Q4 2019 Earnings Call
Good day, ladies and gentlemen.
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Hi, good Judith welcome to our fourth quarter 2019 earnings call with me on the call today as a CEO Oh, my God and our CFO Alex Smith.
A press release and a supplementary investor presentation are available on our Investor Relations website, Hi, our dot net one dot com.
We expect a Form 10-K with the audited financial statements to be filed on Monday September Thirtyth.
As a reminder, during this call we will be making certain 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 had a nice results of operations at our press release in Rand to assist investors in 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 culinary session. Following our prepared remarks and with that let me turn the call over the Harman.
Thank you drew and good day to everybody.
Good morning, I will review, our fourth quarter highlights and specifically the progress on the key focus area as we highlighted on the law school as well as maybe go from here in fiscal 2020 .
[noise] why do into transformational changes during fiscal 2019, as we implemented a comprehensive restructuring of our business at cost base. Following the expiration of our SASSA contract and more importantly, the older migration of a substantial portion about you'd be customer base.
We have been focused and nimble and have largely compete at the restructuring about South African operations.
I'm extremely pleased that we were able to complete our significant and make significant progress towards the three main objectives. We said wow sells over the past six months, which were as follows.
First to achieve cash flow breakeven on a monthly basis.
South African operations by the month of June 29 team I.
I can report that we came very close to breakeven in June , but we were able to get the in the month of July .
Second to the leverage our balance sheet bicycling, the significant liabilities and date.
During the fifth yes, we have no long term debt outstanding and we have improved our net cash position to $37 million compared to Q3.
And food make progress towards unlocking shareholder value by monetizing some of our assets.
We have reduced our interest in DNA from 55% to 30%.
And then issued an option to sell our remaining holding.
Most engaged safety partners to assist us with evaluating all strategic options regarding case Nate.
We have received indicative office during the past week as part of this process.
We have reduced our mask the operating cost in South Africa by approximately 50% driven largely by the difficult decision to retrench approximately 12000 staff members. In addition to other operating expenses.
We believe we have now brought down South African operations to sustainable breakeven level, given our current base of 1.1 million active customers.
As we refocused on growing our business again in fiscal 2020.
We expect to grow sequentially and return to profitability.
Well now for the past the Doctor Stuyvesant out in our recent history and we are focused on rebuilding the group in all respects.
Our remaining transaction related businesses continued to operate broadly inline with expectations and are currently the primary source of EBITDA to the group.
Hey, snakes contribution rebounded from a weak Q3 and easy pay continued to grow at double digit rates.
Yeah, Hi, as Youre aware.
Deconsolidated from the group on March 30, 129 team as a result of the reduction in our ownership.
No longer contributes to the groups EBITDA.
Before I discuss our plans for fiscal 2020 and for the long term.
I want to spend a few minutes addressing the developments on the corporate activity side.
Over the past several quarters, we have provided carrying and market values of our individual investments to highlight some of the thoughts analysis.
Although this has largely been ignored by the market given the steep discount relative to our current share price I'm not happy to provide an update on how we aim to realize some of the value in Edwin.
We are undergoing an extensive strategic review across the group and we intend to return to our roots, namely providing innovative secure and cost effective financially technology solutions to the worlds and bank and the bank individuals and its emmys as well as activities that leverage our deep expertise in security and cryptography.
Business isn't assets that do not seamlessly tie into or add to this strategy will be considered non cool and sold a wound up.
I do need to highlight that this is not an overnight project given that some of the assets or illiquid complex, but we will follow a methodical process as required.
To that extent.
Based on our actions over the past six months we.
We have been able to accomplish the following.
First on D. and I, we have reduced ownership in cannot from 55% to 30%.
And use the proceeds to sit on our long term obligations.
We have issued an option to deny management to purchase our remaining city potential for approximately $61 million on or before December 31 2019.
While the recent public events itself.
Have not impacted operationally and the business has achieved double digit EBITDA growth over last year.
The negative coverage on cell C may have a short term bearing on a prospective investors willingness to invest in denied before sell sees recapitalization is complete.
Which SLC highlighted in the disclosures yesterday is still expected to be 29 team.
Deny remains a profitable and cash generative business and we remain committed and supportive minority shareholders, regardless of when the option will be exercised.
Earlier this week it was announced that he and I will acquire controlling stakes in two businesses being three g. and Blue label mobile.
Over the last year.
Actively sought to up diversified revenue streams and these two acquisitions or a part of that trustees.
These transactions are subject to various conditions, including regulatory approvals and my only closed during the first quarter of calendar 2020 .
So we may extend the option period accordingly, as these acquisitions further enhance the appeal of the allied to prospective investors.
Taking on case Nate.
Okay. So there's a transaction proceeds that it operates with domestically and in a more developed country with limited overlap with the groups of activities.
We believe it remains one of the key sources of value for the group and therefore, we engaged safety partners a top tier Fintech investment bank to assist the company with a strategic review of case made in order to determine the value of this business and the base with forward.
I'm pleased to report that within the past week. The company has received the number of indicative office for both financial and strategic players and we are currently evaluating these office before determining any next steps.
The board is under no urgency to make a final decision as our goal is to maximize shareholder value and we will take the necessary steps to achieve this goal.
This exercise is currently ongoing so we are unable at this time to provide additional details about any potential transaction that is timing or value.
And finally, we are continuing to explore strategic alternatives for some of the other businesses and assets in South Africa and internationally.
We will keep you updated on any material developments on these or any other transactions.
Directly related to the monetization of any of our assets is capital allocation and I will address this specifically following my discussion on strategy.
Similar to the very specific goals, we outlined in the second half of 29 team.
I'd like to lay out specific actions, we are focused on into fiscal 2020 , followed by a reiteration of our Fu four pillar strategy outlining our long term strategic plans.
For fiscal 2020 , the four areas of focus for late one all first.
Accelerate the transition from a b to B model to a BDC model in South Africa.
We aim to grow active accounts through E or our new brand, but at least 10% the 1.1 million customer level, we had in Q4 2019.
We also intend to increase our loan book by at least 10% subject to having access to sufficient liquidity to fund the book.
Second introduce and scale out new payments that one block chain offerings in Europe .
We expect to launch the new IP GE brand together with its new issuing acquiring a new bank products in fiscal 2020.
We also expect to launch a new crypto asset storage product, which in turn will help drive growth and profitability at IP G.
Third.
Want to rapidly grow payment solution sales in Africa, we aim to accelerate market penetration in F.
That group and carbon.
We expect that group to start generating revenue and into at least one other country outside of garner during fiscal 2020.
And fourth.
We want to implement the turnaround plan and compete strategic review in South Korea.
We have moved into phase two of the implementation of our turnaround plan in Korea.
And while this may initially lower revenue as we exit unprofitable agent will merchant relationships. It is expected to be accretive to profitability in parallel we will evaluate corporate finance options for case, Nick and finalize the transaction if appropriate.
Let me now turn to the four pillars of our long term strategy.
The first Fella is focused on South Africa.
A few key operational trends in South Africa include.
First active TB accounts remained stable at approximately 1.1 million and has remained at these levels since November 2018.
We opened roughly 20000, new ERP accounts in Q4, 2019, primarily through customers walking into our branches.
There is natural attrition in the existing LP base, but we are not actively looking to replace those lines on the be rather we will focus on net additions over the year through our new product range developed in collaboration with Finbond.
Second we began issuing our new fund, but it should we be SMB costs as part of our pilot in August 29 team.
We are close to commercial launch and expect these accounts to be the primary contributor of account growth in fiscal 2020.
Third.
Financial services offerings, both micro loans and insurance have largely returned to the historical operating performance and been relatively stable in Q4 2019 compared to Q3 290.
Affordable financial services are a key driver of new customer additions, but at the same time limited by the company's available liquidity.
Fourth we expect a 100 new aims to be delivered by the end of Q1 2020 and be deployed in Q2, and Q3 2020 as we rolled out our teams in fund bonds branch infrastructure and finally, our Easypay processing business continued to grow double digits, driven by more payment transactions both payments mobile eight times.
Sales and the merchant acquiring business.
The key elements to our South African financial inclusion strategy, all based on a distribution.
Combined with Finbond, we have a branch infrastructure of 808 branches. The second largest of any bank in South Africa behind Cappy take at 840 branches.
All of the other major banks have between 500, 700 branches and that number shrinks almost every day.
We also have a thousand 300, plus six eight games access to easy pays 70000 point of sale terminals and thousands of rural cash distribution points.
Our addressable market is not the digital bank type customers, but those who want to be able to have convenient access to physical touch points in close proximity to where they live.
We functionality and cost.
We now have two different variants to our erstwhile SPE accounts.
One a basic banking low cost account that gives biometric security three transactions and Internet banking and does not permit any deductions. The second is an inclusion banking offering a keen to ETP that provides access to all financial and value added services biometric security three transactions.
Internet and mobile banking for a flat monthly fee.
We expect to generate an average ARPU of between 20 and 25 Rand per account across both periods.
The transaction processing, we have been able to build a vertically integrated model in South Africa that spans ATM and pause acquiring processing e-commerce , and bill payments as well as banking and card issuance.
Controlling the value chain allows us to generate higher marginal returns compared to if we had to utilize third parties for some or all of the components.
And deep financial services as a result of the court accounted distribution.
We are able to offer the most competitive micro financial services to our clients.
Providing low cost credit is a key differentiator in being able to establish banking relationships with consumers.
Historically, we funded the loan book from our excess cash reserves and we will continue to do say the future, but we also intend to partner with Finbond to leverage their balance sheet for certain types of loan products.
Moving onto the second pillar of our long term strategy, which is Europe and Asia.
This pillar is driven primarily through IP GE or international payments group.
I think these restructuring reorganization centralization and product certification is now complete.
The last remaining imitation is the conclusion of visa supported on bank Frick, which would allow the bank to board IP GE is a payment facilitator and therefore come into the deployment of its new brand and product offerings.
The visa onside automotive Bear Creek has not happened and we are currently engaged with them to close any remaining outstanding issues. We expect to conclude this exercise in Q2 2020.
With the launch of IP, geez issuing and acquiring services.
Our goal will be to increase the breadth of services offered increase our international reach across the E U an interim drive processing volumes.
Together with bank Frick are issuing platform would be able to support one account and multiple currencies, so plastic and virtual card support a misspoken automated anti money laundering, and kyi see system and full ipi support for clients.
Similarly, our acquiring products will target specific industry verticals offer automated and near instant onboarding of merchants.
Localization for 28, you you member States in 24 languages and offer full mobile payments support.
Lastly, IP Gee with the deep led to an expertise in cryptography unsecured transactions has developed a new crypto asset storage product vastly improving the security redundancy and speed of the current standard using cold storage to be clear. This is a net one developed that peyton spending product and.
We will be offered to custodians, such as that quick and trip to exchanges as well as investors who prefer to store the virtual financial assets themselves.
It's one as an option to increase its ownership of bank free to majority position in October this year.
Given the close alignment of the bank with Apogees activities in Europe , as well as its leadership position in the block chain and cryptocurrency market. We are actively reviewing the merits of exercising our option with reference to the availability of liquidity of the group priorities on deployment of capital and other regulatory matters in making our decision to exercise our option.
Lastly on Mobikwik I am pleased to say that visa has approved mobikwik as a member and therefore will soon be able to issue cost directly without issuing bank partner.
Because this is the first time and non bank has become a member the visa mom Mobikwik application has gone to the Indian Central Bank for approval.
Once approved we will be able to issue virtual cards to millions of Mobikwik customer base.
Mobikwik itself has continued to not only sustained but accelerated momentum.
Annualized revenue in June 29 team was $55 million compared to annualized revenue of $17 million in 20 June 2018 or growth of over 220%.
They digital financial services rollout continues to gain traction from the launch in March 2018, and now accounts for 25% of the revenue.
They have also continued the progress towards EBITDA breakeven and hit that milestone in the month of August 2019.
Making them one of the very few large Indian consumer tech companies that have been able to do so.
Moving onto the third pillar of our long term strategy, namely Africa.
In Africa, depending on the country only 10% to 30% of the Arrow population have access to financial services and Thats. The deployment of cloud based cloud and mobile based solutions together with strong local partners remains a substantial opportunity for us today, we are operational in Namibia Botswana.
We have footholds in other countries.
You offering in partnership with 18.
We have GPS as a national payment system in garner a rapidly growing consumer finance operation in Nigeria through carbon.
And our 10 month old QR based payment initiatives through that group Africa.
We have also actively stepped up the cooperation between our different businesses and investments to maximize the potential and accelerate time to market.
Does that group has made significant strides in its third quarter of existence. During Q4 2019 that group has delivered its Peter product for the largest bank in Ghana and is completing its development for two of the three largest mobile operators currently.
They have also expanded the functionality by including multiple merchant acquirers offering both payments money transfers eight time recharges et cetera.
We expect the commercial launch for that group in Q2 2020.
That group has also commenced activities designed customer contracts in Nigeria and is working closely with asked and carbon to facilitate the entry.
Lastly, given the success of its digital lending product last quarter carbon launched an expanded product, which enhances its offering as a fully fledged digital financial services platform that offers both payments funds transfers and savings.
In addition to loans.
Carbon continues to be a market leader in the digital lending space and disbursed approximately $11 million across nearly 150000 loans during Q4 and processed in excess of one of many transactions on the carbon platform an increase of over 200 to save sequentially.
Our fourth pillar is south Korea, Okay as Nate specifically.
In Q4, K state revenue and volumes rebounded from its seasonally weak Q3 and grew 11% sequentially in local currency.
Similarly, the additional volume and some preliminary impacts from phase one of our restructuring plan helped EBITDA margin improved 200 basis points to 19.3% compared to Q3 2019.
Operating margin in Q4, 2019 improved significantly to 8.3% compared to 4.4% in Q3, 2019, and 5.3% the year ago as a result of lower depreciation and amortization due to lower capex and certain intangibles being fully amortized.
In Q1, 2020 , our restructuring plan has now entered phase two of its implementation.
While we expect us to have a more meaningful impact on growth and profitability than phase. One. It also requires more time and effort to execute.
We still believe we can improve case net EBITDA up to a $10 million per quarter run rate from $7 million a quarter in fiscal 2019.
But it is possible our Q4 2020 target may get pushed back by one or two quarters.
In parallel we have be pursuing a strategic review of case Nate.
We're pleased with the progress made in a short period of time and with interest in such a profitable at cash generative business.
Within the last week, we have received multiple indicative office for the business, which are currently being reviewed by the board with the assistance of Ft partners.
We'll update you have any tangible developments.
I would now like to briefly address the current events and status of cell C and our legacy outstanding matters with SASSA.
First on cell C.
We have been plenty of coverage pertaining to the challenges faced by cell C and its ratings downgrades.
It is accurate that cell C has faced short term liquidity issues infected costs and a challenging macroeconomic environment in South Africa.
However, I would like to highlight that cell C management is closely working with its key stakeholders, including its shareholders and creditors to arrive at a sustainable long term solution to its cost and capital structure.
Telsey has recently signed a term sheets to expand the network sharing agreement with MTN that we'll have a meaningful impact on the opex and capex going forward.
Through the active engagement with a stakeholders.
They also in a position where they should be able to manage through the rickety situation until they are able to close a recapitalization transaction during the next few months.
Once we capitalized we expect southeast funding costs to reduce meaningfully.
And coupled with the into an agreement create a long term sustainable business.
On SASSA, though we have not been involved operationally with SASSA since September 2018.
There are few outstanding in the contract issues that are yet to be resolved.
The two primary areas relates to the fees payable to us for the last six months of our contract and the claim against us for amounts paid to us for bulk registration in 2014.
These issues are yet unresolved, but we're actively working with SASSA and through the courts to put these issues behind us as soon as we can and refocus our energies on our other businesses.
Lastly on capital allocation, we acknowledge that historically, we have a mixed track record when it comes to capital allocation, including some of acquisitions and investments as a board we want to focus on businesses that we control can control or leverage to enter new markets by utilizing our skews teknowledge.
Periods.
We plan to exit those businesses, which do not ascribe to of fit with our core strategies or of providing fintech services to the unbanked and Underbanked all that leverage our 20 expertise in secure transactions.
It is obvious the case need is a significant contributor of current revenue profits and free cash flow to the group and the disposal of any interest in case, Nate will reduce this contribution accordingly.
And is therefore imperative that we returned our south African and IP GE businesses to scale.
And return to profitability as quickly as possible, which will require working capital of approximately $50 million.
We also need to unlock shareholder value to compete.
Two or to compete as a successful global Fintech company with active interest in disruptive and emerging technologies.
As we raised liquidity to any asset sales, we need to determine the optimal use of proceeds execute on our strategic objectives, including reinvesting in the Finbond EVP and IP GE businesses.
Accelerate growth and profitability.
Obtaining controlling shareholdings in those investments that we considered to be critical to the execution of our strategy.
And improving shareholder returns through buybacks and dividends.
To conclude we have been nimble and have stabilized and de leveraged our business returns Chow roots of providing financial inclusion for Unbanked and Underbanked commenced with a monetization of noncore assets and intern hopes to unlock shareholder value going forward.
Let me hand, it over to Nx now to go over the financials.
Thank you haven't and good day to everybody.
I'll discuss the key results in trends within our operating segments for the fourth quarter of 2019 compared to a year ago.
As well as to the third quarter of 2019, a sequential comparisons are more relevant today given the changes in June pedigree over the past year.
For the fourth quarter of 2019, our average rent dollar exchange rate was 14, Rand and 20 nonsense.
Compared to the dollar compared to 11 ran 45 cents, a year ago, which adversely impacted our us dollar based results by approximately 25%.
Our fundamental earnings per share declined to a loss of $2.45, which increased to $2.21 non cash negative impact of the fair value adjustment for cell C.
And 24 cents for impairments of goodwill and the Cdiscount note.
Operationally the breakeven position at a fundamental earnings level reflects the work we've done in Rightsizing, the South African business.
Our fourth quarter 2019 revenue and operating loss to know include any contributions from DNA as that business was deconsolidated at the end of the third quarter. Following the sale of our controlling interest.
Dan I was equity accounted during the fourth quarter 2019, with a further 8% being disposed of in May 2019.
By segment, South African transaction processing reported revenue of $18.9 million in the fourth quarter 2019.
Down 63% compared with the prior period, but up 10% from the third quarter 2019 on a constant currency basis.
The year over year decrease was primarily due to the termination of the SASSA contract, including those with SASSA Grin records and to a lesser extent the reduction in the number of EPA accounts.
These decreases in revenue and operating income were partially offset by a higher transaction revenue as result of increased usage of our teams and double digit growth that easy pay.
Our operating margin for the fourth quarter of 2019.
2018 was negative 13.1% and positive 6.7% respectively.
But an improvement from negative 74.6% in the third quarter of 2019.
Excluding restructuring costs, the operating loss margin for the fourth quarter 2019 was negative 7.5% compared to a negative 57.5% in the third quarter 2019.
International transaction processing generated revenue of $35.6 million in the fourth quarter, 2019, which was down 18% compared with the fourth quarter 2018, and up 4% compared to the third quarter 2019 in us dollars.
A year over year decrease in IP revenue was the largest contributor to the year over year decline.
Segment operating margin improved to 6.1% in the fourth quarter 2019, compared to 4.8% a year ago and 5.6% in the third quarter 2019.
For the fourth quarter 2019 case net revenue in Korean won was down 6% year over year to $34.4 million.
Primarily due to lower volumes processed compared to a year ago, but up 11% sequentially. Following a rebound from a seasonally weak third quarter.
As I mentioned, we are in the midst of implementing our restructuring Korea. In addition to managing through the regulatory environment on interchange fees.
Okay assets cash conversion remained strong with capital investment staying low.
I PGS legacy businesses have continued to decline, but once we rollout new products, we expect the business to return to growth and pay its current losses.
Hi, PG losses also include approximately $760000 in development costs in respect of the Chris Crypto asset storage product incurred during Q4 and $1.4 million for fiscal 2019.
These development costs will start to reduce during fiscal 2020, once we launch the product.
Financial inclusion and applied technologies generated revenue of $17.6 million in the fourth quarter of 2019, which was down 59% compared with fourth quarter of 2018.
And down 51% compared to Q3 2019, primarily due to no contribution from tier nine in the fourth quarter, given this deconsolidation fewer prepaid airtime and value added services sales.
Our lending and insurance revenue and a decrease in intersegment revenues.
Operating margin, excluding impairments was negative 26% compared to positive 25.5% in the fourth quarter 2018, and positive 8.8% in the third quarter 2019.
The third quarter increases a contribution from Deanna.
Excluding this the operating margin was a negative 17.8%.
The decline in performance from Q3 to Q4 2019 is due to the lost effects of the reduction in monthly accounts fees relating to the SASSA Grin Road accounts.
Active ETP accounts have remained steady around the 1.1 million mark through the fourth quarter and these numbers have remained stable through Q1 2020 to date and we're now starting to rollout new product offerings in partnership with Finbond.
With a stable ETP base, our lending and insurance businesses have also returned to more normalized normalized operating performance levels.
Our net loan book increased by approximately 3% in the fourth quarter 2019, compared to the third quarter 2019.
Our micro insurance policy holders have also remained largely flat at around 220000.
In Q4 in Q3, two added 29 team.
We are developing new loan and insurance products to address a broader base of unbanked customers, which we're piloting during the first quarter of 2020 .
Our corporate expenses reduced in the fourth quarter 2019, compared to the fourth quarter 2018, and the prior quarter as result of a $1.8 million right back stock comp stock compensation charges.
Normalizing for this corporate expenses were in line with the previous quarter and slightly higher than the prior year due to higher acquired intangible asset amortization.
As a result of the challenge is currently being faced by cell C. We've assessed the fair value of a 15% investment in the company has zero at 30 to June 29 team.
This resulted in a noncash fair value adjustment of $125.4 million for the quarter and $167.5 million for the fiscal year.
We've changed our valuation methodology to a discounted cash flow approach as the changes to sell sees business going forward made the use of historic EBITDA multiple no longer appropriate.
We've been working closely with so CNN stakeholders to provide liquidity platform three to a recapitalization.
Which we believe will create long term sustainable business.
Our conclusion on the fair value of cell C. Meant we also had to impair the carrying value of the c. the cellular notes info.
Operationally Selsey delivered lower EBITDA for the first six months of the current calendar year due to increased roaming costs and low revenue growth.
With the has been a steady improvement in performance since they are half year as the management team focuses on its turnaround initiatives.
Our fourth quarter 2019, net interest expense, excluding a 7.4 million dollar impairment Cds settlements fell $2.4 million compared to $1.9 million in the third quarter 2019 as results of the early settlement of our debt.
We recognized income from equity accounted investments of $1.8 million during the fourth quarter 2019, compared to $4.2 million in the same period last year.
The main caused the decline was reduced contribution from Finbond who'd like US wrote off their loan book due from SASSA customers as part of the migration to the South African post office.
We expect the contribution from our equity accounted investments to be positive on an annual basis as it has impacted by the timing of reported results by our various investments.
At June Thirtyth 2019, our unrestricted cash was approximately $46.1 million compared to $48.8 million at the end of March setting. These amounts off again short term credit facilities of $9.5 million, an $8.9 million, respectively means our net unrestricted cash.
Reduced from $39.9 million.
$36.6 million in the quarter.
The decrease in our cash balances was primarily due to capital expenditures in the quarter of $2.1 million and $1.5 million of cash absorbed by operating activities, which was significantly less than what we experienced in the third quarter.
We had short term bank facilities available to us in various territories of $32.2 million at June Thirtyth 2019.
$9.5 million of which had been utilized.
As of June 32019, we had restricted cash of $75.4 million and associated short term facilities.
Utilized $75.4 million.
We haven't play short term credit facilities of 1.45 billion Rand or $103 million, specifically to fund our teams in South Africa and presented cash drawn under these facilities and in the processing system as restricted cash on the balance sheet.
Free cash flow utilization amounted to $3.7 million, which included a $2.3 million release from working capital.
At June 32019, there is no term debt left on the group's balance sheet. Following our disposal of an 8% stake Indiana in settlement on the of that remaining term debt.
Well have well we have no long term debt outstanding and have $37 million net cash on the balance sheet, we have liquidity requirements in the short term the constrained our ability to commit resources to share buybacks or fund investments required to few internal growth.
In particular, there are working Caf two funding requirements in respect of intra month cash flows and one of the businesses.
We need to continue funding the international operations and the say operations.
And we have some new product launches and some operational requirements on growth opportunities in some of the ESI business units.
However on the occurrence of liquidity event, such as the disposal of the remaining Tina DNR investment for the sale of other businesses. This will create capacity for share buybacks and dividends.
Our fourth quarter 2019 tax expense was $2 million compared to an expense of $8.8 million in the fourth quarter 2018.
Our effective tax rate for this quarter has been significantly impacted by impairments and the losses incurred by certain South African businesses as we've effectively not recorded a deferred tax asset benefit related to these net operating losses.
Our effective tax rate is likely to continue to be distorted by losses incurred by certain of our businesses.
Our weighted average share count has remained constant at 56.8 million shares in the fourth quarter 2019.
And looking forward to fiscal 2020 , we expect to generate adjusted EBITDA of at least $60 million easing of fiscal 2019 exchange rate of.
14 ran 27 the dollar.
With improvements in South Africa in South Korea, being partially offset by losses in PG, new startup operations internationally and corporate overheads.
Over the course of the year and as we get more clarity on any corporate actions, who will review our communication and reporting in an effort to continue to simplify our story.
We can now open up the cool for Q anyway.
Thank you very much that ladies and gentlemen at this time last question you're welcome to press Star then one and you touched Hanson keypad on your screen.
I touched on media combination 10, falling distress it'll play syndication Q.
If you decide to question has been increased ending this is truly submission.
Starting to let me touch points and to remove yourself from the question Ken.
Just reminding yourself stations.
Still and Dean.
It's a station comes from Alan seen Maxim group.
Yes Hello.
Your three main segments for fiscal 2020 can you go through your thoughts on.
Revenue.
Changes percentage change and and the operating margins that that which we should think about thank you.
Sorry.
Alan Tse in terms of the as the three segments that.
We.
Disclosing.
The.
Does African transaction.
Processing business.
We would expect to see.
Some revenue growth and a.
Returned to.
Two procter profitability, but probably relatively smooth profitability at this point.
It is off to a scale business.
In terms of revenue growth in there, we're probably looking at.
In the order of the high single digits.
In international transaction processing.
The revenue growth will be largely dependent there on.
On the success of their RPG.
Strategy and the new product Rollouts.
So thats, a little bit more difficult to call.
Certainly in Korea, we are looking we pretty looking at.
Some revenue declined in the short term because of the elimination of some of the.
Some of the underperforming agents in our portfolio.
But we are looking to see and Han and enhanced profitability position and certainly at the operating loss.
The operating margin level, we would expect to see.
An uplift.
In the operating margins in the in the international transaction processing space.
Financial inclusion and applied technologies, which.
Which contain our financial services businesses in South Africa.
The continuing component of that we would expect to see some some good good growth in there.
As we plan on expanding in particular, our loan book.
And we should see a return to profitability.
In in that component to it.
Alan This is drew just to add one clarification point for Alex when we're talking about the growth Alex alluded to in his remarks that we're using Q4 as the baseline. So we're not looking we're not talking about a year over year improvement.
But use Q4 is your base from where you start.
Okay. Thank you and then a couple other items housekeeping.
For fiscal two.
2020.
What are your expectations for depreciation and amortization capex.
Intangible amortization stock based comp and tax rate.
Third let me work backwards tax rate.
We should be starting to move more into line with.
With.
The answer more normal 30%.
Get some benefit out of.
Some of the loss the deferred in and not having recognize the deferred tax assets.
But I think work on around about a 30% kind of tax rate.
Capex.
Shouldn't be.
Largely similar to this year.
In terms of of the Capex position.
Obviously you'd have to strip out a little bit them with would have been incurred in DNA, but I wasn't significant.
But I wouldn't expect to see a significant change in the in the Capex position.
Then a depreciation and amortization.
That is coming down as on it on a downward trend because our.
Replacement Capex levels.
Has come down effectively.
So I expect to see that drop a little bit.
What was the other thing Ellen.
Just intangible amortization amortization and stock based comp intangible amortization, we would expect to see a decline.
In this coming year a number of.
Intangible assets have been fully amortizing the cause of this this years, we'd expect to see.
And a decline in that space and then stock based comp.
Has been lower this year because of.
Some reversals, we expect to see that move back into line with where it's been historically.
Okay, and then in terms of.
Bank Bank Frick and your decision to potentially increase your position how do you think about the return on capital that bank Frick should regenerating longer term.
And we obviously are in the process of analyzing the options available to us.
There are a number of considerations that that we take into account when we will arrive before we arrive at.
And our decision key for US obviously is the availability of liquidity to be able to exercise the option.
Which needs to be done in the next couple of weeks and payment then we'll we'll follow in the next six months or so.
So so those are the key considerations that will influence our decision.
But as a standalone entity of course, we are still a 35% shareholder in the in bank Frick.
The returns that have been generated.
Return on equity generated by the bank over the last two years have been quite low.
But.
Very good reasons.
Over the last two years.
Effectively doubled the workforce in the bank from roughly 60 to 120 employees and that was with the specific intent to scale up the knowledge base within the bank on the block chain and crypto initiatives.
The last two years have been quite intense from a learning curve perspective, but I do believe that.
During the next two quarters, we will see substantial improvement and and actual deal flow.
Emanate from the investment that we've made over the last two years and so going forward, whether or not we were controlling shoulder and bank Frick.
We would expect the banks return on equity numbers to return to a respectable.
So with 12% to 15% number.
Okay. Thank you and then can you help us understand for for your E business and growing customers, where that's been stabilized like 1.1 million recently.
To what extent do you still have to interact with SASSA to get any of those customers process and do you feel comfortable like to what extent can they hinder your ability to grow or do you feel comfortable that that they but that's not an issue sure.
So there is no there's no direct interaction between us and SASSA regarding this matter any longer the only.
Part, we assess a would play a role is way a customer who also receives a social welfare grant decides to open one of our new accounts.
If that person one cies social grants to be paid into the account they need to inform SASSA and SASSA they need to change the bank account details on the back end system. This is the infamous ANNEXA see form.
That needs to be submitted by the customer to SASSA and they have to the in processes.
And I have to say after the initial.
Troubles that we had.
In September October November last year.
I think SASSA have streamline the process and we now have very little a delay in them processing those forms as and when they are presented to them.
But other than that there is there's no other into action required between US and then we offer these accounts not only to social grant recipients, but to the public at large.
And so anybody who decides that they like the pricing they like the bundle that comes with it.
It is more than welcome to apply for these cards.
Okay. Thank you I'll get in the queue to ask more questions later, thank you.
Thanks.
Thank you very much Sir the next question comes from Scotiabank B. Riley.
Good morning, guys Im hoping that maybe you can give us a quick kind of step by step over.
Overview here of what the remaining.
Apps are on to complete the recapitalization of cell C and maybe give us a sense of timing when that could be complete and what value you think you'll be able to realize post recap.
Sure Scott.
The southeast currently finalizing the network sharing arrangement with MTN as we said and that will have a material impact on the business model and the end the financial performance and obviously the date carrying capacity of the business.
So southeast currently engaged in discussions with various of the stakeholders around the recap.
And the value post gap will largely depend on the ultimate structure.
That the recapitalization will taken and that obviously is will be heavily influenced by the outcome and the commercial substance of the network sharing deal so but early for us to speculate on that.
But.
The the discussions with all the various stakeholders, obviously, taking place on it on a daily basis.
So we expect some.
Movement, and some announcements around that to flow in the next quarter.
That's great. Thanks.
On the EPA card accounts, where is the incremental growth coming from.
Are these.
Post office account holders that are coming back to.
You guys were a card or are these new kind of first time customers.
I would say in a fair amount of them all our former clients. So piece of people that are coming back to us.
We simply need to have access to the financial services that they enjoyed before remember the post office account is Roger very restrictive in terms of its ability to handle debit orders.
And so we find that I would say probably more than 70% of our new clients.
All of our return or repeat customers coming back to open these accounts.
That's helpful. Prior prior to all the disruption a year ago.
How many accounts, where you opening on average during the quarter.
Yes, so while initially.
When we were in full launch mode to two in all three years ago.
We peaked at opening a roughly.
About 120000 accounts per month.
And yes, thats scaled down after the initial period outside to an average of about 50000 demands.
And so going forward you know we've set ourselves some some pretty conservative goals.
As we've said over the last over the next year, we would like to grow the account base by 10%.
But.
To the extent that we are able to scale back up the operations and obviously, that's largely also determined by the liquidity position of the group.
In terms of being able to provide all of the other services around and account being opened so typically that is accompanied with a request for for a with a load application.
That we hope to increase those numbers substantially over the next.
Q2, three years and entity, we've set ourselves the medium term goal of getting back to around 3 million customers.
Great. Thanks for that last one you mentioned some of the ongoing.
SASSA issues could you remind us what.
What the potential liability is on the 2014 bulk registration suit and then.
What the figures are around the fees payable for the last six months shares they are largely the same coincidentally the same.
The the claim against us for the fees paid in 2017.
Sounds to roughly 300 million am Rand.
So call it $20 million at today's exchange rates.
That number may increase obviously to the extent that any interest these levied on.
On the payment of the amount.
Conversely, the amounts owing to us for the last six months of the contract also amounts to roughly 300 million Rand so $20 million.
And and potentially also could be an interest bearing liabilities for SAP.
So so the two up a pretty much the same size the magnitude.
Okay I appreciate that thanks, guys.
Thank you, ladies and gentlemen, just follow remind any financial condition, you bumped into may still and then well.
The next question comes from BUCCOLAM. According capital.
In the line of the restructuring we're going on the allocation of funds in many different directions.
Now well averse to use the funds to area that we know bass, our undervalued stock as opposed to going with bank Frick and other places where we're dealing with decisions that may or may not work out and are undervalued stock is clear and unmistakable certainly management feels that way they bought back about over a year ago.
Yes, I fully agree we are.
We over the last year or two years, I think they've been substantial purchases by.
Insiders.
As I said looking at the our capacity to buy back stock.
Going forward, we have more than adequate headroom left on the authority.
That weve that we sought a year ago I think there is a 100 million dollar authority that we put in place and we've utilized a little bit of it. So from that perspective, we do have the ability to do so right now all of our decisions whether it's.
To allocate capital to the exercising of options or.
To to acquire controlling stakes.
In in whether its bank recall in fend bond or.
Increasing the size of our lending book.
Those are all impacted by the short term liquidity needs of the business.
And so as soon as we unlock enough liquidity to be in a position to consider a significant.
Investment in buybacks will any of the other opportunities.
Yes for asset will be.
Simple decision of ranking them in terms of the appropriate returns.
Thank you.
Right, ladies and gentlemen, Fortunately that Mr. Final question on behalf of needs one that concludes today's conference.
Thank you for joining US you may now disconnect your lines.
Uh huh.
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