Lesaka Technologies, Inc.

Hello, everyone, and welcome to the LISACA Fiscal Fourth Quarter and Year-End 2022 Earnings Webcast and Conference Call. As a reminder to everyone that the webcast is being recorded and the presentation can be accessed through the webcast link, as well as dialing into the Zoom conference call dial-in numbers provided. Management will address any questions you may have at the end of the presentation. For those joining us via webcast, you will be able to see the management team and the presentation live. And you can ask your questions live by raising your hand in Zoom. For those joining via Zoom teleconference line, you cannot ask your questions live. The webcast link, Zoom conference call dial-in numbers, as well as our press release and supplementary investor presentation are available on our investor relations website at ir.lasakatech.com. Additionally, the company filed its Form 10-K after the U.S. market closed on Friday, September 9, 2022, which is also available on our IR site. As a reminder, during the call, we will 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 in South African RAND, which is non-GAAP. We analyze our results of operations and our press release in RAND to assist investors' understanding. of the underlying trends in our business. As you know, the company's results can be significantly affected by the currency fluctuations between the US dollar and the South African rand. I would now like to turn it over to Chris Meyer, Group CEO.

Thank you, Dora. Good morning, good afternoon, and welcome to our fourth quarter and fiscal year-end 2022 earnings webcast and conference call. Taking a quick look at today's agenda, I will start with a brief business overview and will also share a few performance highlights for our fiscal year 2022. Steve will provide an update on our merchant business and the integration of the Connect Group. Lincoln will focus on the ongoing progress we've made in transforming our consumer business. and Naeem will present the audited consolidated performance of the group for the 12 months ended June 30, 2022, and the three months for the quarter ended June 30, 2022. I will then conclude the results presentation with a few thoughts on the outlook for the SICA before we open up for Q&A, where we would obviously welcome any questions you may have. So as I reflect on our overall performance over the past four quarters, I want to recognize and thank each and every person in the Lusaka family who has remained laser focused on executing the key strategic priorities that we are committed to as a collective. We have moved a long way over the past 12 months and the changes have been profound. They've been bold, sometimes difficult, but undoubtedly transformational as we've laid the foundation for establishing a leading FinTech focused on providing innovative digital solutions to merchants and consumers in Southern Africa. So as Lusaka, our core purpose is to improve people's lives by bringing financial inclusion to South Africa's underserved consumers by helping small businesses access the financial services they need to prosper. And we achieve this through our ability to efficiently digitize the last mile of financial inclusion and by providing a full-service fintech platform across cash and digital, serving the needs of both, while also facilitating the secular shift to digital that is currently taking place. So there are real challenges to delivering financial inclusion and digitization in South Africa. And some of this is a product of our history and is manifested in a deep distrust in and a lack of understanding of cash alternatives. And this is driven by low levels of financial literacy in our country. And adding to this challenge are the relatively high connectivity costs in South Africa around airtime and data, which are expensive and prized commodities. As well as smartphone penetration, which remains relatively low, where many South Africans still use older style feature phones. So taken together, this all means that although over 80% of South Africans may have a bank account, many treat them as postboxes, withdrawing their money in one transaction. And this has a real implication for both merchants and consumers. On the merchant side, less than 8% of merchants have access to formal credit, and less than 4% of informal merchants can accept digital payments. And for consumers, approximately 20% of South African consumers in LSM 1 to 6, which are our lower income groups, have access to credit and savings. And around 90% of the approximately 12 million permanent grant recipients require immediate cash withdrawal of their grant. So these sources of friction and challenges present a significant market opportunity for Lusaka to provide innovative solutions to both merchants and consumers, and more importantly, to facilitate wider financial inclusion and digitization. So our dual-sided financial ecosystem has two overlapping segments, merchants and consumers. In our merchant business, we serve over 50,000 micro and small businesses with an offering that covers cash digitization, card acquiring, working capital, value-added services, or VAS, bill payments, and supplier payments. And in our merchant enterprise business, we operate one of the largest non-bank financial switches in the country, and we provide bill payment solutions via most of the large retailers across the country. And we also distribute and service POS devices, and we manufacture and distribute SIM cards. And in our consumer business, where the focus is on the lower income groups in South Africa, many of whom, as I said, rely on social grants, we serve just over a million customers, just over 1.1 million customers, and with an offering that covers banking, credit, and insurance. And it is important to recognize that many of our merchants and consumers operate in the same space, which gives us the opportunity to create a mutually reinforcing business model that incentivizes and rewards both the merchants and the consumers for interacting in our dual-sided financial ecosystem. So the Lasaka platform serves micro and small merchants together with the consumers who typically shop in their stores. And it is within this context that we think about our target addressable market, our TAM. So first on the merchant side, we divide the TAM into the informal and the formal sector. The informal sector is a large and highly cash-driven economy. We estimate there to be over 1.4 million informal merchants in our target market, which is largely unpenetrated by the traditional banks. And although we have a leading proposition, our 45,000 informal merchants represent less than 4% market share, which presents a significant and ongoing growth opportunity for Lusaka. In the formal merchant space, we estimate around 700,000 merchants to be in our target market. And we currently serve over 6,500 merchants, mainly by having one of our smart vaults in their store or a card acceptance device in their business. The former market is more competitive, but our leading cash digitization offering, which essentially places the bank in the merchant store, means we are highly embedded in their business. And as a result, are very well placed to grow our offering through innovating and solving pain points, such as with our merchant offering, Capital Connect. On the consumer side, the TAM is 26 million people in the lower LSMs 1 to 6. which really represents the lower income groups in our country. And within that we estimate, as I said, there to be approximately 12 million people reliant on permanent grants. And so our strategy is to build our ecosystem wherever our customers are located. And this often means in the townships and the rural areas of South Africa, creating points of presence that are convenient and accessible. And as such, Lusaka has over 58,500 touchpoints with our consumer and merchant customers in the form of branches, retailer pay points, ATMs, satellite kiosks, and merchant devices. So in setting our vision for Lusaka, we looked across the globe at companies such as Block, PagSeguro, and Fari. And we observed that despite South Africa displaying many of the same characteristics as countries such as Brazil and Egypt, There is no dual-sided financial ecosystem for merchants and consumers akin to the likes of a PagSegura or a Fari. And so today, with the combination of two complementary fintech platforms, we have created a unique dual-sided ecosystem in Southern Africa, powered by proprietary technology and coupled with proprietary data and insights. a platform focused on cash and digitization, as I said, serving the needs of both, but at the same time facilitating the secular shift to digital that is taking place. And in essence, Lusaka is a self-reinforcing business model whereby the ecosystem creates the conditions for us to continuously spot our customer pain points and to address their challenges by designing innovative products and solutions, which in turn allows us to deepen our customer relationships, incentivize and reward loyalty, and ultimately create a flywheel effect in terms of growing our ecosystem and generating improved returns for our business and for our customers' business. So a recent example of innovation and strategic distribution is the pilot we are running to enable our Kazang merchants to take deposits and process withdrawals for our consumer customers. And this should mean that our consumer can walk into a Kazang store and withdraw their grant at the merchant's till, their pay point, which is highly convenient for the consumer and has obvious benefits for the merchant in terms of increased spend in store. So turning to the synergies we expect to capture from creating our unique dual-sided ecosystem. As I've explained, both the merchant and the consumer businesses have large addressable markets and significant growth opportunities in their own right. However, taken together, we also have the opportunity to develop the self-reinforcing ecosystem I've spoken about. And this creates synergies and further opportunities to accelerate growth and to expand Lasaka's value proposition. It's important to remind everyone that the Connect acquisition is about bringing together two complementary and mutually reinforcing businesses. This is a growth story, more so than a cost optimization opportunity. Connect fills the gaps in our MSME offering and completes the end-to-end financial ecosystem I've been describing. And as such, our merchant and consumer businesses should both scale and grow in their target markets, while at the same time benefit from the synergies and opportunities created by this dual-sided ecosystem. And we have taken a number of important synergistic steps already. For example, by merging EasyPay and Kazang under a single leadership team, which has already started to deliver positive results, one of which is the launch of our easy pay money market, which is in pilot stage to become our VAS offering in the formal market, similar to Kazang in the informal market. And separately, we are also piloting cash deposit and withdrawal functionality with our Kazang merchants, as I previously mentioned. And in addition, we are combining our cash vault and ATM businesses, creating a complete cash solution proposition for key merchants. And we believe this will create exciting synergies as we look to develop our merchant partnership model on the consumer side of the business. So turning to the consumer business, We have reinvented our distribution model with a focus on building in-store partnerships with merchants, both the national and independent players, which brings our consumer proposition to where our customers want to be. And it also drives footfall into the merchant stores. So our mindset is to shift from traditional bricks and mortar towards in-store kiosks wherever possible. So turning to our group financial and operational highlights for fiscal year 2022 and the fourth quarter. We have successfully executed on our objectives for the year, which is demonstrated by the closing of the Connect acquisition and the progress made on the consumer turnaround. We reported total revenue of $223 million for the year, which increased from 131 million in the prior year. This is driven by the inclusion of the Connect Group for part of the fourth quarter, which was from April 14, 2022 to June 30, 2022. And the Connect Group added $86 million to the group's revenue, while at the same time, our existing merchant business grew revenues by 13%. Group segment adjusted EBITDA improved significantly, reducing from a $32 million loss in 2021 to a $5 million loss this year. And on a quarterly basis, we reported a segment-adjusted EBITDA profit of $6 million for Q4, compared to a $7 million loss in Q4 of FY21. This evidences the substantial progress in our turnaround strategy. So segment-adjusted merchant EBITDA for FY22 was significantly improved to an $11 million profit, which is underpinned by the growth in our existing merchant business and the contribution made by Connect. And segment-adjusted consumer EBITDA improved to a reduced loss of $16 million for the year, positively impacted by cost optimization through a right-sizing of the operations via Project Spring, which we've spoken about previously. And Project Spring has delivered cost savings in excess of our original guidance with $13.7 million or R208 million realized in the financial year to June 30, 2022. This translates to approximately $19.7 million or over R300 million in savings on an annualized basis. Our active EasyPay Everywhere account numbers grew 11% during the year, ending with just over 1.1 million active accounts. And we have invested in our sales and distribution network in terms of people, systems, and overall proposition. And as such, we anticipate seeing continued growth in new account activations and cross-selling benefits in the new financial year. It is important to note that FY22 includes the Connect Group from 14 April 2022 and thus does not reflect a full quarter of performance. And with that, I'd like to turn over to Steve to provide an update on the merchant business as well as progress made on the integration of the Connect Group. Thank you.

Thank you, Chris. As highlighted in our Q3 and Connect Group presentations recently, where we described our products in detail, the SOC today has a comprehensive offering to SME merchants in South Africa and now has a distinct dual-sided ecosystem, driving financial inclusion and serving both merchants and consumers. We also have assets and technology in the enterprise space, which we are leveraging for growth across the merchant segment. Now the Connect Group was an obvious, attractive and transformative acquisition for Lusaka due to the alignment of vision and the complementary product and customer sets. It also is a business unit that has managed to achieve significant growth and penetration in a fast-growing and under-serviced sector. We are incredibly pleased that the business has continued to grow in line with expectations and in sync with historical achievements. The initial integration work between the pre-existing merchant business and Connect has been extremely encouraging and we expect synergies to exceed the expectations that we had going into the acquisition. There are some exciting developments that we are working on which will positively impact customer acquisition and operational efficiencies as well as improve value for our merchants. In our VAZ and bill payments business, we have managed to grow our devices in the field to over 51,000 at year end, representing a 36% year-on-year increase. Our vault business, which effectively puts the bank in the merchant store, has grown by 13% this year to approximately 4,100 sites. Historically, we've been placing our vaults into formal SME merchant stores, but we are now also penetrating the informal sector under the Kazang Connect Vault brand. This has provided significant operational and risk benefits for our Kazang informal merchant customer base. In our card acquiring business, we saw excellent growth rates during the year as we extended our offering into the informal market. The majority of our Kazang VAZ and bill payment devices are card acquiring enabled. These devices need to be activated through an onboarding process with the merchants. So the 51,000 devices that we have in the field has presented us with a significant growth opportunity. Actual card-enabled POS devices increased by over 100% this year to 22,600 at year-end. Our innovative offering, providing merchants quick access to working capital, continued to grow and showed good growth where we dispersed over $40 million during the year, which is an increase of 49% year-on-year. We continue to anticipate strong growth in this arena. As evident from the above figures, the merchant business has delivered strong growth over the past year, and with all the fundamentals remaining intact, we expect this performance to continue through FY23. Emphasizing the point already made, the Connect acquisition was an essential building block in expanding and transforming Lasaka's merchant offering to what it is today. It has served the purpose of introducing new products, services and customers, establishing Lusaka as a leading player in South Africa's merchant sector. We are excited about the opportunities this acquisition presents as it paves the way to scale and effectively deliver on Lusaka's vision of being a key consolidator and driver of financial inclusion through a dual-sided fintech platform. It's important to note that going forward, Merchant will be presented as one integrated business. It's just for this quarter that we are showing separately the revenue drivers of the pre-existing Merchant business and then updating you on how Connect performed since we last reported to you on it, based on the audited results to Feb 2022. If we now turn to slide 15, you can see that the pre-existing merchant business delivered strong revenue growth in the fourth quarter of 2022. This slide consolidates the performance of Lasaka's merchant business post the acquisition of Connect. I would like to point out that these financials for Q4 22 only reflect two and a half months from the 14th of April 22 to 30 June 22 of revenue costs and profits relating to connects consolidated with a full quarter of revenue costs and profits from the pre-existing merchant business. For Q4 2022, the pre-existing merchant business reported total revenue of R19.5 million, growing 35% on a constant currency basis to R304 million compared to Q4 2021. I will explain the revenue drivers for the pre-existing business in more detail on the slide that follows. Connect contributed 86.2 million in revenue in the fourth quarter, bringing the total revenue for Q4 to 105.7 million, significantly higher than the fourth quarter of 21. Similarly, segment-adjusted EBITDA for the merchant business was 114 million rand, with EBITDA from the pre-existing merchant business for Q4 increasing from 4 million rand in Q4 21 to 24 million in Q4 22, and Connect contributing R90 million for the two and a half months that Connect was consolidated into the group results for Q4. As mentioned, the pre-existing merchant business grew revenue by 35% on a constant currency basis in Q4 2022 compared to Q4 2021. This growth was primarily driven by key product areas, particularly the increase in our point-of-sale devices sold and terminals rented. In our easy-pay business, we saw an increase in VAS value processed with prepaid electricity growth of 9% and prepaid airtime significantly growing at greater than 100%. Our bill payment business volumes increased by 13%. The Connect Group presented to the market on the 1st of November 2021, and again on the 7th of July 2022, and you can refer to the LASARCA Investor Relations website for these presentations. Prior to the acquisition, Connect had a 28th of February year end, and its performance was presented up to the 28th of February 2022. In this Connect presentation, we demonstrated the strong revenue performance based on a five-year compounded annual growth rate of 39% and a five-year compounded EBITDA growth of 41%. This slide provides an update on Connect's performance since we last reported on its audited results to the market. This business continues to present a strong growth trajectory supported by a stellar historical performance. The cash conversion rate is strong and the business remains well positioned for growth. Throughput is one of the fundamental measures of how this business is performing and supports ongoing growth. We have set out the year-on-year comparative cumulative throughput of Connect's offerings for the four-month period from March 22 to the end of June 22. Over this period, Kazang's cumulative transactional throughput grew 29% to R7.5 billion. This continued momentum demonstrates the value that we bring to our informal merchants through our offering. We saw robust growth in our cash settlements, which grew 14% to $35.5 billion. Our card cumulative transactional throughput had exceptional growth of 116% to $2.6 billion. This is due to further traction in penetrating the informal market through Kazang Pay. And we believe there's still to be very strong growth potential in this product. Finally, Our Capital Connect solution continues to see demand, with the loan capital that we advanced growing by 41% to R223 million in the four months ended June 22. Similarly, the loan book size grew 54% to R229 million. In conclusion then, the results reported for the merchant business for the fourth quarter of 2022 are indicative of a great growth trajectory. We are excited about the growth prospects of our merchant business, of which Connect is the foundation and has a proven and profitable business model and track record. The integration process of Connect and the pre-existing merchant business has been very encouraging, with tangible results already being achieved. We now have a differentiated merchant offering that is well positioned for growth, unlocking the value for all stakeholders. This, coupled with synergistic opportunities via Lysaka's dual-sided ecosystem, already outlined by Chris earlier in his presentation, further accelerates Lysaka's growth potential. I'd like now to hand over to Lincoln, CEO of Southern Africa, to discuss the consumer business.