Lesaka Technologies, Inc.

Hello everyone and welcome to LASAKA Technologies fiscal third quarter 2023 webcast and conference call. As a reminder, the webcast is being recorded and the presentation can be accessed through the webcast link as well as dialing in to 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 can ask your questions by using the raise your hand button in Zoom. And for those joining via the Zoom conference line, you cannot ask your questions live today. The webcast link, Zoom conference call dial-in numbers, as well as our press release and supplementary investor presentation are available on the investor relations website at ir.lasakatech.com. Additionally, LISACA filed its Form 10-Q after the U.S. market closed yesterday, Tuesday, May 9, 2023, which is also available on the Investor Relations website. As a reminder during this call, we will be making forward-looking statements, and I ask you to look at the cautionary language contained in our Form 10-Q regarding the risks and uncertainties associated with forward-looking statements. Also, as a domestic filer in the United States, we report results in U.S. dollars under U.S. GAAP. However, it is important to note that our operational currency is South African Rand, and as such, we analyze our performance in South African Rand. In this presentation, we will discuss our results in South African Rand, which is non-GAAP. This assists investors' understanding of the underlying trends in 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. Taking a quick look at today's agenda, Chris Meyer, Group CEO of LASAKA, will start with performance highlights of the third quarter of fiscal year 2023 and a review of LASAKA's progress against its key strategic objectives. Steve Halbron, CEO, Connect and head merchant division, will provide an update on the merchant division, which produced a stellar set of results. Lincoln Mollie, CEO of Southern Africa, will provide an update on the consumer division, which has passed another key milestone this quarter. And then Naeem Kola, Group CFO, will present an overview of our financial performance for the three months ended March 31st, 2023. Chris will then conclude the results presentation with a discussion on the outlook for LASAKA before the team opens up for Q&A, where we welcome any questions you may have. With that, Chris, the call is yours.

Good morning, good afternoon, and welcome to our Third Quarter Earnings webcast and conference call. I am pleased to report that Q3 represents another excellent quarter. We are excited by the Merchant Division's outperformance, which is driven by the Connect Group, and another quarter of continued improvement and profitability in the Consumer Division, where we have delivered on our turnaround strategy and are moving strongly onto the front foot. Our mission at LASAKA is to enable small merchants to compete and grow and to improve the lives of South Africa's grant beneficiaries by providing access to innovative financial technology and value creating solutions. We will achieve this through our vision to build and operate the leading full-service FinTech platform in Southern Africa, offering cash management, payment processing, value-added services, capital and financial services to small merchants and underserved consumers. We have a comprehensive product and service offering tailored for the markets in which we operate. Lusaka's strategy is supported by the secular trends which support FinTech disruption. South Africa's economy is dominated by cash, especially in the informal MSME markets and the consumer space, where our operations are focused, with up to 90% of transactions still being cash-based. Globally, digitalization is advancing at a rapid pace, and South Africa is also experiencing this secular shift. The market opportunity to extend digitalization to the informal economy is exponential as it is both underserviced and untapped. And Osaka is uniquely positioned with our comprehensive product offering and deep national footprint with over 80,000 points of presence across the consumer and merchant divisions. With our portfolio of cash and digital solutions serving both merchants and consumers, we believe Lusaka is well positioned for significant growth. In the merchant division or B2B sector, we offer innovative solutions to both informal and formal business owners to grow, manage and digitalize their operations. In the formal sector, operating as CashConnect, we initially relied heavily on product innovation using technology to disrupt and secure our position in the market. When Connect moved into the informal sector through the acquisition of Kazang, it used this technology to quickly grow from a traditional VAS offering into merchant credit, card acquiring, cash digitalization, and supplier payments. We now have a network of over 70,000 merchants in the informal markets using our products and services. In the B2C or consumer division, our products and services are specifically designed to enable access to financial services and cash for individuals who receive government grants and social welfare support. Through Easy Pay Everywhere or EPE, we are providing regulated and affordable banking, lending and insurance products to 1.3 million active consumers each month. Across the merchant and consumer markets, our network and product relevance give us broad reach into what have traditionally been seen as difficult environments for the banks and financial services providers to operate in. It is the opportunity to continue expanding our reach and relevance into these environments that present us with exciting growth potential as we pursue our purpose of enabling small merchants to compete and grow and improving the lives of South Africa's grant beneficiaries. As a management team, our journey of transforming the Saka into a leading Southern African FinTech began in mid 2021. And throughout this time, we have been clear and consistent around how we intend to build our merchant offering and transform the consumer division. The acquisition of the Connect Group closed in April last year and the rebranding of the combined business as Lusaka was only announced in May of last year, almost 12 months ago to the day. We are tremendously proud of the progress made since then and hugely appreciative for the unwavering dedication and resilience displayed by each one of our Lusaka colleagues who have made the journey thus far such a success. So turning to the progress made against our strategic objectives. In our B2B or merchant division, we said that we would expand our offering and complete the dual-sided platform through acquisition. And the acquisition and integration of the Connect Group has been nothing short of transformational for Lusaka. The secular growth trends underpinning the acquisition remain firmly intact. and the integration of the Connect Group into Lusaka and the performance delivered to date has exceeded the expectations at the time of the acquisition just over a year ago. In our consumer division, we committed to transforming the division from a significant loss-making business into a positive adjusted EBITDA contributor to the group. And I am pleased to report a second consecutive quarter of segmented adjusted EBITDA profitability, which was sharply up on quarter two. The consumer division is now well positioned for growth, and Lincoln will go into more detail on this later, covering some of our specific initiatives and our consumer value proposition. Lusaka is well positioned to offer competitive, tailored, and cost-effective solutions to South Africa's social grant recipients and improve the lives of South African grant beneficiaries and their families. Thirdly, with the outperformance of the merchant division and the greatly improved operating results from the consumer business, our liquidity and debt position have continued to improve as the group generates positive cash from operating activities, excluding the impact of bulk purchases of airtime in our VAZ and car division. Our lenders demonstrated a significant vote of confidence in Lusaka by increasing and extending our borrowing facilities and providing us with greater flexibility in managing cash balances and increasing our capacity for growth. So turning to our performance for quarter three, I am pleased to report we achieved our profitability guidance with a group-adjusted EBITDA of R137 million for the quarter, which is an annualized increase of 22% over quarter two FY23. And this was achieved despite lower contribution from parts of our pre-existing merchant division, which Steve will go into later, and represents a significant turnaround on the loss of R113 million recorded in Q3 FY2022. Our guidance was for group revenue to be in the range of R2.5 billion to R2.8 billion for FY23 Q3. and we reported group revenue of R2.4 billion, which is marginally lower than our guidance. However, this is due to the mix of airtime products sold in the quarter, which Naeem will explain in more detail. The important point, however, is that both the gross profit contribution on airtime and the contribution of airtime to group-adjusted EBITDA was in line with guidance. And so overall, I'm very pleased to report yet another quarter of continued growth in group-adjusted EBITDA. Our business is on an exciting trajectory, supported by secular growth trends that remain firmly intact. And as a management team, we remain laser-focused on delivering to our strategy and continuing to execute on the growth opportunity. And with that, I will hand you over to Steve, who will provide an update on the performance of our merchant division.

Thanks, Chris. As Chris touched on in his opening remarks, South Africa's evolution from a cash base to a digital payments economy is at a relatively early stage, and there is a significant growth opportunity as digitization gains momentum. This creates space for disruption, which Lusaka is well-placed to achieve. In our merchant division, we offer innovative solutions focused on formal and informal merchants, and we continue to build a leading position in a growing and underserved market. We often get asked, how large do we think this opportunity is? The following high-level data points provide guidance in answer to this question. Like many developing economies, some 60% of total transactions in South Africa are cash-based. Less than 8% of merchants have access to formal credit and less than 4% of informal merchants can accept digital payments. South Africa's future prosperity lies with small business. Our focus is to resolve the pain points that both formal merchants and primarily informal merchants experience by using financial technology as an enabler. Experts agree that cash will remain a key component in the choice of payment in the South African economy, particularly in the informal sector. And that's why it's important to have a realistic offering that spans across both cash and digital. Many players in this market are either focused on cash or digital, not both. In summary, the market opportunity attendant to the digitization of the South Africa's informal economy is significant and untapped. Made up of merchants and consumers, underserved by incumbents, and with limited access to traditional financial services, this sector is large with an estimated GDP of well above 300 billion. Within the informal sector, 90% of transactions are cash-based, and only 10% of the informal sector flows are digital payments. We are excited about our holistic offering, positioned across cash and digital, and suited to the transformation of commerce in the informal market, a market that is vibrant, untapped, and growing. This was another solid quarter for our merchant division, driven by the Connect Group. We reported revenue of 2.1 billion rand and 148 million of merchant segment adjusted EBITDA, exceeding guidance during the third fiscal quarter. As evident on this slide, the relative contribution to revenue and EBITDA from our pre-existing merchant division, comprising of Newitz, being our legacy terminal business, and EasyPay, our bill payments business, has declined as the Connect group of businesses continue to grow at a quicker pace and ahead of expectations. We are pleased that the Connect Group continues to outperform the acquisition business case, despite macroeconomic and sociopolitical challenges highlighting the resilience of our business model and value proposition to merchants. The Connect Group's revenue grew 25% year on year from FY22 Q3 to FY23 Q3. Revenue grew 4% compared to Q2, despite the seasonality of the prior quarter, which included the December holiday period, where trading activity is higher than in other months, and the fact that this current quarter included February, which is a 28-day month. We have included a graph that shows this quarterly seasonality over the past three years. We often get asked why we are not significantly impacted by the current levels of load shedding. Our client base is well diversified across South Africa, making load shedding a localized phenomenon, and the period of downtime thus far has been manageable. It's also important to stress that we have significantly grown our merchant base from approximately 35,000 merchants in February 2020 to approximately 44,000 by February 2022, and approximately 71,800 merchants at the end of March 2023, which represents a three-year compound annual growth rate of 27% per year and 63% growth rate over the past 12 months. As is evident, rapid growth in the national footprint of our merchant base, coupled with the continued broadening of our product offering accounted for robust growth. I will now move to discussing our offering and revenue drivers in more detail. Our bouquet of products results in increased consumer adoption, driving higher volumes of sales for merchants. We utilize our proprietary infrastructure to offer a merchant and their customers what they need. We provide merchants with a point of sale device linked to a digital wallet from which they can pay suppliers, sell many products like airtime, electricity, and bill payments, take customer payments via card swipes or tap and pay whilst providing instant settlement. Merchants are also able to access funding and a smart vault via the device. For us, the partnership with a merchant usually starts with a VAZ device. This drives growth in all products, more merchants, more devices, more wallets, more product flow. By way of example, more than 60% of merchants that have our VAZ device in store convert to also utilizing our Kazang Pay offering, followed by Kazang Pay Advance. The Kazan VAS Merchants Estate closed Q3 at approximately 71,800 merchants, up 52% year on year from FY22 Q3 and up by approximately 7,300 merchants on Q2. Kazan VAS throughput for the quarter was 7.3 billion, up 28% year on year and up 7.5% compared to Q2. Kazang VAS volumes are now consistently averaging close to two and a half billion per month with a more diversified product range. Supplier payments in our Kazang VAS business continue to grow and are becoming a larger composition of the Kazang VAS throughput. This proposition supports custom acquisition as we expand our ecosystem and provide additional value to our merchants. Supplier payments is safer and more efficient for the suppliers and merchants who utilize this platform. This offering allows merchants to pay suppliers at their own convenience, reducing the need to hold cash, lowering transport costs, as well as the time taken to execute supplier payments. The combined Card Connect and Kazan Pay merchant estate closed Q3 at approximately 42,000 merchants. This is up 107% year on year and up by 22% on Q2. In our card acquiring business, Card Connect and Kazang Pay throughput for the quarter was 3.2 billion Rand, up 93% year on year from FY22 Q3. This performance is almost entirely attributable to the incredible growth achieved by our Kazang Pay solution. To provide some perspective, the average monthly throughput volumes for Q3 2023 was 770 million per month, compared to an on average 72 million per month in Q3 2021. This represents a greater than tenfold increase over the 24 month period. In our merchant credit business, Capital Connect and Kazang Pay Advance, credit dispersed for the quarter of 280 million is up 40% year on year. We have become a key provider of capital to the vital MSME merchant segment and have grown the receivables book from 238 million presenting a 44% growth year on year. We are experiencing great momentum in the Kazang Pay Advance and Capital Connect businesses, evidenced by strong uptake from our merchants. To date, we have created value in advancing over 2.2 billion rand to merchants in support of their prosperity and growing their small businesses. We are uniquely positioned to serve these merchants, given the data sets available to us. These merchants transact with consumers, utilizing our holistic merchant offering, which provides us with a view into the flows and throughput of each of their businesses. Loss rates remain low, and we are conservatively provided in these businesses. The formal market is more competitive, but our leading cash digitization offering, which is essentially placing the bank in the merchant store, means we are deeply embedded in their businesses and as a result are well-placed to grow our offering through innovating and solving pain points. An example of this is Capital Connect. The Cash Connect business throughput for the quarter of 26.2 billion is up 2% year on year. partially affected by load shedding and other seasonal implications. However, we believe the annual run rate trajectory for this business to be in the order of eight to 10% for the fiscal year into June 24. The merchant estate closed Q3 at circa 4,370 cash vaults. This is up 8% year on year. As previously discussed, we have integrated the ATM business into Cash Connect. This has served to enhance our focus on the ATM offering as a standalone ATM acquiring business with a heightened focus on achieving scale and efficiencies. We continue innovating in the cash recycling space and launched our ATM recycler in the third quarter and are progressing with expansion to our merchant clients. The ATM business has been transformed into a profit center, In servicing our consumer business, our strategy of moving ATMs away from branches and into retailers is proving to be successful. The focus for ATMs is profitability, not growth. We are downsizing the ATM network by removing unprofitable sites to drive incremental profitability into FY24. EasyPay is a strategic asset in our merchant offerings. We have identified that this business requires some additional investment for growth over the near term, which will position it well for growth and profitability in years to come. We are having success at signing up new billers and new collectors. We have added Kazang top up through EasyPay. We have also transitioned our EasyPay money market from pilot phase to rollout phase in Q3 2023 and are optimistic about its prospects. In conclusion, This was an excellent quarter for the merchant business. We continue to grow across all products with standout performances in our Kazang VAS and Kazang Pay business units, as well as notable performances in both the merchant credit businesses, Capital Connect and Kazang Pay Advance. A key highlight of this quarter is that Kazang, across all products and services, delivered the best quarter in the business's history. The Kazang brand is increasingly recognized and respected across the South African economy. We remain excited about the opportunities in the merchant division and are encouraged by our ability to scale our product sets within the respective target market. This is evident from our historical performance as reported over the past four quarters since the acquisition of Connect and our growth rate to achieve pre-acquisition. We are focused on and are achieving our objective of providing our growing merchant base with relevant solutions. I would now like to hand over to Lincoln, CEO of Southern Africa, to discuss the performance of the consumer division.