Q2 2021 Net 1 UEPS Technologies Inc Earnings Call

Okay.

[music].

Good day, ladies and gentlemen, and welcome to the niche Y and Q2 'twenty 'twenty one earnings call all participants will be in listen only mode. The Ruby and opportunity to ask questions later during the conference.

If you should need assistance during the call she signaled and operated.

By pressing Star Zero. Please note that this call is being recorded I would now like to turn the conference over to.

Dara Dex. Please go ahead ma'am.

Thank you operator, and welcome to our second quarter 'twenty 'twenty, one and earnings call with me today is CFO and interim CEO, Alex Smith, our press release and supplementary supplementary investor presentation are available on our Investor Relations website at IR Dot net one dot com.

Reminder, during this call, we'll 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. And addition during this call we won't be using certain non-GAAP financial measures and we will and we have provided reconciliations of these non-GAAP.

<unk> measures the most directly comparable GAAP measures, we will discuss our results and South African Rand, which is a non-GAAP measure and analyze our results of operations and our press release and Rand to assist investors understanding the underlying trends of our business as you know the company's results can be significantly affected by the currency fluctuation.

And between the U S dollar and the South African Rand.

Q&A session. Following our prepared remarks, so with that let me turn the call over to Alex.

Thank you Sarah and good day to everyone and thank you all for joining us on our second quarter earnings call and we hope everyone is staying healthy and safe during these difficult times.

On today's call will run through the following first we will review some of the financial and operational highlights from the quarter, then review our shorter term initiatives.

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 and South Africa, The President announced a return to level III restrictions on December 28th and these are expected to remain in force until at least February the 15th.

This level is and the Sofia as severe as we experienced in April and May of 'twenty and 'twenty.

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 C and a high incidence of cases and deaths recently and during the first wave.

Infection rates do you seem to be dropping so there is hope that the restrictions will be eased and the short term as we eagerly await widespread vaccinations and 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.

And South Africa, all consumer bank accounts, and easy pay everywhere or E. P. E increased by about 62000 gross accounts and 44000 net accounts during the quarter.

This is the first quarter of net positive additions to E. P in eight quarters.

Our primary operational focus over the next two quarters is from continuing to rebuild our customer base and this area.

I want to reiterate our goal of reaching $1 4 million and E. P 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 and your accounts and when we expect to generate and 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 and the last quarter are still pending processing.

Importantly, our cost base and South Africa remains stable and asset level can support significant growth and business activity.

As a result of a relatively large percentage of any revenue growth and the coming quarters should drop to the profit line, providing us a clear path to reaching breakeven and South Africa, and then to achieving profitability at the corporate level.

Our plan continues to be to reach breakeven and South Africa on and on a monthly basis as we exit. This fight 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 and are operations and expect meaningful growth from here.

Yes.

Internationally, we have made significant progress and the exit of IPG and.

While this resulted in various once of closure costs for this quarters result, the decisive actions taken this quarter should lead to maturity reduced operational losses and cash burn going forward.

Okay.

Now to provide a bit more color colour on the operational performance and South Africa.

The total number of active bank accounts is about $1 million.

And once the backlog of new accounts is processed will result, and a net increase versus the last quarter.

And our ATM network utilization has continued to see a meaningful recovery since June.

For the quarter transactions were up four 4% compared to the prior quarter.

And $14, 8% higher than the same quarter and fiscal 'twenty and 'twenty.

The loan book finished December 'twenty, and 'twenty at 317 million Rand versus 327 million at December 31, and 2019 and 345 million at September 30th 2020.

Loan growth was a little bit disappointing 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 cost 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 'twenty and 'twenty.

And so there was a knock on effect in October and November as they were much fewer loans being settled and last month.

Transaction volume through our easy pay 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 and encouraging 8% growth and transactions in the more important and 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'd be duplicating, our processing revenue and and equal cost of sales amount and respective customers using our ATM network that has switched over to the new SASSA Sappho issued card.

This has happened over the past eight quarters since our SASSA contract expired.

To be clear we included this revenue and.

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 our 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 as 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 and U S dollar terms and.

And a 12 per cent 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 are core revenues were up 6% sequentially.

And the U S dollar was 6% stronger against the Rand during the second quarter of fiscal 2021 compared to the second quarter of fiscal 'twenty, and 'twenty, which adversely impacted our reported results.

We reported and adjusted EBITDA loss of $12 $8 million, which was markedly higher than the 9.8 million loss reported for the first quarter of 'twenty 'twenty one.

The core South African operations saw EBITDA losses increased slightly from $4 $2 million and Q1 to $4 $6 million and 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 trying to get down as well as items that are really one off in nature.

The international operations.

And a significant contributor to the loss.

Partially due to those nonrecurring closure costs.

The operating loss and cash burn of the international operations should reduce in the third quarter of 2021 and be largely eliminated and the fourth quarter.

And particular, the majority of stuff and international in the international operations left during the quarter and processing activity was largely curtailed.

We are now going through the administrative process of pretty cloudy and these operations and expect this to be substantially complete by the end of the current fiscal year.

Second quarter 'twenty 'twenty, one fundamental loss per share was 24 cents compared to a 10 cents fundamental loss per share a year ago.

Corporate costs were $4 $8 million inflated by the impairment of loans.

Our equity method investments of $27 million and various one off transaction cost of about one point and $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 and might be quick as a result of and external capital raise that might be quick closed in November and December 2020.

And Bud and is the reason for the inflated tax expense for the quarter.

Net interest was negligible for the quarter, reflecting the cash and our balance sheet.

And the associated interest income is relatively low and the current environment. It is sufficient to largely offset the interest expense associated with funding, our ATM infrastructure and South Africa.

Our equity accounted investments generated losses of a million dollars for the quarter as a result of impairments principally related to a further decline and fin bonds market price.

But this was partially offset by a positive earnings contribution from bank Frick.

We will provide more detail and the performance of these investments and just a moment.

At December 31, and 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 and the second quarter of 'twenty 'twenty one.

Now I'd also like to give some feedback on developments and our various investments and the quarter, where we are able to do so.

Starting with bank Frick and.

As we announced yesterday, we sold our remaining interest back to the Q&A Frank family Foundation to $30 million.

This is further solidifying our focus on South Africa.

$18 $6 million of that purchase price was received and completion with the balance G. A a twofer the payments due in October 21, and July 22.

And the 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 and completion was $15 million with a further $11.4 million to be received over the.

18 months.

Meanwhile, in Nigeria, carbon and started to increase loan disbursements after the tightening of credit criteria and response to the effects of the pandemic.

They are benefiting from a lower interest rate environment and 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 the statistics for the year, which showed encouraging trends even in the face of the pandemic.

Okay.

And maybe quick continues to show good progress and developing their business.

Last year, they launched and you buy now pay later product called Zip.

They originated approximately 50000 of those buy now pay later loans in July 2020, and exited December 'twenty and 'twenty with in excess of 500000 loans issued so a very successful start with that program.

They also launched the Blue Amex prepaid card and in five months and issued nearly 500000 amex.

And that makes prepaid cards, making it one of the largest amex prepaid programs in Asia.

As for recent results the net revenues and the December 2020 quarter grew more than 10 per cent compared to the September quarter, but is still impacted by the effects of COVID-19, but showing sequential improvement.

Cash EBITDA loss for the December 'twenty, and 'twenty quarter remained below $1 million similar to the September quarter.

And might be quick is clearly doing well.

And 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 and zero as of December 31, and 2020.

<unk> continues to make slow progress on its recapitalization plan.

And is delivering improved operational results, which should assist that process.

If the capital structure could be rightsize, we're confident there is a sustainable business that can emerge.

I would just like to highlight that we currently hold about $16 million of soucy airtime and our balance sheet, which is only likely to be realized after a recapitalization is concluded.

I know all of you are very interested and an update on our investment Company Act status and capital allocation plans.

First on our investment Company Act status.

We continue to engage with the top and the orphan who specializes in this field and the legislation and somewhat arcane and complex.

Given the complexity of the application and then 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 complete and there is no assurance that we can achieve a favorable outcome.

However, based on current assistance this can take months or it could be completed sooner or later.

While this is progressing we continue to pursue our strategic aims and South Africa, and this could naturally cure or assist and the resolution of the current uncertainty over our status.

We will continue to keep our investors updated on our progress for this matter and.

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 it and formed a buyback.

The balance of approximately $150 million will be available to fund the organic and acquisitive growth, we have targeted and a 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 and South Africa.

And we plan to implement this strategy through a combination of organic growth and strategic acquisitions.

We will continue to focus on two broad categories, and consumer banking and financial services Tam or total addressable market, which is estimated at approximately 57 billion rand or approximately $3 $8 billion annually and.

And our merchants and financial services Tam, which is estimated at approximately 104 billion Rand was $6 $9 million annually.

Yes.

In addition to the substantial size of these markets South Africa market is primarily a cash based economy with approximately 60% of consumer retail transactions still being conducted and cash.

Our primary product offering coupled with our superior distribution channels provide for an exceptionally competitive offering for both categories of markets wishing to price as cash and or transition to electronic or digital payment platforms.

This involves the provision of financial inclusion to under service and humans, which includes unsecured credit transactional banking micro insurance as well as revenue generating value added services offered through our easy pay switch.

Our independent switching business easy pay as the market leader in terms of prepaid and postpaid services, including bill payment and electricity.

Three deployed infrastructure, we have the ability to own the last mile and thereby providing us with the perfect opportunity to penetrate these largely untapped markets and provides secure payment methodologies as well as to provide a comprehensive ecosystem.

Our strategic review identified our strength as well as the requirements to substantially scale, our business model on an incremental basis.

While we're in a very strong position and respective distribution infrastructure technology and licenses.

We've identified the following areas that require focus.

Firstly, the distribution of E M D compliant and point of sale terminals into the SMN and he market that will facilitate card processing and acquiring as well as value added services.

We have completed and agreement with a large south African bank to bridge. This gap and have commenced the pilot project.

And secondly, whilst attending a banking license is preferable.

And will result in better economics, and our business model as well as facilitate and 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.

And is focused on South Africa and is currently in progress to drive our strategy alongside all stated organic initiatives.

Finally, and other key initiatives for the board is the appointment of the new CEO. The board is very engaged and we have a great shortlist a 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 and seeking to formally clarify our investment company X status, which will lead to a return of capital.

And we are fully focused on exploiting the huge opportunity to grow this net one into the leading fintech business in South Africa.

Before taking any questions I'd like to extend my appreciation to the entire net one team and specifically to our customer facing employees, who have continued to provide and excellent service to our customers during an unprecedented and uncertain time.

In particular, we would like to pay tribute to three of our colleagues and he said he lost their lives to the pandemic.

Net contribution and dedication to the group will be remembered.

Claudia if I can hand, it back to you for questions now.

Thank you Sir if you would like to ask a question. Please press star and then one on your Touchtone phone and the keypad on your screen. If you decide to withdraw the question Keith price Dod and choose to move yourself from the list again, ladies and gentlemen, if you would like to ask a question. Please press Star then one we will post to see if there are any questions.

The first question comes from from Raj Sharma from B Riley. Please go ahead Raj.

Hi, good morning.

I wanted to I wanted to ask you about how are you progressing on your plan.

Of being at $1 4 million.

And users.

By the end of this year.

You you were looking to add 400000, new.

And new customers and and you did 44000 and how does the plan book and you know all of you.

Could you talk about that.

Sure. Thanks Ross.

Look we are we feel we made good progress and the last quarter.

We were targeting net gross additions of about 50000 and for the quarter and.

And we came a little bit above that it's at 62000.

And then in terms of moving forward, we're obviously looking to accelerate that rate from sign up and through the through these these these next two quarters.

And there are several reasons why we think that target is achievable.

Firstly, there's been some recently published a draft regulation changes that we expect to be enacted.

Relatively soon.

And that we believe would make it easier for them and grown recipients to open and designate a bank account and which they receive their monthly ground.

The existing processes is pretty onerous and involve spinning out a form the recipient and has to go and hand deliver.

In order to.

And 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 and the willingness of the recipients to move to a private sector Bank account.

And that's obviously, a change, though and benefit the whole and financial services industry.

And secondly.

We currently interact with them are.

Very large group of non EP account holders and utilizing our ATM network. So we are and you know with touching those people.

At least once a month and we are based and Nikki and and initiatives to to offer day the E product to them.

And finally, you know what.

And we were at our peak.

From the back in 2018, we had just over 3 million E. P accounts.

And then when he said and he felt we had a happy customers and that now.

And our brand and so we hope that we can can really look to that group of of day of the target based T to basically attract and back into the E. P E vote.

And a lot of our marketing efforts are really targeted around those opportunities.

And.

So with those initiatives and some of those dynamics, we feel we remain confident around the guidance of the $1 4 million E. P accounts by the end of June.

Got it so also just following up.

And the related to that you know.

The SaaS and recently.

And the stated users need.

I need to upgrade their cards at some point right and they will not be force too, but how do you view this.

Development of the opportunity and when do you take this as an opportunity of gaining more and more accounts.

Yeah, I think that that's part of the of the wider opportunity. So as we understand it the are they.

The the SASSA has put an announcement that our cards will need to be upgraded but they and they will continue to operate past 31 March.

But you know I think.

And there's maybe a little bit of uncertainty certainty this created and market and and in terms of those pods and.

You know with the provision of and EP accounts that uncertainty can be removed. So you know, we'll look at that as an opportunity T.

T attract in particular, those two sort of target areas back to us.

With that as one of the catalysts.

Alright, and and lastly on the sale of the remaining stake.

Great.

You talk about the motivation there was it just.

Wanting to refocus and South Africa operations.

Was it.

That's a good price or.

How would you sort of thinking about.

And we will have private and vessels in that regard.

Yeah. I mean, you know we stated that our aim is to devote all our capital and resources and management time to to South Africa.

So.

You know the opportunity came around and came around and discussions with the FERC family.

T to basically complete the disposal and you.

This takes away the time, that's involved and in our involvement there and you know with the closure of the IPG operations.

Lot of the.

Strategic rationale behind the original investment anticipated and so we saw the sort as preferable to realize the capital and devote all of our time and attention to to the South Africa and opportunity.

And does it does this imply that you're also looking to sell the other states with Bobby Quaker would be.

A consideration or do you intend on holding that and for a while.

We looked.

Like I said with all the focus on South Africa, we're not actively.

Looking to do anything around and the other investments and when opportunity arises we would certainly take it seriously but you.

You know you've seen from the progress that might be clicks are made and the last year or so that and things are looking very very good it might be quick and so we're not in any rush to exit out of that one and you know I think will.

Our focus is very much and 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 ladies and gentlemen, just another reminder, if you would like to ask a question Keith by Dod and button. If you would like to ask a question. Please press Star then one we will post to see if there any further questions.

The next question comes from Bill Gordon from G. C. Please go ahead bill.

I had a quick question, we've been concerned with the <unk>.

<unk> that we have and the bank, we had to go and getting liquidation to shareholders et cetera. If if Africa is exciting and you people seem to suggest certainly the economist says.

And part of your 2025, and Africa will be a big a and China, if that's the case and where and to Fintech and Andy has done so well.

Why not focus purely on Africa don't give us back any of the money grow Africa grow the Fintech and Africa and take the ball and run with it.

Yes.

Thanks, Bill I mean, you know, we see plenty of opportunities and in Africa. We you know we.

And we always felt there was a bit of a balance to be struck between what we're hearing from our shareholders and are and where we see the opportunities.

Obviously, we've had this uncertainty around our status under the investment Company Act and once that resolved and you know 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 and the past around and capital return and we need to honor that and less the circumstances have fundamentally changed.

Okay.

Thank you and the next question comes from Jeff <unk> from capital you. Please go ahead Jeff.

Hi, Alex It's Jeff Yeah, I was just curious.

Curious whether the sale of.

Frac helps at all and clearing up the investment Company Act as you remove an equity investment and and and raise cash. Thanks.

Yeah. Thanks, Jeff.

Look we were hopeful there will be another step towards addressing the issue the grant and closed the transaction yesterday and so we haven't really had the opportunity to discuss its impact and with our counsel, but we believe it should help with the metrics that you use to assess the situation.

However.

Ironically, the increase and the carrying value of our might be quick investment in the quarter does work against it slightly so yeah.

There are constantly shifting dynamics here.

I mean, we see probably the best opportunity is our focus on growing our business and South Africa organically and and acquisitive Lee.

To strengthen our offerings here.

And we think that if we progress on each or either of those fronts.

That's the and he May also be a a fast route.

To resolving the issue.

Okay. Thank you we have no further questions and the queue and.

Alex do you have anything you want to add or can be compute no. I think we can conclude now cloud Claudia okay. Thank you very much and ladies and gentlemen, and that concludes today's conference. Thank you for joining US you may now disconnect your lines.