Good day, ladies and gentlemen, and welcome to the Net1 Q3 2020 results. [Operator Instructions] Please note that this call is being recorded. I would now like to turn the conference over to Dhruv Chopra. Please go ahead..

Thank you, Irene. Welcome to our third quarter 2020 earnings call. With me on the call today is our CEO, Herman Kotzé; and our CFO, Alex Smith. Our press release and a supplementary investor presentation are available on our Investor Relations website, ir.net1.com.

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 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 analyze our results of operations in our press release in rand to assist investors 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 question-and-answer session following our prepared remarks. And with that, let me turn the call over to Herman..

a) acquiring services in the EU, which is providing small merchants the ability to rapidly begin accepting debit and credit card payments; b) acceptance of alternate payment methods, or APMs, mainly providing small merchants in the EU the ability to accept over 30 alternate payment methods, such as Alipay, WeChat Pay, Skrill and SOFORT; c) card issuing prepaid and virtual cards to EU-based corporates and merchants; d) bank account opening through the issuance of instant IBAN’s and performing direct debits and credits through the SEPA system in Europe and ACH in the USA; and e) crypto and blockchain products, including a FIAT to crypto trading platform and vice versa as well as a crypto asset storage product.

We will continue to collaborate with Bank Frick to introduce new payment and blockchain-related products. In Africa, we have seen meaningful business momentum at Carbon and V2, which supports our strategy to focus on using local talent, resources and partnerships to establish a sizable pan-African business.

As for Carbon prior to the outbreak of the pandemic and its resulting impact in Nigeria, that business had continued to report exponential sequential growth across all the key indicators of its business.

It has reacted quickly to the changing circumstances, tightening lending criteria and communicating regularly with its customers, particularly as Nigeria faces the additional challenge of low oil prices. It has successfully raised local funding in recent months and was able to settle all of its U.S.

dollar denominated funding prior to the crisis, leaving it in a sound financial position. Carbon’s vision is to be the first pan-African digital bank with an end-to-end product set for the under-banked. Pre-COVID, Carbon had an un-audited $24 million annual revenue run-rate with a 70% repeat rate of its lending customers.

Based on revenue, Carbon’s run rate is higher than many better known challenger banks in the UK, such as Atom, Monese, Starling Bank and Monzo. Carbon is further expanding its suite of services to include virtual cards, cryptocurrencies and foreign exchange.

Retail credit penetration in Nigeria is still only around 2% and with 90 million adults, leaves a long runway for growth. And finally, on the international front, we’ve had a number of discussions with MobiKwik’s management team recently as both India and Africa are facing a number of similarities in dealing with the outbreak.

This is the time when key players with strong financials and relevant products can rapidly expand their business, while many others are reactionary and focused on survival. MobiKwik is one such company that does not have to contend with high monthly cash burn, like most of its peers.

There are a number of our technologies, products and know-how we are looking at jointly that have the potential to positively impact both of our businesses in India and across the world. We have talked about our virtual card and expect MobiKwik to launch that before calendar year-end to its 15 million qualified customer base.

We will discuss other offerings as and when they materialize. MobiKwik itself continues to perform ahead of expectations, primarily due to its successful transition to being a digital financial services provider.

For the quarter ended March 31, 2020, MobiKwik recorded un-audited annualized gross revenue of $74 million, up from $38 million for the quarter ended March 31, 2019. It has been contribution margin positive since October 2018 and has been around cash EBITDA breakeven since the month of August 2019.

COVID-19 is expected to have a positive impact on its payments business, but a nationwide 180-day moratorium on all term loan repayments is likely to reduce top line growth in the June and September 2020 quarters. However, they still expect to generate healthy top line growth for the full year.

During the March 2020 quarter, MobiKwik disbursed approximately 150,000 new loans per month. They were also the first to introduce the coronavirus insurance product, which offers a cover of $700 to $4,000 for a premium as low as $6 to $18. They sold over 2,000 such policies within the first week.

So similar to our South African business, our international portfolio is well positioned to grow off a small base once the restrictions ease in the markets in which we operate.

Finally, as I touched on earlier, we have concluded a number of corporate actions over the past 6 months, including the sales of FIHRST, KSNET and DNI, which have positioned us well for the near and long-term. Now that I have outlined the sources of liquidity, I would like to focus on capital allocation.

Following the recent disposals, our Board has initiated a comprehensive strategic review of the entire company.

In light of the continued uncertainty around the current pandemic, the need to ensure that the company maintains a strong balance sheet and pending completion of the strategic review process, the Board has decided to delay any share repurchases.

Any return of capital will also be subject to clarification of the company’s status under the Investment Company Act.

Due to the sale of several large businesses and the decision last month not to take control of Bank Frick, coupled with the depreciation of the rand and the shrinking of our South African operation base, we do not currently qualify for clear exemption from the Investment Company Act.

An investment company classification has numerous and significant implications for the operation of the company and its use of capital. However, we consider ourselves to be an operating company and not an investment company.

Nevertheless, it is important for us to develop a plan to provide us with an exemption that we can confidently rely upon and, therefore, we have engaged in a further strategic review by the Board in cooperation with Value Capital Partners to prepare such a plan.

Depending on the outcome of the plan, we may decide to seek an exemptive order from the SEC. We still very much intend to return some capital to shareholders, but we will need a resolution on the above-mentioned items before we can commence any such activities.

Over the last few months, we have announced 5 new non-executive appointments to the Board of Directors, including the appointment of Jabu Mabuza as our Chairman designate when Chris Seabrooke retires at the end of June.

We believe that each of these directors bring significant and specific skills and decades of business experience to the Net1 Board, and we look forward to their future contributions. We also look forward to a productive relationship with Value Capital Partners, who recently became our largest shareholder.

And finally, I would like to express our heartfelt appreciation to Chris Seabrooke for his tireless leadership and guidance during some very challenging times as Director and Chairman over the years, and we wish him all the best. Let me now hand it over to Alex to go over the financials..

total proceeds of $237 million were reduced by the $23.5 million of cash disposed of as well as the $21.1 million of taxes paid in Korea. This latter amount includes withholding taxes of approximately $19.9 million on closing the transaction, and we have commenced a process to have this amount refunded in the next 12 months; estimated U.S.

taxes of approximately $15 million, which we expect to pay in July 2020 and we incurred transaction-related costs of around $8.6 million and recognized an after-tax gain on sale of $12.7 million.

Financial inclusion and applied technology segment revenue from continuing operations increased modestly, primarily due to higher ad hoc terminal sales and insurance revenue. Lending and prepaid sales were broadly consistent with the third quarter of fiscal 2019.

Our operating income margin from continuing operations for the segment was negative 5.3% against a negative 26.1% during the third quarter of 2019. This compares with negative 4% that we saw in the second quarter of 2020.

Active EPE accounts continue to remain fairly steady, with the new Finbond accounts offsetting some of the natural attrition in account numbers.

Our plans were to start ramping up account numbers on the back of the loan product following the release of capital from the disposals, but we have not yet been able to action this due to the current pandemic lockdown. For Q3 2020, we experienced gross loan originations of between ZAR80 million to ZAR110 million per month.

We would expect a step reduction in our lending revenue as the book unwinds and assuming there were no lending activities during the next 2 quarters, we would expect to record approximately 70% of the revenue related to the March 2020 book in the fourth quarter of fiscal 2020 and 30% in the first quarter of fiscal 2021.

To clarify further, without new originations, the revenue on the existing book will decline each month but, conversely, cash flow will improve as the book unwinds. In April 2020, there were almost no new loan originations as in-store activities have been curtailed.

In the interim, our technical teams developed a new mobile-based origination product to fulfill demand during these times and commenced with the origination of loans through this channel in May.

Month-to-date, the response for this product has been positive, and we believe doing the restrictions, we can originate about 25% of our normal monthly origination volumes through this distribution channel.

It is also important to note that we have not observed any deterioration in the repayment characteristics of our customers through the duration of the pandemic thus far and believe we are adequately provisioned.

We expect that our lending book and associated revenue will meaningfully increase only once we are able to commence in-store lending activities again.

However, in the current environment, we are unable to predict the level of origination through the new mobile-based product or when we will be able to commence face-to-face lending in branches again or the expected growth rate in the lending book.

We believe that there will be significant demand for these products once the operating restrictions are lifted, but that the credit criteria will need to be closely monitored. Similar to lending, our insurance business has also been unable to grow its policy base and continues to receive premiums based on its existing level of policies.

Given the low level of infections in South Africa, to date there has not been any related increase in claims, but our insurance business is well capitalized to deal with any adverse claims experience, should it arise.

From recent press articles and speculation, it’s clear that Cell C is making progress on its recapitalization, but this remains an ongoing process.

The progress made in recent weeks is encouraging, but until such time as a recapitalization is finalized, the impact on Cell C’s operating viability is assessed, and we understand the extent of any dilution we will suffer. We will continue to assess the fair value of our investment at a 0 value.

Cell C has seen some benefits from an increasing focus on its core operations over the last 9 months but needs to complete its recapitalization to create a sustainable business.

We recognized income from equity-accounted investments of $0.6 million during the third quarter of 2020 compared to a loss of $0.5 million in the same period last year, primarily due to the contribution from DNI in the current quarter.

However, we recognized 3 noncash charges to our investments, two of which, namely Bank Frick and V2 related to market conditions, and DNI, primarily due to changes in foreign exchange rates between December 2019 and March 2020.

On April 1, 2020, we sold our remaining 27% interest in DNI for $48 million, of which $43 million was received in cash and the remaining $5 million will be recovered over the next 24 months.

We recorded an impairment loss of $11.5 million related to the difference between the fair value of consideration received on April 1, 2020, and the carrying value of DNI, including the $11.3 million included in the accumulated foreign currency translation reserve as of 31st of March 2020.

In April, we paid a termination fee of $17.5 million to cancel the exercise of our option to acquire a further 35% of Bank Frick.

In the third quarter of 2020, we recorded an impairment loss of $18.3 million, which was calculated as the difference between the determined fair value of our interest in Bank Frick and our carrying value before the impairment. In April 2020, we received a cash dividend of approximately $1.3 million.

We remain committed to the Bank Frick investment and working closely with them to exploit opportunities. At March 31, 2020, our cash and cash equivalents were $209.3 million and comprised primarily of U.S. dollar-denominated balances of $192 million.

We received a further ZAR760 million of cash, $43 million at current exchange rates, related to the portion of DNI sold on April 1 and settled our remaining outstanding debt of $3 million using the proceeds.

Our cash used in operating activities during the third quarter of 2020 was impacted by the cash losses incurred by the majority of our continuing operations.

We were unable to commence origination of loans towards the end of March 2020 due to the COVID-19 restrictions imposed on our lending activities in March 2020, and this had a positive result on net cash during the third quarter of 2020 compared with 2019, where we originated loans and which resulted in a net outflow of cash.

Going forward, we expect our interest income to increase due to the higher cash balances, partially offset by lower interest rates. We also expect to continue to incur some interest expense related primarily to our ATM funding facilities.

Our third quarter 2020 tax expense was $0.6 million compared to a tax benefit of $3.6 million in the third quarter of 2019. And our weighted average share count has remained relatively constant at 56.8 million shares during the third quarter of 2020.

Based on the results for the third quarter, our continuing operations incurred an EBITDA loss of around $6.4 million. EBITDA is a reasonable proxy for cash in our business, and so we are currently incurring cash losses of around $2.1 million a month. The loss of our cash withdrawal fees will increase this cash burn by about $1.1 million a month.

In respect to the loan book, the monthly reduction in income due to the unwind of the loan book will be more than compensated for by the capital repayments, though this will clearly reverse once the loan book starts to grow again.

The duration and severity of the COVID-19 pandemic is still unknown and, therefore, we believe it’s prudent to withdraw our financial outlook for the remainder of fiscal 2020.

While many of our South African processing businesses have recently observed strong transaction volumes, our inability to charge for certain essential services during the lockdown period has had an adverse impact on our financial statements.

If we are able to commence the marketing of our new financial and banking products prior to the end of fiscal 2020, we believe our adjusted EBITDA will be modestly positive for the full fiscal 2021. We can now open up the call for Q&A..

Thank you. [Operator Instructions] Our first question is from Scott Buck of B. Riley..

Hey, good morning guys.

I am curious if you could tell us when you became aware of the Investment Company Act issue and what are the options to remedy that?.

Sure. Hi, Scott. The company has been aware of the investment company issue for a while, and it’s been part of our planning over the last year or so. We had specific plans in place to deal with this issue. But unfortunately, the change in circumstances over the last 3 months has resulted in the current position that we find ourselves in.

It is a fairly complicated piece of legislation that one needs to analyze and we don’t have enough time, I think, on this call to go through all of it.

But from our perspective, the key matters that had an influence on the current situation obviously revolves around the Bank Frick option, which we did not exercise, that was clearly part of the plan to remedy the situation as well as the significant decline in the South African rand, which had a resultant effect on the relative valuation of our South African assets.

So this is an issue that we are aware of and that we plan to deal with. We still intend to deal with it as efficiently and as swiftly as we can. There is a strategic review currently underway to determine the best course of action, which is not going to take a very long amount of time.

And if depending on the outcome of this investigation we need to ask for an exemption from the SEC, then that is what we will do, but we hope to certainly deal with this as expeditiously as possible..

What are the ramifications if you are declared an investment company and you can’t get any kind of forbearance from the SEC?.

So it’s – as I said, it’s a fairly complicated area of the law. But I think the best description of the various impacts or implications that this may have is actually contained in our Q. So you’ll see that there’s a risk factor that we’ve included over there, and I’ll refer you to that for a concise description of what it means..

Alright.

And in terms of timeline to gain clarity, I mean, are we talking about 3 months or longer?.

Yes. So obviously, some of it may not be entirely under our control when – as far as the regulators are concerned. But from our perspective, we certainly intend to complete everything that we need to do within the next 3 months..

Great. Next question for me, in terms of the strategic review, it feels like we went through this exercise about a year ago, and that’s what kind of drove the decisions to sell KSNET and DNI.

What’s different this time? And why are we doing this again?.

I think a couple of things. Obviously, there have been quite a few changes recently in terms of the corporate structure. We have a new number one shareholder in the form of Value Capital that came on board a month ago or so or during the last few weeks.

And as part of the cooperation agreement that we’ve signed with them, we agreed to embark on a strategic review of the company. We also have 5 new non-executive directors on the Board, and we believe that it’s important and also fair to them to embark on a further review.

Obviously, during these times, Scott, with the world changed as it has and various business activities impacted in different ways, we think that now is a prudent time to actually just – it’s not a brand-new review, I would say. This is a continuation of a plan that we’ve been propagating and that we started communicating about a year ago.

So for those very specific reasons, we think it’s opportune for us to complete it now..

Alright guys. I appreciate the answers. Thanks..

Thank you..

[Operator Instructions] We have a question from Bill Gordon of Gordon Capital..

I was going to go down the same route as Scott just did, but he did it. And everything’s figured out so I don’t really want to reopen that story.

But now that we have cash there, can we get some sort of direction where we’re going to go with the cash when we don’t get a dividend, when you don’t pay a quarterly dividend or anything of that nature? In other words, we got some high-growth areas in this company, whether it’s India, mobile pay doesn’t seem to need it.

What can use our money that can be the best investment for us at this particular point?.

We – so obviously, this will support the level of our review that we’re currently busy with. I – just generally speaking, about the various uses of capital, as I said during my remarks, it is still our intention to return some capital to shareholders as soon as we are in a position to do so. So that hasn’t changed.

And it’s – the form of – in terms of what it will take is what we’re currently analyzing. But from our perspective, we still intend to return an amount of capital to our shareholders in the not too long term.

But as far as other uses of cash is concerned, when we look at M&A activities, etcetera, we have not identified any, and we – at this stage, don’t intend to do any large-scale M&A activities over the foreseeable future.

Those that we are considering or may be considering are very specific smaller bolt-on kind of deals that will add to our strategic intention and focus.

And the other part of the capital that we’ve earmarked for the distribution over the next 3 months or so, again as soon as we can start, which we think is as early as next week, is to significantly grow the South African loan book..

Okay, thank you..

We have no further questions.

Do you have any closing comments?.

No, no further comments from our side. Thank you..

Ladies and gentlemen, that concludes this conference. Thank you for joining us. You may now disconnect your lines..