Lesaka Technologies, Inc.
Q3 2020 Earnings Call Transcript

Published: 28 May 2020

[Operator:]

Good day, ladies and gentlemen, and welcome to the Net1 Q3 2020 results. [Operator Instructions] Please note that this call is being recorded. I would now like to turn the conference over to Dhruv Chopra. Please go ahead.

[Dhruv Chopra:]

Thank you, Irene. Welcome to our third quarter 2020 earnings call. With me on the call today is our CEO, Herman Kotzé; and our CFO, Alex Smith. Our press release and a supplementary investor presentation are available on our Investor Relations website, ir.net1.com. As a reminder, during this call, we will be making forward-looking statements, and I ask you to look at the cautionary language contained in our press release regarding the risks and uncertainties associated with forward-looking statements. In addition, during this call, we will be using certain non-GAAP financial measures and we have provided a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures. We will discuss our results in South African rand, which is a non-GAAP measure. We analyze our results of operations in our press release in rand to assist investors 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 question-and-answer session following our prepared remarks. And with that, let me turn the call over to Herman.

[Herman Kotzé:]

Thank you, Dhruv and good day to everyone. I hope everyone is healthy and safe during these unprecedented times. Just like many of you, most of us have been working from home for the last several weeks as South Africa remains on a national lockdown. Similar to every business around the world, the COVID-19 pandemic has impacted our operations. During this time, though, I’m proud of our ability to ensure we are doing the right things for our employees, our customers and the communities that we serve. Today, I would like to focus on four key things

[Alex Smith:]

Thank you, Herman, and good day to everybody. Given the structural changes in the business over the past 12 months, the comparison of our third quarter results to Q1 and Q2 is more relevant than the year-over-year comparisons. Adding to that, the effects of COVID-19 have direct bearing on the operations, and therefore I will spend more time than normal discussing quarter-to-date trends for Q4. Though the pandemic is global in nature, given the current mix of our operations, the most relevant and material impacts for Net1 are experienced in South Africa and, therefore, limited parallels can be drawn between trends in the U.S., Europe and many other markets, and those that we see in South Africa. Unsurprisingly, our near-term financial results will depend on the severity of the situation in South Africa, the length of the lockdown and curtailed economic activities, and finally, the trajectory of the recovery once restrictions begin to be lifted. Given our business is largely focused on the un-banked and under-banked, our customer behavior is more dependent on necessities and less so on discretionary spend and habits. We, therefore, do not believe that there will be any systemic shift in the behavior of our target markets that we recognize that actions like social distancing, safety, etcetera, will likely be more pronounced. Following the disposals of the last 2 months, we have a very strong balance sheet, a good handle on our costs, having gone through a substantial cost reduction exercise over the past year and, therefore, have reasonable visibility on our expected cash burn over the next two quarters. Despite the pandemic, we’ve not laid off any employees nor reduced salaries, with the exception of the management team and directors, as discussed by Herman, and our employees are all productive and eager to execute on our strategy as soon as regulatory and safety conditions permit us to do so. South Africa was in Level 5 lockdown from March 27 to April 30. This is the most severe form of lockdown, with only very limited parts of the economy operating. The country then moved Level 4 on May 1, Level 4 allowed some increased economic activity, but still maintains most restrictions as before. It has now been announced that South Africa will move to Level 3 from June 1, and the operating guidelines for this phase are expected to be released by government over the next few days. Outside of designated hotspots, this will see many areas of the economy reopen, but there remains significant restrictions on any activity involving social interaction and travel. At this point, it is not definitively clear whether our micro-lending operations will be able to resume in earnest and whether the other direct impacts we have seen will fall away. South Africa is expecting the incidence of the virus to continue rising over the coming winter months, which, as a reminder, is summer in the Northern Hemisphere, and should the situation deteriorate from the expected path, there is a risk that the lockdown level will be increased again, particularly in the country’s economic hubs. Moving on to our third quarter of 2020 results, our average rand-dollar exchange rate was ZAR15.37 to the dollar compared to ZAR14.17 a year ago and ZAR14.60 in the second quarter. However, the rand appreciated sharply during March to almost ZAR19 to the dollar in reaction to ratings downgrades, weak commodity prices and the pandemic, before partially recovering to its current level around ZAR17.50 to the dollar over the past 10 days or so. Third quarter 2020 fundamental loss per share was $0.11 compared to the $0.62 fundamental loss per share a year ago. This compares to a fundamental loss per share in the second quarter of $0.10. By segment, South African transaction processing reported revenue of $19.9 million in the third quarter of 2020, up 24% compared with the third quarter of 2019 and up 2% from the second quarter of 2020 on a constant currency basis and would have been even higher if not for the foregone transaction fees in the last week of March. The increase in segment revenue was primarily due to an increase in transactions performed through our ATM network and EasyPay, but partially offset by lower fees as a result of fewer EPE and SASSA accounts in the prior period. Our revenue for third quarter 2020 was adversely impacted by $0.5 million as a result of the COVID-19 pandemic as we were unable to charge certain cash withdrawal fees to customers as a result of the lockdown during the last few days of March 2020. We expect the monthly impact of foregone fees to be approximately ZAR20 million or $1.1 million at current exchange rates until the current dispensation is ended. Excluding the impact of the $5.6 million EasyPay goodwill impairment loss, our South African transaction processing operating segment revenue and operating loss have been adversely impacted by the loss of SASSA customers compared to a year ago. Our operating margin for Q3 of 2020 and 2019 was negative 44% and negative 75% and negative 14.6% in Q2 of 2020. Our operating loss margin for Q3 2020, excluding the goodwill impairment, was negative 15.5%. While we’ve made progress in returning this segment to profitability, we remain subscale at this level of accounts, and the key focus is on lifting revenue. International transaction processing generated revenue from continuing operations of $1.6 million in the third quarter of 2020, which was down 26% compared to the third quarter of 2019 but up sequentially on a constant currency basis. The year-over-year decrease in revenue in this segment was primarily due to an ongoing contraction in international transaction volumes. As Herman noted, the conclusion of Bank Frick’s Visa audit will allow us to launch various new services over the next few months. However, we expect initial sales activity may be tempered by the effects of the pandemic in Europe and will be influenced by the extent to which restrictions ease and economic activity returns. Once new product sales commence, we expect to see transaction volumes return to a positive trajectory. Given its largely fixed cost nature, we anticipate losses will start to decline with growing volume and that we are able to reach monthly EBITDA breakeven in early calendar 2021. Segment operating loss from continuing operations during Q3 2020 increased compared to fiscal 2019 due to higher operating losses, reflecting the high fixed cost component of the business. Our operating loss margin for Q3 2020 and 2019 was negative 202.6% and negative 84.2%, respectively. As you know, we sold our Korean operations in early March, and they contributed revenue of $19 million and EBITDA of $3.5 million for this quarter. Key features of the disposal were

[Operator:]

Thank you. [Operator Instructions] Our first question is from Scott Buck of B. Riley.

[Scott Buck:]

Hey, good morning guys. I am curious if you could tell us when you became aware of the Investment Company Act issue and what are the options to remedy that?

[Herman Kotzé:]

Sure. Hi, Scott. The company has been aware of the investment company issue for a while, and it’s been part of our planning over the last year or so. We had specific plans in place to deal with this issue. But unfortunately, the change in circumstances over the last 3 months has resulted in the current position that we find ourselves in. It is a fairly complicated piece of legislation that one needs to analyze and we don’t have enough time, I think, on this call to go through all of it. But from our perspective, the key matters that had an influence on the current situation obviously revolves around the Bank Frick option, which we did not exercise, that was clearly part of the plan to remedy the situation as well as the significant decline in the South African rand, which had a resultant effect on the relative valuation of our South African assets. So this is an issue that we are aware of and that we plan to deal with. We still intend to deal with it as efficiently and as swiftly as we can. There is a strategic review currently underway to determine the best course of action, which is not going to take a very long amount of time. And if depending on the outcome of this investigation we need to ask for an exemption from the SEC, then that is what we will do, but we hope to certainly deal with this as expeditiously as possible.

[Scott Buck:]

What are the ramifications if you are declared an investment company and you can’t get any kind of forbearance from the SEC?

[Herman Kotzé:]

So it’s – as I said, it’s a fairly complicated area of the law. But I think the best description of the various impacts or implications that this may have is actually contained in our Q. So you’ll see that there’s a risk factor that we’ve included over there, and I’ll refer you to that for a concise description of what it means.

[Scott Buck:]

Alright. And in terms of timeline to gain clarity, I mean, are we talking about 3 months or longer?

[Herman Kotzé:]

Yes. So obviously, some of it may not be entirely under our control when – as far as the regulators are concerned. But from our perspective, we certainly intend to complete everything that we need to do within the next 3 months.

[Scott Buck:]

Great. Next question for me, in terms of the strategic review, it feels like we went through this exercise about a year ago, and that’s what kind of drove the decisions to sell KSNET and DNI. What’s different this time? And why are we doing this again?

[Herman Kotzé:]

I think a couple of things. Obviously, there have been quite a few changes recently in terms of the corporate structure. We have a new number one shareholder in the form of Value Capital that came on board a month ago or so or during the last few weeks. And as part of the cooperation agreement that we’ve signed with them, we agreed to embark on a strategic review of the company. We also have 5 new non-executive directors on the Board, and we believe that it’s important and also fair to them to embark on a further review. Obviously, during these times, Scott, with the world changed as it has and various business activities impacted in different ways, we think that now is a prudent time to actually just – it’s not a brand-new review, I would say. This is a continuation of a plan that we’ve been propagating and that we started communicating about a year ago. So for those very specific reasons, we think it’s opportune for us to complete it now.

[Scott Buck:]

Alright guys. I appreciate the answers. Thanks.

[Herman Kotzé:]

Thank you.

[Operator:]

[Operator Instructions] We have a question from Bill Gordon of Gordon Capital.

[Bill Gordon:]

I was going to go down the same route as Scott just did, but he did it. And everything’s figured out so I don’t really want to reopen that story. But now that we have cash there, can we get some sort of direction where we’re going to go with the cash when we don’t get a dividend, when you don’t pay a quarterly dividend or anything of that nature? In other words, we got some high-growth areas in this company, whether it’s India, mobile pay doesn’t seem to need it. What can use our money that can be the best investment for us at this particular point?

[Herman Kotzé:]

We – so obviously, this will support the level of our review that we’re currently busy with. I – just generally speaking, about the various uses of capital, as I said during my remarks, it is still our intention to return some capital to shareholders as soon as we are in a position to do so. So that hasn’t changed. And it’s – the form of – in terms of what it will take is what we’re currently analyzing. But from our perspective, we still intend to return an amount of capital to our shareholders in the not too long term. But as far as other uses of cash is concerned, when we look at M&A activities, etcetera, we have not identified any, and we – at this stage, don’t intend to do any large-scale M&A activities over the foreseeable future. Those that we are considering or may be considering are very specific smaller bolt-on kind of deals that will add to our strategic intention and focus. And the other part of the capital that we’ve earmarked for the distribution over the next 3 months or so, again as soon as we can start, which we think is as early as next week, is to significantly grow the South African loan book.

[Bill Gordon:]

Okay, thank you.

[Operator:]

We have no further questions. Do you have any closing comments?

[Herman Kotzé:]

No, no further comments from our side. Thank you.

[Operator:]

Ladies and gentlemen, that concludes this conference. Thank you for joining us. You may now disconnect your lines.