to servicing their monthly repayment and premium. We will also continue to enhance our proposition, looking to identify more products and services that are of relevance and benefit to our customers. Briefly due to our active EPE growth strategy. We currently have approximately 1,300,000 active EP account holders, of which 85% are permanent grant recipients or just over 1,100,000. As of the end of March 2023, we increased our overall active EPE customer base by 16% year on year.

Speaker 1

Customer care is a major focus in our business. Natural attrition, which is largely attributable to children turning 18 and mortality, averages around 10% to 12% per annum in the overall grant beneficiary market. Our permanent grant account base grew by 3% on a net basis year on year. Temporary or SRD grants were introduced during the COVID pandemic in Brandy, and our FID customer base has grown 5 fold since last year. Looking forward, the Consumer division will be targeting and increased growth rate in our permanent plant base given the investment we have made in our sales team, technology platforms and relationships with Casa at a local level.

Speaker 1

Over the last few months, we focused so much of our efforts on turning the business around in the fastest possible timeframe. Achieving that EBITDA profitability has allowed us to move on to the front foot and to position ourselves for future growth. I would like to highlight some of the salient aspects of our growth plan and the activities that will drive the growth in the coming quarter into financial year 2024. Thirdly, we bolstered the management capabilities in the team by bringing on board George Rousseau, a as a veteran of 24 years with African Bank as Head of the Consumer Division. Working with George, we streamlined the efforts of our team to move from a turnaround mode to a growth focused mode as we shift from the sometimes difficult and delicate rightsizing initiatives towards growth and expansion.

Speaker 1

I'm pleased with how George has integrated into the team and the energized focus that we have. Secondly, we remain focused on growing our permanent dry and EPE base. In this regard, we've taken many actions, more specifically, but not limited to marketing initiatives, enhanced onboarding systems, incentives to promote customer switching and continues engagement with SASSA and other actions in response to SASSA's outreach programs. Thirdly, we want to focus on purpose based lending. This means that we want to further align our lending products to the unique needs of social grant beneficiaries.

Speaker 1

We are investing in terminals like USSD and voice branch or call center to make the lending process more convenient for our customers. We will also be entering into partnerships with other players We are also starting to see social grant beneficiaries as customers. We think that this can unlock value for customers and enable us to offer in more competitive and relevant products. Fourthly, we want to reposition our distribution network for more feasibility and convenience. We are doing a lot of work on our physical infrastructure, call center functionality and digital channels.

Speaker 1

Lastly, we want to focus on improving our operational efficiency by further developing our systems and introduce more technological interventions within our business and to propose other innovations to the industry and to SASSA. The current challenges facing the Post Office with regard to social grant payments as well as service as an opportunity for a creative partnership between the public and private sector. As many social grant beneficiary post bank cards expire, These recipients are looking for alternative solutions and provide us for assistance. This has increased awareness and competition among banks, fintechs, retailers and telcos to try and attract this previously ignored customer segment. As EasyPay Everywhere.

Speaker 1

We've mobilized our staff and teams to be responsive to this challenge and we stand ready to assist in any way we can. Our relationship with African Bank, which acquired 100 percent of Green Road Bank in May 2022 remains strong, and we continue to interact on a regular basis. LESSAKA is specifically important to African Bank. We have a full plate indeed, but I'm very excited by the prospect of the consumer business. We believe that we can achieve our growth ambitions this year in the years ahead through the initiatives we've spoken about and others we have in the pipeline.

Speaker 1

We have truly only just begun. Thank you. I'd like to hand over to my brother, Naeem, to take you through the detailed numbers. Thank you, Lincoln. I'm very pleased with the strong financial performance achieved this quarter across group revenue, group adjusted EBITDA and the group debt restructure.

Speaker 1

The Merchant division outperformed guidance and the Consumer division continued an EBITDA positive trajectory. As a reminder, as a surprise of domestic filing in the United States to report results in U. S. Dollars and the U. S.

Speaker 1

Dollar. However, our operational reporting currency in South African DRAIN, which is a non GAAP measure. This assists investors understanding of the underlying trends in our business. As you know, our results can be significantly affected by the currency fluctuation between the U. S.

Speaker 1

Dollar and the South African rand. Q3 2023 includes reentering the Saka and Connect Group for the full quarter and so on the case for Q2 2023. However, compared to Q3 2022, this quarter only includes the pre existing stockholders and thus the Q3 2023 versus Q3 2022 comparison is not meaningful, especially within our merchant division. We will provide sequential quarter comparisons, which we believe is a more accurate representation of growth and profitability. I will note that for next quarter, the Q4 of fiscal 2023, year over year comparability of results will be more meaningful.

Speaker 1

As the 2022 cross border included Connect for most of the quarter. This slide illustrates the significant positive turnaround of revenue, Group adjusted EBITDA and operating loss before PPA. Over the last four quarters, we have seen a ZAR250 1,000,000 Improvement in our quarterly group adjusted EBITDA, turning the business around from a group adjusted EBITDA loss of R113 1,000,000 in Q3 2022 with a group adjusted EBITDA of R137 1,000,000 this quarter. We are very pleased with this achievement. Operating income loss before the acquired asset amortization, the first one block on the graph as we move from a loss of R147 1,000,000 in Q3 2022 to a profit of R34 1,000,000 in the current quarter.

Speaker 1

As a reminder, acquired asset amortization represents the accounting discipline of acquired assets, which is both a non operational and a non cash accounting charge, which we believe significantly skews our reported operating income. This result was driven by positive turnaround in the performance of the Consumer division and the significant contribution in the Merchant division coming from the Connect Group acquisition. Looking at the group income statement, we We achieved a consolidated group revenue of ZAR2.4 billion for the quarter, up 1% sequentially on Q2. Noting that in the previous quarter, including approximately $75,000,000 of the lumpy NU. S.

Speaker 1

Revenue, which related to the sale of hardware devices. Adjusted for this, Group revenue grew by 4% quarter on quarter. Reported group revenue is marginally lower than our guidance range of ZAR2.5 billion to ZAR2.8 billion. As Chris mentioned earlier, this relates to an increased percentage of pinless or direct top up airtime and data bundles being sold versus in base or voucher airtime. On permanent airtime and data bundles, where we act in an agent capacity, only commission earned is reported in revenue.

Speaker 1

Whereas for end based airtime, where we act as principal, to recognize the total face value of air revenue. Our revenue is marginally lower as the mix of pinless airtime was higher than pin based airtime when compared to the assumptions in the forecast. At gross profit level, the Merchant Division exceeded forecast. Consolidated group revenue was 100 and $34,000,000 for the quarter compared to $136,000,000 in Q2, 2023, representing a decrease of 2%, which is due to ZAR weakness against the U. S.

Speaker 1

Dollar. Operating loss for the quarter is ZAR33 1,000,000, an improvement of ZAR5 1,000,000 or 13% as compared to Q2 2023. Looking at our segment financial performance, Q3 2023 reflected positive performance across both business divisions, validating our efforts to transform the business to deliver growth and strong profitability. World Regions contributed positive adjusted EBITDA in the quarter. Virtual revenue increased normally in Xa to RMB2.1 billion.

Speaker 1

In U. S. Dollar, merchant revenue decreased approximately 2% at $218,000,000 due to the currency exchange fluctuations. Excluding the effect of the lumpiness revenue in Q2 2023, Merchant revenue grew by 4% on a GAAP basis. Consumer revenue increased 5% to R284 1,000,000 from RMB 270,000,000 in the 2nd quarter, driven by strong growth in our insurance and consumer loan book product revenues.

Speaker 1

In USD, consumer revenue increased 3 percent to $15,900,000 from $15,400,000 The Merchant division delivered a segment adjusted EBITDA of R148 1,000,000 compared to R160 1,000,000 in the second quarter. Excluding the effect of the ramping U. S. Business contribution of R22 million, segment adjusted EBITDA would have grown 8% quarter on quarter. The Merchant business outperformed the other end of our guidance range provided for FY2323, which was RMB145 1,000,000.

Speaker 1

The Consumer division delivered segment adjusted EBITDA of ZAR50 1,000,000 compared to ZAR10 1,000,000 in Q2 2023, a ZAR20 1,000,000 improvement with the business delivering a positive segment adjusted EBITDA during each month of this fiscal quarter. In U. S. Dollar terms, this represents $1,600,000 compared to $578,000 in Q2, increasing by more than 100%. The consumer division performed lower than the bottom end of our guidance provided for FY23 Q3 of R40 1,000,000.

Speaker 1

We experienced positive revenue growth. However, we did not fully achieve the cost saving benefits. Cost benefits not achieved approximating ZAR12 1,000,000 mainly related to timing of executing on the drivers of these underlying savings. We continue to see traction and the implementation of our rightsizing initiatives and are confident that the underlying savings will be reflected in our financial performance in quarters to follow. Group costs for the quarter were in line with expectations and closer to the lower end of guidance provided despite currency impacts.

Speaker 1

Stock based compensation declined by 41% sequentially compared to Q2 as expected. Stock based compensation charges decreased in the quarter compared to 2023, mainly due to the one off award of approximately ZAR25 1,000,000 and issued to secure a longer term contract with a key senior executive in Q2. Refer to Slide 33 in the appendix for more details. Once off items increased by ZAR19 1,000,000 in the quarter, predominantly driven by a ZAR4.6 million increase in transaction related expenditures for the recognition of other costs of R14.5 million incurred this quarter, which includes certain employee separation expenses and charges related to previous years. The stock based compensation charge for Q3 2023 is normalized compared to Q2 2023, which included a one off award.

Speaker 1

Operating income, pre interest and DTA improved by RMB34 1,000,000 from RMB29 1,000,000. And has improved from a RMB 13,000,000 loss in Q1 2023 and a loss of RMB 146,000,000 in Q3 2022. Interest costs in the quarter increased predominantly due to higher interest rates and short term funding of best bulk purchases that will be explained on Slide 23. Fundamental loss per share, which excludes non operating items of SEK 0.35 per share and we are ahead of market consensus and in management's view is the appropriate earnings per share measure given the adjustment for 1 off items, non repeatable items and CPA amortization, which is non cash item. We generated R141,000,000 of operating cash flow before interest paid, tax paid, working capital related items and the movement in the loan book funding.

Speaker 1

We define this as cash generated from business operations to consider it an appropriate indicator of our conversion of EBITDA to cash. In Q1 2023, we generated R73 1,000,000, an increase of approximately R70 1,000,000 in 6 months. Looking further at how our net cash utilized in operating activities for cash flow statements compares to cash generated from business operations. Our net cash utilized in operating activities is predominantly impacted by $135,000,000 of bulk airtime purchases as well as the impact of interest payments and loan book funding. Bulk vest purchases are short term investments using a DLIs within 3 to 6 months and funded through short term funding arrangements.

Speaker 1

For us, this is opportunistic in nature, and driven by the benefits of scale, adding further profitability in our sales business. On the whole, taking this all into account, The business generates positive working capital. This is most notable in our merchant debt business, where working capital is mainly funded from advanced purchases In our merchant card business, working capital retirements are relatively small. We estimate that approximately Every $100,000,000 in throughput growth requires $3,000,000 in additional working capital. Our net debt adjusted for short term funding of bulk VAT purchases The EBITDA ratio calculated on annualizing the relevant quarter's group adjusted EBITDA has improved to 3.5 times as compared to 3.6 times in Q2 2023, applying the same basis of calculation for comparative quarter Q2 2023.

Speaker 1

Capital expenditure in Q3 FY2023 amounted to R85 1,000,000. As we previously I'd like to just remain mainly closely muted in the Merchant Division. As set out on the slide, we believe our gross CapEx delivers a from IRR on amounts invested. In conclusion, our performance in Q3 2023 is evident of the efforts in fiscal 2022 and the continuation thereof. The corresponding positive financial performance thereof is reflected in this quarter's results.

Speaker 1

We are very pleased with the conclusion of our new funding arrangement, which is testament to the continued execution of our strategy, which has resulted in an extended borrowing term to December 2025 and an increase in our borrowing with additional funding of ZAR 200,000,000 abroad. This provides adequate liquidity and time to focus on growing our consumer loan book and other organic growth opportunities within the group. NetEca is now profitable in terms of adjusted EBITDA in both divisions on a sustainable basis and well positioned for growth. Our continued focus on strategic initiatives is progressing well and we are optimistic about delivering on positive performance for the remainder of the year. In line with South African Ministry Audit Consultation Group, we have appointed KPMG as our principal accountant effective from July 1, 2023, for our fiscal 2024 year and Deloitte Services will terminate or completion of the audit of our fiscal 2023 results.

Speaker 1

The change in our auditor is solely as a result of our compliance with on Africa's mandatory or the front rotation requirements. I would now like to hand over back to Chris, who will address the group outlook. Before I turn to our full year outlook, I'd like to provide a brief update on our progress towards establishing an employee share ownership plan or ESOP. You will recall that as part of the competition commission's approval of the Connect Group acquisition, we committed to establishing an ESOP of up to 5% of issued share capital within 2 years of the Connect transaction closing.

Speaker 2

The ESOP will be a

Speaker 1

qualifying transaction under in South Africa's Broadband Black Economic Empowerment Act and is a key strategic imperative for LASACA as a company. I am pleased to report that we are progressing well on this initiative and are confident that we will achieve this condition of the Kynecta acquisition within the time frame to read. Turning to our Q4 and full year outlook for the and EBITDA at a group level remains unchanged for the 12 months ending 30 June, 2023. We expect revenue to come in between ZAR8.7 billion and ZAR9.3 billion and group adjusted EBITDA of between at ZAR180 1,000,000 and ZAR525 1,000,000. More specifically, with 3 fiscal quarters under our belt and visibility into our 4th fiscal quarter, we believe our group adjusted EBITDA will likely be at the midpoint of this range.

Speaker 1

At a divisional level, we are raising our FY 2020 Merchant segment adjusted EBITDA range to between R580 1,000,000

Speaker 2

at ZAR595 1,000,000 from our previous guidance of between ZAR550 1,000,000 and ZAR565 1,000,000

Speaker 1

as a result of the continued outperformance of the Connect Group. We are lowering our consumer segment adjusted EBITDA range to between at R65 1,000,000 and R80 1,000,000, primarily due to the lower than expected EPE accounts and loan growth in the last two quarters. In line with market practice, we will provide our guidance for FY 2024 in September when we report our results for the year ended during June, 2023. Suffice to say that we believe our monthly net loss before tax will turn positive in the Q1 of FY 2024, excluding PPA amortization and the impact

Speaker 2

of any changes in our non core investments.

Speaker 1

This would mark another important milestone in the growth trajectory of Lusaka. And in conclusion, The results for the fiscal year to date are evidence of the turnaround in our consumer division and continued growth in our merchant division and our testament to the strategy we put in place just over a year ago. We will continue building on the momentum created across the business, delivering on our unique position to drive growth.

Speaker 2

And with that, we'd like

Speaker 1

to open up the Q and A session and take your questions.

Operator

Thanks, Chris. We're now going to open up the Q and A session. From Zoom, there are 2 ways you can participate. The first is to use the raise your hand icon, which is at the bottom of your screen. Clicking this will alert the operator that you want to be called on to ask a live question.

Operator

And so you'll be placed in the queue and called on. Just note you're going to be on mute until you are called on. The second way to participate in Q and A is to use the Q and A widget, which will allow you

Speaker 1

to type in and text

Operator

a question in. And so We will take questions from there as well. But just note, if we run into a time constraint, someone from the IR team will get back to you if your question is not asked on today's call. So let's open the session and fill the queue. And while we wait for our first live question, I'm going to read a question that was submitted by Theo O'Neill from Ledgefield Hills Research excuse me, from David Garrity.

Operator

Looking at Q4 and backing out the first 3 quarters of the year from your annual guidance, data back into a revenue range of R1.83 billion to R2.43 billion and EBITDA of $140,600,000 to $185,600,000 He wants to know given the midpoint of those ranges, How you think about the dynamics of revenue going down and EBITDA going up? Can you explain that?

Speaker 2

Thank you for the question. Naeem, do you want to

Speaker 1

pick that up or would you like me to hear? Yes, Chris, I'll touch on that and hand over to you as well. So I think, well, as we highlighted in the consumer performance, The major reason for the miss in the guidance was related to cost saving benefits coming through. We envisage that Some of those cost initiatives that we have undertaken will come through in the Q4. So that is the uplift that comes through in our consumer business.

Speaker 1

In terms of revenue, our revenue uplift for Q4 would be towards the upper end of the guidance limit, which you have indicated in your calculation. So yes, we are expecting our overall EBITDA margins to improve. There is this cost saving benefits on which we've already Action on will come through in the Q4, mainly on the ATM business as well as on the branch network with costs that will be reduced. Do you want to add anything more left, Chris?

Speaker 2

No, that's right. I think as you say, our outlook for revenue would be at the top end of that range and EBITDA is in the middle.

Operator

Great. Thanks, Chris. Next, we're going to take a live question from James Stark, for Morgan Stanley. Operator, please unmute James' line.

Speaker 3

Hi, good afternoon, guys. Can you hear me? Yes. Hi, Chris Lincoln and team. Thank you very much for the opportunity.

Speaker 3

Two questions from me. Firstly, if you could just tell us bit more about your money market offering and what sort of revenue expectations you're expecting for that. Just give us some color on how it's going to roll out, What you're kind of thinking it will serve and how you're going to take that to market? The second sort of question really relates to PaySharp, I mean, obviously, you are quite involved in the informal market. So I know PaySharp is ready to be new innovation out of the bigger banks.

Speaker 3

But I mean, are you seeing or detecting any kind of impact, anecdotal or otherwise around the progress this is having on decashing the informal sector. Thank you.

Speaker 2

And I think certainly 2 questions, the question around the money market offering on

Speaker 3

merchant business and then Paychef. Steve, do you want to pick up

Speaker 2

the question on our money market offering? And if you wish, comment on Paychef, I'll also come in at the end, but I'll pass Perfect.

Speaker 1

Perfect. So just as an offset, if we say that the money market product was launched Q3. It's very much at its nascent phases. But if I can say, as you saw, we never we didn't participate in the formal market, in the money market space. So while our entire VAS and cash digitization offering was more focused on the informal markets, we are very excited about our ability to bringing that VAS offering more holistically together with an ecosystem of supplier payment into the formal market.

Speaker 1

And so far prospects look good and we've had some really good traction. So we have a fairly significant formal merchant base, well over 1,000 fuel courts, etcetera. And this product this offering is testing well in the formal space. Chris, with regard to Tayshia, do you want to deal with that or would you want some comments from me?

Speaker 2

If you got any comments, guys, go for it. I'll pick up if you're doing anything else. You'll need to add it.

Speaker 1

Around that table and innovate in relation to what this new technology brings. So we see it as both a challenged to some revenues that we have, but we also see a real opportunity from a product development perspective. At this particular point, as you know, this is only available to the banks in the country and has not been visible to the FinTech community.

Speaker 2

I believe, Steve, the first part of your question was lost. Apologies was a technical glitch there. So Steve, if you wouldn't mind just Repeating the answer on your comments on Paychef, apologies.

Speaker 1

Sorry, Chris, on Paycheck or in relation to money market comment?

Speaker 2

Paycheck. Your money market question was heard. It was fine. It's just the Paycheck Patient comments, unfortunately, we lost the first half

Speaker 1

of what you're saying. Okay. So I think the first point I was making is that it's very early days from an on a PP perspective and pay share. We still the early adoption rates haven't been publicized as yet, but we at Lusaka are quite excited about getting a seat at the table and our ability to participate. I'll just make a point that at this particular stage, Fintechs don't actually have a seat at the table.

Speaker 1

The The ability to participate at this point has been limited to the banking community. This is something that we would like to see change very quickly. And we see opportunities to reduce our cost base. We see opportunities to create new revenue streams. And of course, we also anticipate that some of our revenue streams may come under pressure, but this will be offset by the lease to reduce costs and create new revenue lines.

Speaker 1

Thank you. And it's a big business that we are An exciting amount of rules will be used both on the revenue and cost side in our business. Thanks. Thanks, Steve. James, I think that's the important thing.

Speaker 2

At the moment, there are really 4 banks, Only 4 of the banks are involved in cash, as I'm sure you're aware. We are in a very close and regular in conversation with Banksert. And as a leading fintech in South Africa, we are tremendously excited about the introduction of Paychef and our potential involvement in this as soon as it opens up a little while. We've been ready for that.

Operator

Thanks, Chris. Our next question coming in is from Raj Sharma of B. Riley and Company.

Speaker 1

Hello. I just wanted to ask you about Could you tie in your operating profit before the prepaid time to the U. S, The GAAP loss reported, how should we think about this going forward? And we'll be conducting a

Speaker 2

few questions. Did you get that? So it was just a tiny operating profit number to the net loss number. Before the PPA.

Speaker 1

Thank you. Hi, Raj. Hope you're doing well. So Raj, I think the operating profit numbers are in.

Speaker 2

As we presented on the

Speaker 1

slide, after we've adjusted for PPA and interest, we get to a rand amount in the quarter of about $114,000,000 And then if you adjust for the net loss of gain on equity investments of $5,900,000 to get to the income or loss before taxes of the $120,000,000 which ties which is the rand amount that ties back into the dollar amount of $6,700,000 loss. And we'll be conducting a few questions. Got it. And then could you talk about the prepaid ad time, The classified that Howard impacted the revenue, it seems like the revenue that Came in was a little bit lower than expected. Was that because of the airtime sales?

Speaker 1

And how do you classify them and Yes. So, Chris, do you want me to take that one?

Speaker 2

Yes, sorry. Go for it, Niyet.

Speaker 1

Yes. So, Raj, as I mentioned in the presentation, with the Airtime, you have the spin based Airtime and the spin less Airtime. So the difference with the 2 is that the voucher based airtime, we actually carry that as inventory and per accounting rules and standard where we then have show the face value of that as revenue. But still less airtime, because we only act as an agent on behalf of the provider, That is not considered as you don't have to carry that as inventory and therefore we only show them commission. So if you look at how the market is changing, The fitness airtime is what customers prefer because it's more efficient and easier than getting a voucher and loading a voucher.

Speaker 1

So what we are seeing with a much more higher volume of fitness airtime, so we're only bringing in the commission amount versus bringing in the page value. From a GP basis and from a margin basis, We own a very similar GPN margin on both the product, which is really the product mix that impacted revenue. And that's why we said this was more a forecasting Change in the mix of pin list and pin base rather than revenue declining. Got it. Thank you for that.

Speaker 1

And then I have one more The

Speaker 2

other thing about it is the voucher based airtime, we're recognizing on a gross basis where we are principal and where we are acting as an agent, we're recognizing it on a net basis. That's Literally, the difference between gross and net, the bottom line in terms of margin, gross profit is unchanged.

Speaker 1

Got it. Thank you. And I'll ask you another follow on question. Could you Talk about the how severe the impact is of load shedding on your merchant South Africa?

Speaker 2

The impact on load shedding of load shedding on our merchant business has not had a material impact. Load shedding is a localized phenomenon. In other words, parts of the country I experienced load shedding in concentrated areas while the rest of the country remains open and on. And so, outside of this customer base across the country, That impact is therefore localized and not a national impact all at once. It also means load shedding is done in stages through the day.

Speaker 2

It means that our merchants often have the opportunity to catch up and make up some of the volume loss through the course of the day. And I would add though that and so We haven't seen a material impact of load shedding to date. I'll be assuming some within our cash business as Steve mentioned earlier. What I would add is my comments are, I suppose, mainly in relation to what we've seen over the last quarter, which is probably an average around low trading level 5, level 5 and below level 4 even. And what that means is you probably We've probably been experiencing something like 6 to 7.5 hours of load shedding in a 24 hour cycle.

Speaker 2

More recently in the last month, let's say, load sharing is averaging higher than that is probably averaging closely called level 8, which means you could be up to even 12 hours of load shedding in a 24 hour period. And there might be different challenges that come through with things like connectivity in terms of for cell towers for the telcos and sometimes battery life as well. So that if lotioning Materially, in a certain versions from what we saw in this quarter. There may be different Factors that say that it may impact. But I think on the whole, what we're very happy with is that in a tough rather Operating environment where our merchants and our consumers are enduring a lot of inconvenience through load shedding.

Speaker 2

And our business has proven to be resilient and you're seeing this growth, you're seeing this performance despite the fact that we face, and our customers face in the South African economy.

Speaker 1

Yes, thank you. Just one last question on the CNECT acquisition that continues to perform very strongly. And also, Could you mention could you talk about the competition in the merchant space? How is it that you Continue to grow and touch resilience and strength.

Speaker 2

And Steve, I'm going to offer that to you if you'd like to start.

Speaker 1

We have tremendous respect for the competitors that play in the merchant space. We are well diversified between the formal and the informal market, which makes us a little bit different to the majority of the competitors, together with the fact that we have a fairly comprehensive offering and that we pay in digital and cash and we also play in card and card acquiring. We play in the value added services, airtime, electricity, prepayment business. We're also in the credit space and in the digitization of cash, which means we pay right across the spectrum. Many of our competitors play in 1 or 2 of these particular areas.

Speaker 1

Let me also say that the informal market is relatively nascent and the fact that this competition is healthy and good, but this is a big market, it's untapped and there's plenty of opportunity for growth for a variety of different players. And in the formal market, the Lazarkand Connect brand has developed real strength. And as we've mentioned before, Capital Connect 1 Retail Funder of the Year. In past days, we're starting to get traction in that business. We are very soon as we touched on earlier, we're launching our BaaS or prepaid business to the money market into the formal markets.

Speaker 1

And because we're so deeply embedded in the formal market, we are actually taking business, the ability to scale is as a competitive advantage that we have. Great. Thank you. I'll get offline. Thank you for my question.

Operator

Thanks, Raj. Again, if you want to ask a live question on today's call, you can just use the raise your hand button to express your interest. While we vote for additional questions, we're going to take a question from Sven Thortzen, Bankers Securities. Given the environment, Has lending criteria in consumer been amended? What is happening with loan decline rates?

Operator

Are you increasing provision coverage?

Speaker 2

So on the whole, we apply quite strict lending and affordability criteria in our consumer business and in our on merchant business. So we don't believe we've had to adjust our criteria. As I said, we applied very strict criteria across both businesses. In terms of Loan loss provisions, we haven't seen any material change in terms of credit performance in our consumer business. We slightly increased our provision on our merchant business, but nothing material there at all.

Speaker 2

Just again, to reflect the type of interest rate environment in that space. But I think on the whole, we're comfortable with credit. We're comfortable with our and approach to lending and we feel that our book is performing well.

Operator

Great. Thank you. And we have one final question from Lee O'Neill on Litchfield Field Research. In your prepared remarks, you said you were active in moving unprofitable ATMs into other areas. How do you evaluate whether to move an ATM or find a way to increase usage?

Operator

2nd question, Is there a limit to the number of ATMs you can manage or acquire?

Speaker 2

And

Speaker 1

I think what we want to look at is volume, The number of customers that are patronizing that ATM from across the spectrum, The proximity of that ATM to the transfer nodes that are there and if we feel that that ATM is performing below The thresholds that we put, we have discussions with the merchant that's there. And if there are ways to up the volumes, we will keep that ATM. Or if the merchant is not prepared to do that, we would ask them to pay a rental for that. If the merchant is not willing to do so, Then it's the call that will now reside in Steve's team for the ATM business to withdraw that ATM and put that ATM in an environment where there's higher growth, better transaction and better service to customers. So this has allowed us to look at every ATM and see whether that ATM is providing value, providing service and is giving us the right GP.

Speaker 1

So that analysis has been done across the country and it's been done also in consultation with The consumer team to make sure that it makes sense from the customer point of view, but it also makes sense from a business point of view.

Speaker 2

Thanks, Liam. I think it's about the very commercial lens and understanding our customer behavior. Also, please, it's driving our strategy around

Operator

There are no further questions here. So that is going to conclude the call. Chris, do you have a closing statement or final thoughts?

Speaker 2

And just on behalf of the team and everyone at Losarco, just thank you to everybody for Thank you for taking the time to be on the call with us today, dialing in and listening to our updates. As we've said and hope it's come across, we're tremendously proud of the results that we presented here today. We feel that this is testament to about the turnaround in the consumer business and and the excellent growth that we've seen in our merchant business. The consumer business, as we said, is now consistently EBITDA profitable. The merchant business is growing with the Connections exceeding our initial expectations.

Speaker 2

And importantly, as we said, at a business operational level, we are producing a positive cash flow. So on the whole, we're very excited about where we are and we look forward to Again, giving further update in September, when we'll give you the full year to June numbers. And as part of that, we'd like to give you an outlook, as we said, around as a full year 2024, which for us holds a lot of excitement and a lot of potential. So thank you very much for joining us today.

Speaker 1

I wish you all well. Thank you.

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Earnings Conference Call
Lesaka Technologies Q3 2023
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