Q3 2021 Net 1 UEPS Technologies Inc Earnings Call
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Good day, ladies and gentlemen, and welcome to <unk> Q3, 2021 and earnings call.
All participants will be in listen only mode.
The Ruby and opportunity to ask questions later during the conference.
You should be and this is to exchange call. Please signal and operated by pressing star and P&L. Please note that this call is being recorded.
And I'd like to turn the conference over to bad debt. Please go ahead ma'am.
Thank you operator, welcome to our third quarter 2021 and earnings call with me today is CFO and interim CEO, Alex Smith, our press release and supplementary Investor presentation are available on our Investor Relations website, and I are of that and that one dot com as a reminder, during this call we'll be making.
Forward looking statements and I ask you to look at the cautionary language contained in our form 10-K regarding the risks and uncertainties associated with forward looking statements also we will discuss our results and South African Rand, which is and is non-GAAP.
And analyze our results of operation and our press release in Rancho assist investors understanding the underlying trends of our business as you know the company's results can be significantly affected by the currency fluctuations between the U S dollar and the South African Rand.
And it'll have a Q&A session. Following the prepared remarks, so with that let me turn the call over to Alex.
Thanks, Tara and good day to everyone and thank you all for joining us and off third quarter earnings call.
Hope everyone's 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 short term initiatives finally, I'll review, our longer term initiatives and it didn't.
And so 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. We are currently and locked down level, one which is the least restrictive of the five lockdown, Nevertheless, Houston and South Africa.
The data and your infections has been relatively stable and and at a low level through April but they're all concerns over a third way of hitting the country as we approached the southern hemisphere winter months.
So that's been government is rolling out and the vaccination program.
But it is at a relatively early stage and has suffered from some delays and then.
Unless we are hopeful the time and we made up and we can take but we continue to expect uncertainty and the environment.
It's now been about eight months since we announced net ones new strategy on which we are currently executing.
Having been with the company for several years prior as well as during this transition.
And I can say undoubtedly though this is a new enterprise focused and strategic and our mission to become a major fintech player and South Africa focused on financial inclusion for underserved consumers and merchants.
To help each other and drive the strategy. We have recently hired a dynamic new CEO for our Southern Africa business link and Molly who is a well respected and.
And experienced executive and the South African financial services and banking industry.
This has also enabled us to attract some amazing new talent among the executive ranks and I.
Along with our ambitious goals will make net one very desirable place to work and growth.
Lincoln only took up office on Monday, but we can already feel the excitement and revitalize energy and the business from the tasks ahead.
During these eight months, we have operationally streamlined the business selling a stake and bank Frick.
Collected the final proceeds and the sale of our stake in DNI substantially.
Substantially closed down and IPG or European payments venture, thereby reducing cash burn and preserving our ample cash position for more strategic opportunities.
We've also been preparing for a relaunch of our financial inclusion products here in South Africa, which will be the key focus for us over the next 12 months.
So in summary, while it might not be obvious to our investors and really get a glimpse beyond the quarterly financials and much less of the inner workings and the company. We definitely believe we are well positioned with talent energy and strategy to scale the business meaningfully and create the standout financial inclusion and Fintech and South Africa.
Now onto the financial and operational highlights from the third quarter.
The key theme for this quarter has been progress as a board and exec team continues to be very busy.
Scaling the card business as well as pursuing our strategic initiatives.
While the financial results have been disappointing and we've been able to stop building meaningful tangible momentum and our customer acquisition project. We have made good progress operationally.
Total revenue was $29 million, which was a 17% decline year over year in U S dollar terms and and 19% decrease in Rand terms, primarily due to fewer prepaid airtime and Pos sales.
And as well as lower account fee revenues.
The U S dollar was 3% and weaker against the ran during the third quarter of fiscal 2021 compared to the third quarter of fiscal 2020, which also impacted our reported results.
We reported and adjusted EBITDA loss of $12 $8 million, which was comparable to the $12 8 million loss reported for the second quarter of 2021.
The core South African operations, so EBITDA losses of $8 $5 million, reflecting the weaker revenue in the quarter.
However, the cost base remains stable and we have significant available capacity.
The third quarter 2021 fundamental loss per share was 24 cents compared to an 11th and fundamental loss per share a year ago.
Corporate costs were $1 $5 million returning to a more normal run rate from the inflated amount of the previous quarter.
Yeah.
And South Africa, our consumer bank accounts easy pay everywhere or E. P. E increased by about 52000 gross accounts and 28000 net accounts during the quarter.
This reflects further progress, but does fall short of the expectations, we set out and the last quarter.
We had been expecting to see a meaningful acceleration and customer acquisition from March which we have not achieved and we believe this pushes our expectations and reaching 1.4 million E. P accounts backed by several months.
This delay has been caused by a number of factors some internal and some external.
And certainly we've had several management changes with several high caliber additions to the team and the departure of a number of long serving executives.
And from an external perspective, we have not seen the regulatory changes we had expected pushed through.
The proposed changes are clearly being lost and to make it a much easier process for grant recipients to open and designate the bank accounts into which they receive their monthly SASSA grant.
As we've discussed previously the existing process is pretty onerous and involves printing and filling out a form which the recipient and then has to deliver has to hand deliver to assessor office for processing.
These draft regulation changes are yet to be gazetted, which would result, and then passing into law.
However, we're not sitting idly waiting for regulation changes, we've put together a comprehensive marketing plan to communicate to our target market.
And the last two and a half years, we have not made any significant investment into a marketing campaign and we feel the time is now right to lift our profile again in the communities, we serve and embark on a nationwide customer acquisition campaign.
Our cost base and South Africa remained stable and at a level, where we can support significant growth and business activity.
As a result, a relatively large percentage of any revenue growth in the coming quarters should drop to the profit line, providing us a clear path to reaching breakeven and South Africa, and then to achieving profitability at the corporate level.
Our plan continues to be to reach break even and South Africa on a monthly basis.
During the first half of next fiscal year with the caveat and then we may be impacted by future COVID-19 related lockdown restrictions that may adversely affect this plan.
The total number of active bank accounts is a little over 1 million, while our net increases to date have been encouraging and achieved without proactive marketing all customer acquisition initiatives. We continue to see ongoing delays in these accounts, becoming active and revenue generating.
This seems to be primarily because of the regulatory process I referred to earlier and emphasizes why we believe that the proposed regulatory change is so important and respective our growth initiatives.
Our ATM network utilization has continued to trend and the right direction that's true.
Transaction volumes reduced slightly and total withdrawal values, which affects fees were lower this quarter.
For the quarter transactions were down 5% compared to the prior quarter and 9% higher than the same quarter and fiscal 2020.
The number of unique customers using our infrastructure was up 1% on the prior quarter and up 14% on the same quarter last year.
Okay.
The loan book finished March 2021 at 305 million Rand versus 278 million Rand and March 31 and 2020.
And 327 million Rand at December 31st 2020.
Theres been limited loan growth over the last two quarters, indicating that there is little room for higher penetration into the existing customer base.
Future growth and the loan book is therefore expected to come from the expansion of the ebay customer base.
We currently see around about a 40% penetration of loans into this customer base base.
And any growth in our loan book will likely lag any customer growth by around three months due to the lending requirements, we applied to new customers.
Transaction volume through our easy pay switch continued to trend stronger than they were affected by normal seasonality and this quarter.
Compared to the same period last year, we did see reductions and the volume of lower margin airtime and electricity rate recharges, but and encouraging 13% growth in transactions and the more important and full payment space.
We also have some high volume and new relationships coming into the ecosystem and the next few months, which should result, and good growth and the short term.
In terms of IPG, we recorded a loss of $3 $3 million for the quarter.
As we indicated last quarter. This is expected to be the last quarter with any significant costs and respective IPG and.
The operational closure of the business is largely complete and we are now entering the liquidation process from the various entities that formed part of that business unit.
Included in the loss for the quarter, what was the profit and loss account impact of the settlement, we reached with bank Frick.
This settlement accounted for around $2 $1 million of the loss for the quarter.
With the balance of the three four and 6 million and settlement, having having already been provided for and creditors.
The balance of the 1.2 million loss for the quarter represents the cost of closure for all the IPG operations and this quarter.
Now just a few minutes to review various investments.
First for bank Frick as Youre aware, we sold our remaining interest back to the Q&A free.
Family Foundation for $30 million and the quarter.
As a reminder, $18 $6 million and that purchase price was received on completion with the balance do you have a cheaper the payments due in October 2021, and July 2022.
And the $15 million and the initial installment and the purchase price was received on completion as $3 $6 million was used to settle all and any outstanding liabilities between the group and bank Frick.
We believe this was the final major cost and the IPG closure process.
We continue to carry FINMA and at the same value recorded in December 'twenty, and 'twenty, which equates to around 84 cents per share.
During the quarter, we saw some recovery and the pinball and share price and over the last month. It has been trading around one ran 50.
As an equity accounted investment, we're not able to write and the value of our stake up to the market price.
We will only have visibility of thin bonds trading performance for the latest fiscal year.
Which is to the end of February towards the end of May and this will be incorporated into our fourth quarter results.
In mid March 2021 might be quick raised additional capital through the issuance of shares to new shareholders at a pre money valuation of $480 million.
We use this March 2021 valuation as the basis for our adjustment to increase the carrying value of our investment and might be quick by $10.8 million.
From $42 $1 million to $52.9 million as of March 31, 2021.
The financial performance continues to improve despite some of the challenges India is facing each and the pandemic.
In particular, there achieving rapid growth in the buy now pay later product and are positioning themselves as the leading player in India in that market.
We continue to carry the value of our cell C investment and zero as of March 31st.
The other C continues to make slow, but steady progress on its recapitalization plan, but it is delivering improved operational results.
While the slow progress is frustrating this is a highly complex multi party restructuring.
And if the capital structure can be right sized we are confident there is a sustainable business that can emerge.
And once again I would just like to highlight that we currently hold about $16 million of cell C. Airtime on our balance sheet, which is only likely to be realized after the recapitalization is completed.
We just don't have anything new to report this quarter in terms of clarifying our status under the investment Company Act.
We will continue to keep our investors updated on our progress for this matter and we can assure you it remains a top priority for us.
And the clearest way out to the uncertainty is through either acquisitions or the recovery of our core South Africa operations.
Both of which are focus areas for the team.
At March 31, and 2021, we had unrestricted cash of $208 million and no debt.
The U S dollar denominated balances were $171 million out of that total.
As soon as our investment Company Act status is clarified we will review the most effective use of the remaining capital which may include a capital return to shareholders.
What's the allocation of capital will look at will be governed by the circumstances at the time and where our capital is likely to general and likely to generate the best possible return for our shareholders.
Finally to spend a few minutes on the feature of net one.
As I mentioned earlier, we announced the appointment of Lincoln Molly Southern African and CEO in February.
Officially joined US on May the first and is certainly hit the ground running.
This is a new position for the company and we believe that Lincoln is a perfect candidate for the position.
Is a highly accomplished financial services executive with over 25 years and the industry.
He was most recently head of group card and payments and standard Bank group.
And he chairs the board of directors of Diners Club, South Africa, and as a member of the Central and Eastern Europe, Middle East and Africa business Council for visa.
His strong track record and consumer and merchant and financial services across South Africa, and 16 other African countries will be invaluable as we look to expand our consumer banking and merchant and financial services businesses.
As a reminder, the consumer banking and financial services Tam or total addressable market is estimated at approximately 57 billion Rand.
A $3 $8 billion annually.
And our merchants financial services Tam is estimated at approximately 104 billion Rand or 6.9 millions and billions.
Dollars annually.
Okay.
Our primary product offering coupled with our superior distribution channels provides for an exceptionally competitive offering for both categories and market markets wishing to price as cash and to a transition to electronic or digital payment platforms.
Okay.
With the streamlining of the business that we've achieved over the last three quarters, we were able to dedicate more and more resources to focus and our activities and South Africa.
As a result, our corporate activity as well as our M&A activity is fully focused and South Africa as currently in progress to drive our strategy alongside our stated organic initiatives.
We are continuing with our search for our group CEO and we will communicate progress.
On that process in due course.
Wrapping up I'd, just like to reiterate that while the financial results for this quarter have been disappointing. We have made good progress operationally, which has laid the groundwork for improved financial performance going forward.
We continue to engage and seeking to formally clarify our investment company X status.
And we are fully focused unexploited machines your opportunity to grow net one into the leading fintech business and South Africa.
And before taking any questions I'd, just like to extend my appreciation to the entire net one team.
And specifically to our customer facing employees have continued to provide and excellent service to our customers customers during an unprecedented and uncertain time.
With some of the developments and the last quarter.
It really feels like we are at the start of and exciting new journey that can provide significant opportunities and returns for all of our stakeholders.
Claudia if I can hand, it back to you now for questions.
Thank you very much Sir if you would like to ask a question Keith.
And then one on your Touchtone phone and the keypad on your screen.
If you decide to withdraw the question Keith Please stop being true to move yourself from the list.
And ladies and gentlemen, if you would like to ask a question Keith and stop been one we will post to see if we have any questions.
The first question comes from Raj Sharma from B Riley. Please go ahead Raj.
Hi, good morning, Alex.
Good morning, Don.
So if you could give a little bit from on my questions are related to the net account additions and clearly they were lower than we expected and what changes.
That.
And you know given the South Africa was not necessarily in a day restrictive lockdown level.
And you you were saying that the other.
And I think you said that the target of the.
400000, net new adds and it's been pushed out a.
A few quarters or a few months and what changes that going forward.
How do you how do you how would you see this happening from 27000.
Accounts, a quarter and just significantly higher.
Look I think we see the key catalyst here is becoming much more proactive in terms of our.
Marketing of the product and and.
And much more.
I guess public engagement with our target market and really the customer base that we're acquiring at the moment comes out of.
People that are the net are starting to access them.
Grants. So it's people that are opening bank accounts, because they are now entitled to them to a grant from <unk> from the government. That's a relatively small portion of the <unk> of the target customer base.
And as I said in the prepared remarks, I think we have been we'd never really well and not never but we believe we've done very limited marketing over the last two and a half years.
And we spent much of the last quarterly preparing a what we believe is a very compelling marketing campaign.
And we're going through the process now of lining up the and the start of that process. So we see that and as a major catalyst.
And I think you know where we're also planning on on various stakeholder engagements debt.
And we believe can also assist and that process of all the enabling us to stop ramping up customer and customer acquisition at a fast and level.
So you know the sequential and there was a sequential decline and the net new adds and what would explain that.
Is it COVID-19 related.
Locked down.
Or you know restricted levels or.
And so there's like the one that has one day and age there hasn't really been any impact from them from from COVID-19 in terms of trading and this last quarter and.
As I mentioned the these numbers are primarily coming out of people.
Starting to access crumbs and.
And the seasonally and we have seen that that's typically quite slow in the first quarter of the calendar year.
And in that.
And we're coming to the end of the government's fiscal year.
And <unk>.
But you know that apart from that that some seasonality dynamic.
There's nothing else that would have led.
And led to the drop.
And so we think it's around.
Starting up this marketing campaign, you know that's how we change the direct the direction and the and the momentum is T is is to start at the moment of the marketing campaign and are really focused effort from really the whole company around driving the increase and this customer base.
So and and what is the new sort of target now will add the we'll get to one 4 million accounts you think buy.
We're basically and then this year or yes. So we're looking at during our first half of next fiscal year and is a is our target to get to the 1.4.
You know where are and we're gonna be guy you know with the initiation of the various initiatives will be a really targeting to ramp that up as quickly as possible, but you know our guidance is.
Within the first the first half of the next fiscal year.
And when do you also expect the SASSA sort of things to get.
Net do get mandated and how and when do you think that opens up and does that contribute to that.
New accounts.
So it would definitely.
Make the process easier and.
And our lockup I tried to indicate and the remarks is that you know.
So the we need to Oh, and the process and drive their customer acquisition.
And with regardless of what happens and the SASSA environment. So, we'll obviously work with Merck with engaging with them. They are a key stakeholder and this whole environment.
And if we can.
And probably you know and get the regulation.
And if the regulations day start to change and some other dynamics change then and obviously just help in terms of the process of signing up new customers.
Yeah.
Right and.
And just I got a couple more questions any timeline on that resolution.
The FCC investment issue you had indicated earlier would be by the end of May.
And that has been pushed out or that's still sort of.
Yeah, that's affected and possibly being pushed out I don't see and being resolved by the end of May.
But and so we continue to work on and unfortunately, there's not much that we can and can share in terms of you know tangible.
Tangible progress.
But we do continue to work on it but we don't have any clear and timelines for resolution at this point.
Okay, and then I have a question on.
Number.
We work and just hypothetical question and you can maybe give us a sense of what the operating leverage here is if we were to get to.
Call it.
3 million ETE accounts.
And what would you.
Would we be able to do that I'll, just say across basically all the words what would the EBITDA.
Levels look like.
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And that's sort of a.
And level.
And 3 million <unk> accounts, you know, obviously would be a very different environment. So.
Do we have the infrastructure in place to service 3 million people absolutely the and this infrastructure based was originally built for 10 million people, we did cut it back a bit with all the changes, but you know and there's a substantial fixed cost.
So a component to it. So you know the 3 million, we believe could be serviced quite comfortably out of out of the existing.
<unk> infrastructure.
And there are though some variable costs in terms of oh servicing that quantum.
So we would currently estimate probably.
Probably between 65, and 7% of revenue would fall to the bottom line and.
In terms of and of the operational leverage.
And you know very significant portion of that of the rate of revenue growth would drop to EBITDA.
Okay.
Right and so.
And the assumptions still the same as they've been in the past how much and we can get out of in terms of.
Atms and products and in terms of the processing how much you can get out of each E.
P E accounts, yeah or have those come down.
No we're still.
Those numbers are still solid in terms of how we are.
How we how we see the business and I think and the POS we've talked about like an average and I'll pay of approximately $2 50 per month of revenue per user and I think and that's probably it's probably a little bit more than that.
Probably closer to $3 in terms of look at is affected a bit by exchange rates.
And that's about 45 rent 50 ramp and.
Per month.
Per account is kind of the number is kind of the number that we work on.
And that would you.
And he then apply that.
So the gross margin percentage to the to that number and then you've got a good sense of where 3 million <unk> accounts were taking.
Right. So it still is actually better than what we've talked and the path is about it's not the smart now about $3 per account per month.
A little of processing and financial services.
Yeah, Yeah in respect of the P. H I read that the business to consumer side of the of the business. Yeah. Yes, yes, okay. Thank you I'll take my questions offline. Thank you.
And it's Raj.
Ladies and gentlemen, just another reminder, if you would like to ask a question Keith per stop being one and if you would like to ask a question Keith. Please stop me and when we were pushed to see if there are any further questions.
The next question comes from Mitch could have from signal a M. Keith go ahead Nick.
Yeah.
And thank you for taking my call my questions.
I have no other questions on cell C and.
And now I'll just awesome.
One other time.
And my first question is do you think your cover.
And the 2 billion run retro screen from healthy.
And Nick we.
You know I think we've been pretty clear and associate in terms of the carrying value that we apply to it which is zero. So.
We our position is that that's where we bid and the fair value at the moment.
If we get anything out of the investment in terms of once the recap process is.
He's completed then that will obviously be upside for us but it.
It's not a key feature of for the group and you.
You know that investment and something from the past we are we're not focused on it and we're focused on building our operational business.
And we'll keep an eye on on cell C, but.
And frankly.
You know where the management team is focused entirely on on rebuilding.
Our operational business, our core competencies and.
And and.
That's where it should be focused.
And to my 2 billion range, yes.
Current away.
And no one seems to want to take responsibility.
Com correct.
And then at the same time, you want to use the cash from the balance sheet to make.
More acquisitions or other acquisitions and higher <unk>.
Feel very uncomfortable.
Got you and.
And Todd Com from what happened and healthy.
And that you won.
Hum.
And the same brake Austria holders.
True.
Allow you to invest the money and other.
Uh huh.
And very uncomfortable with it.
And I'm comfortable.
Because of your position.
And you take them and you cited the euro value that you can recover.
Meantime, the other shareholder.
Publicly patent claim they will recover that year.
And can you reconcile that for me please.
Look Nick and I think.
We can certainly take this discussion offline because I'm.
And I'm not sure. It's a it's a key focus area for most of the shareholders and the cool but.
The there's been a fundamental change and this business over the last 12 months and a completely new board.
We've got a largely new management team.
And I think there's anybody that remains.
And on either the management team on our board, who are involved and that cell C investment.
So as I said, we are very much focused on the way forward.
We will do what's necessary in terms of good governance, and and appropriate level of supervision and all of south and given our limited involvement and.
And we don't want the current management or the board for that distracted and from the aim of rebuilding the.
Africa, and the core South African business, which is where our core competencies life sales he was far outside of that we're.
And we're focused on financial inclusion and.
And from that you know in the financial services space for consumers and merchants.
And I think if you want a more detailed discussion around where things lie and respective Soucy. Then you know and we're very happy to engage offline on that.
Thank you very much ladies and gentlemen that concludes today's conference. Thank you for joining US you may now disconnect your lines.
Yeah.
Yeah.
Yes.
Okay.
Okay.
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