Lesaka Technologies, Inc.

Hello, everyone, and welcome to the Lissaka Technologies webcast and conference call for the second quarter of fiscal 2025. As a reminder, 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 the webcast, you can ask your questions by typing into the Q&A function. 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.lesakertech.com. Additionally, Lesaka filed its Form 10-Q after the US market closed yesterday, which is also available on our investor relations website. 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 regarding the risks and uncertainties associated with forward-looking statements. 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-GAR. This helps investors understand 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 will now turn the call over to Ali.

Good morning, good afternoon, and welcome. It's been a year since I assumed the role of Executive Chairman at Lusaka, and so I thought it appropriate this quarter to slightly amend the way we presented our quarterlies. Accordingly, I will start by representing the opportunity as we see it and highlight key events of the quarter. Dan will then present on the group's financial performance, Steve represent the merchant division, Lincoln, the consumer division, and Naeem, the enterprise division, which we are separating out for the first time as a third pillar to our business. I will then conclude with the outlook for FY25 and also guidance for FY26. We have framed the opportunity for Lusaka and our strategic positioning before, but I'm conscious that we haven't presented the size of our serviceable addressable market in dollar terms or given an indication of our perception of market share and the competitive environment. We will start by doing so for South Africa. Today, we believe our existing products in our three divisions operating in South Africa represent an addressable market net revenue pool of more than $4 billion. We believe the underlying market that we are addressing is growing by 10% to 15% per annum, and that through organic and inorganic product and geographical expansion, the addressable market will grow to more than $12 billion in five years' time. Comparable business models to ours at maturity routinely achieve EBITDA margins of north of 30% and high free cash flow generation from that. We expect our experience will be no different. We believe we will grow revenue faster than the market as we increase market share, and we believe our EBITDA growth will be faster than the revenue growth as we experience operational leverage. it's worth double-clicking on the Merchant and Consumer Division's addressable markets to give more color. Today we estimate we represent 7% of the serviceable addressable net revenue pool in the Merchant Division in South Africa. A key component of our strategy is to differentiate ourselves by being a customer-led rather than product-led company by evolving our product offering to meet the various needs of our customers. No single competitor offers the range of solutions we do in the market and addresses as many subsegments. In this respect, we face a different competitive environment depending on the specific product. For example, while banks may still dominate the core merchant acquiring market, we face a different universe of competitors offering software products and a different one offering alternative digital payment solutions, which we have previously referred to as VAS. Today, we address the merchant market with three brands, depending on the type of merchant. For micro merchants, we use the Kazang brand. For QSR and hospitality, we use the GARP brand. And for other types of merchants, Aduma. It's worth noting each brand historically has had a different hero product for their customer subsegment, but now sell other products. For example, in the case of Kazang, that product was alternative digital payments. In the case of GARP, it was point of sale software. However, both brands now offer a fast-growing merchant acquiring product. The continued integration of these respective units within LASAKA will allow us to not only offer more products to more segments, but also improve the product offering and the efficiency of the route to market, materially improving our value proposition and unit economics over time. We expect to grow substantially faster than the market. And as the leading FinTech in the country, we should be targeting more than 10% market share in the medium term, as market share continues to move from traditional banks to FinTechs. In the last quarter presentation, I showed how this has happened in the rest of the world. The regulatory environment in South Africa has been one of the core impediments to the speed of this evolution and the rate of digitization here. LASAKA has been at the forefront of spearheading the case for the regulatory environment to evolve in line with other markets and for the benefit of the country as a whole. We are delighted that regulators and stakeholders are taking note and that substantial movements are afoot in the industry. Last week, the Association of South African Payment Providers, or ASAP, was launched in Johannesburg, with Lusaka as a founding member and with our own Lincoln Marley taking the role of president. The presence of the South African Reserve Bank there and the public pronouncements they made to the media were encouraging for the industry and the country. The consumer market we address is focused today on South African grant beneficiaries and other payout customers. We believe we have 6.5% market share of the revenue of the market. Again, we face a different subset of competitors depending on the product offering. While banks are the principal competitors for transactional accounts, the lending market is dominated by microfinance companies and the insurance market by insurance companies. We are confident that we can grow our market share well above 10%. And indeed, our share of transactional accounts is already above that. The immediate opportunity we have is to continue to expand our base of customers, especially as they switch from competitors who have experienced well-publicized challenges, and to grow our ARPU by cross-selling into the base, as we have been doing. The longer-run opportunity in the consumer market is to increase our addressable market by expanding our product offering and moving out of the grant and payout market into other underserved niches of scale that the traditional banks have ignored. There are scale ones, and I'm excited about our ability to compete and win there, as we have been doing in the grant market. While we organize the business around the customer and are prioritizing the customer unit economics, we ultimately make our money by those customers buying our products. The different products we sell have different margins associated with them. And indeed, there are different economics when sold at a bundle with other products or individually. However, it is worth noting that by EBITDA contribution, the top three products at LASAKA today are merchant acquiring, alternative digital payments and transactional accounts. Together, these represent more than 50% of our EBITDA and within each, there is no material customer concentration. It is also worth noting our key products have revenue drivers that benefit from the digitization of the economy, as they make money as a percentage of the digital transaction value or volumes they process. For the same reason, they also have the benefit of some hedge against inflation. There is a lot that we can unpack here, but given that the predominant focus of this presentation is on the quarterlies, I will leave you with that teaser and move on for the moment. I will revert on when we will unpack this further at the end of this presentation, but I would now like to hand over to Dan to talk to the group's last quarter's financial performance.

Thank you, Ali. Good day, everyone. Before I start, as a reminder, LASOC is a domestic file in the United States. We report results in US dollars and the US GARP. However, our operational currency is South African Rand, and as such, we analyze our performance in South African Rand. Q2 has been a quarter of continued strong and consistent performance, representing robust growth compared to the prior year and delivering on what we committed in terms of group adjusted EBITDA, revenue and net revenue guidance, as well as a focus on balance sheet optimization and continued M&A activity. We exceeded the upper end of our guidance at an EBITDA level, delivering 10 successive quarters of achieving our EBITDA guidance. We have also grown our fundamental earnings and fundamental earnings per share, which we believe is the most appropriate measure of our performance and we have reduced our net debt to group adjusted EBITDA ratio. We achieved a number of key milestones in the quarter as we grow and shape our business. These have, however, impacted the comparability of our results, our balance sheet make-up and net debt position when compared to the prior year. Firstly, we welcomed Adumo into the Lusaka Group with the completion of the acquisition on 1 October 2024. To remind you, we paid an effective purchase consideration of R1.67 billion, comprising a combination of cash and the issuance of 17.2 million shares. ADUMA has also given rise to a large increase in the goodwill and intangible assets we carry on our balance sheet. Intangible assets are amortized, being a charge to our income statement, and you will see a large increase in this charge in our results going forward. I note that this is a non-cash item. ADUMA has now been integrated into the group, with its payments and technologies businesses incorporated into our merchant division and ADUMA payouts into our consumer division. ADUMO is material to our merchant operations and has led to a large uplift in net revenue and group-adjusted EBITDA. Stephen Lincoln will provide more detail on these businesses in their respective divisional overviews. As a reminder, we have already incorporated the impact of ADUMO into our guidance when we set out our FY25 guidance last quarter. Following the completion of the Duma acquisition, we anticipate closing recharger in Q3 2025. Our acquisition activity complements our organic growth and we continue to optimize operating structures, extract revenue synergies and eliminate cost duplications. As we move forward, for comparative purposes, we will not be tracking each individual acquisition's contribution to net revenue and group-adjusted EBITDA separately, as these lines quickly become blurred as the businesses are combined and it is fundamentally not how our management and reporting structures are set up for the group. Lusaka is not a fintech holding company and it is not our strategy to hold a basket of separate investments. Our acquisitions are disciplined and aligned to the vision communicated in 2020, growing and augmenting Lusaka's integrated, multi-product fintech platform, organized around our customers. Secondly, we had a significant increase in short-term gearing in the period, as we funded the acquisition and related costs with a short-term bridge of R665 million. We also raise further facilities to fund the growth in our consumer loan book with the enhanced loan offering to our EPE customers. As mentioned in our Q1 FY25 investor call, we are undertaking a comprehensive refinance of all our debt facilities in order to optimize our debt across the group and reduce our considerable interest charge. We expect to complete this in the current quarter. Thirdly, during the quarter, MobiQuik, our non-core investment in an Indian fintech, listed in the National Stock Exchange of India. Prior to this listing, MobiQuik did not have a readily determinable fair value and we valued the investment on the basis of cost plus or minus changes in observable price equity securities. This gave rise to a carrying value of R1.31 billion. Post MobiQuik's listing, we now measure this investment applying the closing price reported on the NSE at quarter end, representing a carrying value of R802 million. This has resulted in a pre-tax write-down of R615 million on the investment and an associated tax benefit of R117 million. This was the primary contributor to our overall net loss of R584 million for the period. MobiQuik has now become a liquid investment and our intention is to monetize it in a disciplined manner once the lock-up expires in mid-May this year. We are now reflecting it as listed securities held for sale in our net debt position and we have a clear path to reduce gearing in the Group. During the quarter, we have moved to analysing the group's profitability into three operating lines, with our enterprise business now being reported as a standalone division, whereas in previous quarters we reported its results within the merchant division. This division has been restructured and a platform for growth established. Naeem will provide more perspective on the enterprise division in his overview. At a group level, revenue slightly exceeded the upper end of our guidance provided, decreasing 2% to R2.6 billion. The decrease was driven by merchant revenue decreasing 5%. However, this was as expected as a result of the changes in airtime sales mix between agency and principal sales. We measure top-line performance on a net revenue basis, which eliminates the volatility caused by the agency and principal sales mix, and which has no impact on overall profitability. Group net revenue increased by 42% year-on-year. At a divisional level, merchant net revenue was up 68%, mainly attributable to the inclusion of Adumo from 1 October. Consumer continued its strong growth with revenue increasing 31% to R411 million, attributable to a larger EPE account base and a higher ARPU on the back of continued cross-selling success. In the enterprise division, net revenue retracted 29% as we built this platform, focusing on profitable business in conjunction with right-sizing the cost base. We have eliminated a number of unprofitable contracts over the last 12 months. Group adjusted EBITDA grew by 26% to R212 million, exceeding the upper end of our guidance of R210 million. Merchant adjusted EBITDA grew by 32% to R185 million, primarily driven by the inclusion of Adumo for the quarter, offset by significant cost investment in our platform and a change in sales mix towards lower margin products. Consumer delivered strong EBITDA growth, increasing by R29 million or 61% on last year, including ADUMA payouts. The underlining performance of the consumer division compared to the prior year is skewed by the inclusion of R13 million of interest expense charges directly related to the consumer loan book this period, whereas we did not allocate such interest costs in FY24 and prior years. Had this not been included, consumer-adjusted EBITDA would have been R90 million, an increase of 88%. As mentioned, enterprise is going through a year of building and repositioning, with cost overhangs and investment in our technology leading to a reduction in enterprise-adjusted EBITDA for the quarter to a loss of R0.5 million. Group costs increased to R50 million for the quarter due to higher employee costs with more team members now being allocated to the group function, including an additional executive position, base salary adjustments and higher consulting and legal fees. Group costs, however, reduced 6% from last quarter. On our GARP income statement, I would like to highlight a few items before moving on to fundamental earnings commentary. Under GAAP, we incurred a net loss attributable to shareholders of R584 million for the period. Included in this is the R615 million charge related to the change in fair value of equity securities relating to the downward adjustment to the fair market valuation of our non-core MobiQuik investment. This adjustment is non-cash. Linked to this is a deferred tax benefit of R117 million raised with a net impact of R484 million on our overall net loss attributable to shareholders. Our net interest expense has increased year on year to R98 million due to higher borrowing levels than last year, primarily due to the debt taken on in respect of the ADUMA acquisition. Our selling general administration expenses increased by R250 million compared to Q2FY24 due to a combination of the inclusion of ADUMO in our cost base, higher employee-related expenses and stock-based compensation charges, increased transaction costs, costs related to the investment in the growth of our business, and year-on-year inflationary increases on certain expenses. Depreciation and amortization increased by R38 million, largely due to the acquisition of ADUMO. We believe that fundamental earnings is the most appropriate measure of our performance. It adjusts for once-off items such as change in fair value of equity securities , intangible asset amortization , stock-based compensation charges, transaction costs, indirect taxes provisions released, net loss on disposable equity account and investments, income recognised related to the closure of legacy businesses, and other such items. Fundamental earnings for the quarter increased 35% to R23 million, leading to an increase in fundamental earnings per share of 12% to 29 SA cents. As a reminder, we issued 17.2 million shares to Dumo shareholders as part of the acquisition, increasing the weighted average number of shares in issue. Cash generated from business operations increased to R169 million, supported by the inclusion of a Duma for the quarter. Net cash generated from operations, after accounting for interest payments, increased to R193 million, up from the R138 million last quarter and R89 million last year. Cash utilised in working capital reduced from R193 million in Q1 to R81 million this quarter due to the unwind of higher-than-usual accounts payables in respect to the micro-merchant settlements arising in Q1, offset by increased investment in working capital with the take-on of Odumo this quarter. The growth in the consumer loan book in that period was funded through short-term banking facilities, with an outflow of R149 million. and Kazang took the opportunity to do a bulk-based purchase with a net investment in inventory of R69 million in the period. We also made provisional tax payments in the quarter of R56 million, resulting in net cash utilised by operating activities of R164 million. We spent R113 million on capex, leaving net cash utilised before financing activities of R277 million for the quarter. Our gross debt increased by just over R1 billion in the quarter to R3.8 billion. This is due to the Duma acquisition, adding R665 million of debt, funding utilised from short-term facilities for the growth of the consumer loan book, and net funding of R69 million utilised to purchase prepaid airtime. Cash on hand increased from R854 million to R1.1 billion in the quarter as a result of the cash brought on from the acquisition of Edumo. With its listing on the NSE, MobiQuik has now become a liquid investment and our intention is to monetise it in a disciplined manner once the lock-up expires. We are now reflecting it as listed securities held for sale. This differs to prior periods when our stake was not readily monetizable at or near fair value. Liquidity in MobiQuick stock is high and we anticipate being able to convert our position into cash and pay down debt once our lockup expires. In principle, this could effectively reduce our net debt to R1.8 billion at the end of Q2 FY2025. and our net debt to Group Adjusted EBITDA ratio to 2.4 times, using the reported last 12 months Group Adjusted EBITDA of R754 million, which only includes the Duma for 3 months. This is lower than the 2.6 times at the end of Q1 FY25. If one were to include a DUMO for a full 12 months in an EBITDA run rate, our effective net debt to EBITDA ratio on this basis would be closer to 2.1 times. We have communicated to the market that we are looking to continue bringing our net debt to group adjusted EBITDA ratio down with a medium term objective of 2 times, which we believe is comfortably serviceable and is the appropriate capital structure for the business. Capital expenditure for the quarter amounted to R113 million, of which R56 million related to investment in growth. We invested R25 million in merchant acquiring POS devices, including Kazang and Edumo, and R26 million in cash vaults as we continue to invest in this business in line with our growth initiatives. Maintenance capex increased to 57 million rand, including Odumo and GARP. The balance of our maintenance capex was primarily driven by software and server upgrades. In close, I'm encouraged by our overall performance and the progress we have made this quarter. I will hand over to Steve to take you through the Merchant Division's performance.