Good day, ladies and gentlemen and welcome to the Net1 Q3 2021 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] Please note that this call is being recorded. I'd now like to turn the conference over to Dara Dierks. Please go ahead ma'am..

Thank you, operator. Welcome to our third quarter 2021 earnings call. With me today is CFO and Interim CEO, Alex Smith. Our press release and supplementary investor presentation are available on our Investor Relations website at 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 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 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 the currency fluctuations between the US dollar and the South African rand. We will have Q&A session following the prepared remarks.

So, with that let me turn the call over to Alex..

Thanks, Dara. And good day to everyone. And thank you all for joining us on our third quarter earnings call. We hope everyone is staying healthy and safe during these difficult times.

On today's call, we'll run through the following; first, we will review some of the financial and operational highlights from the quarter, then review our short term initiatives, finally, I'll review our longer term initiatives relative to our new strategic focus before opening the call up for questions.

To bring everyone up-to-date on the latest COVID-19 situation in South Africa, we are currently in lockdown level one, which is the least restrictive of the five lockdown levels used in South Africa. The data on new infections has been relatively stable and at a low level through April.

But there are concerns over a third wave hitting the country, as we approach the southern hemispheres winter months. The South African government is rolling out its vaccination program. But it is at a relatively early stage and has suffered from some delays.

Nevertheless, we are hopeful the time will be made up and we continue - but we continue to expect uncertainty in the environment. It's now been about eight months since we announced Net 1's the strategy on which we are currently executing.

Having been with the company for several years prior, as well as during this transition, I can say undoubtedly that this is a new enterprise, focused and strategic in our mission to become a major Fintech player in South Africa, focused on financial inclusion for underserved consumers and merchants.

To help anchor and drive the strategy, we have recently hired a dynamic new CEO for our southern Africa business, Lincoln Mali, who is a well respected and experienced executive in the South African financial services and banking industry.

This has also enabled us to attract some amazing new talent among the executive ranks and along with our ambitious goals we’ll Net 1 a very desirable place to work and grow. Lincoln only took up office on Monday, but we can already feel the excitement and revitalize energy in the business for the tasks ahead.

During these eight months, we have operationally streamlined the business selling our stake in Bank Frick, collected the final proceeds on the sale of our stake in DNI, substantially closed down IPG, our European payments venture, thereby reducing cash burn and preserving our ample cash position for more strategic opportunities.

We've also been preparing for a re-launch of our financial inclusion products here in South Africa, which will be the key focus for us over the next 12 months.

So in summary, while it may not be obvious to our investors, who really get a glimpse beyond the quarterly financials, much less of the inner workings of the company, we definitely believe we are well-positioned with talent, energy and strategy to scale the business meaningfully and create the standout financial inclusion Fintech in South Africa.

Now on to the financial and operational highlights from the third quarter. The key theme for this quarter has been progress, as the board and executive team continues to be very busy we’re scaling the current business, as well as pursuing our strategic initiatives.

While the financial results have been disappointing, and we have been able to start building meaningful, tangible momentum in our customer acquisition project, we have made good progress operationally.

The total revenue was $29 million, which was a 17% decline year-over-year in US dollar terms and a 19% decrease in rand terms, primarily due to fewer prepaid airtime and POS sales, as well as lower account fee revenues.

The US dollar was 3% weaker against the rand during the third quarter of fiscal 2021 compared to the third quarter of fiscal 2020, which also impacted our reported results. We reported and adjusted EBITDA loss of $12.8 million, which was comparable to $12.8 million last reported for the second quarter of 2021.

The core [ph] South African operations saw EBITDA losses of $8.5 million, reflecting the weaker revenue in the quarter. However, the cost base remained stable, and we have significant available capacity. The third quarter 2021 fundamental loss per share was $0.24 compared to an $0.11 fundamental loss per share a year ago.

Corporate costs were $1.5 million, returning to a more normal run rate from the inflated amount of the previous quarter. In South Africa, our consumer bank accounts, EasyPay Everywhere or EPE increased by about 52,000 gross accounts and 28,000 net accounts during the quarter.

This reflects further progress, but does fall short of the expectations we set out in the last quarter. We have been expecting to see a meaningful acceleration in customer acquisition from March, which we have not achieved. And we believe this pushes our expectations are reaching 1.4 million EPE accounts backed by several months.

This delay has been caused by a number of factors, some internal and some external. Internally, we've had several management changes, with several high caliber additions to the team and the departure of a number of long serving executives. From an external perspective, we have not seen the regulatory changes we had expected push through.

The proposed changes are clearly been drafted to make it a much easier process for grant recipients to open and designate the bank account into which they receive their monthly SASSA grant.

As we've discussed previously, the existing process is pretty onerous and involves printing and filling out a form which the recipient then has to deliver - has to hand deliver to assess the office for processing. These draft regulation changes are yet to be gazetted, which would result in them passing into law.

However, we're not sitting idly waiting for regulation changes. We've put together a comprehensive marketing plan to communicate to our target market. In the last 2.5 years, we have not made any significant investment into our marketing campaign.

And we feel the time is now right to lift our profile again in the communities we serve and embark on a nationwide customer acquisition campaign. Our cost base in South Africa remains stable and a level where we can support significant growth in business activity.

As a result, a relatively large percentage of any revenue growth in the coming quarters should drop to the profit line, providing us clear path to reaching breakeven in South Africa and then to achieving profitability at the corporate level.

Our plan continues to be - to reach breakeven in South Africa on a monthly basis, in the first half of next fiscal year, with the caveat that we may be impacted by future COVID related lockdown restrictions that may adversely affect this plan.

The total number of active bank accounts is a little over 1 million, while our net increases to date have been encouraging and achieved without proactive marketing or customer acquisition initiatives, we continue to see ongoing delays in these accounts becoming active and revenue generating.

This seems to be primarily because of the regulatory process I referred to earlier and emphasizes why we believe that the proposed regulatory change is so important in respect of our growth initiatives.

Our ATM network utilization has continued to trend in the right direction, though transaction volumes reduced slightly and total withdrawal values, which affects fees were lower this quarter. For the quarter transactions were down 5% compared to the prior quarter, but 9% higher than the same quarter in fiscal 2020.

The number of unique customers using our infrastructure was up 1% on the prior quarter and up 14% on the same quarter last year. The loan books finished March 2021 at ZAR305 million versus ZAR278 million in March 31 2020 and ZAR327 million at December the 31 2020.

There's been limited loan growth over the last two quarters, indicating that there is little room for higher penetration into the existing customer base. Future growth in the loan book is therefore expected to come from the expansion of the EPE customer base. We currently see around about 40% penetration of loans into this customer base.

And any growth in our loan book will likely lag any customer growth by around three months due to the lending requirements we apply to new customers. Transaction volumes through our EasyPay switch continue to trend stronger, though they were affected by normal seasonality in this quarter.

Compared to the same period last year, we did see reductions in the volume of low margin airtime and electricity recharges, but an encouraging 13% growth in transactions in the more important bill payment space.

We also have some high volume new relationships coming into the ecosystem in the next few months, which should result in good growth in the short term.

In terms of IPG, we recorded a loss of $3.3 million for the quarter, as we indicated last quarter, this is expected to be the last quarter with any significant costs in respective IPG, as the operational closure of the business is largely complete, and we are now entering the liquidation process for the various entities that formed part of that business unit.

Included in the loss for the quarter was the profit and loss account impact of the settlement we reached with Bank Frick. This settlement accounted for around $2.1 million of the loss for the quarter with the balance of the $3.6 million settlement having already been provided for creditors.

The balance of the $1.2 million loss for the quarter represents the cost of closure for all the IPG operations in this quarter. Now just a few minutes to review various investments. First the Bank Frick. As you are aware, we sold our remaining interest back to the Kuno Frick Family Foundation for $30 million in the quarter.

As a reminder, $18.6 million of that purchase price was received on completion, with the balance due over two further payments due in October 2021 and July 2022.

Only $15 million of the initial installment of the purchase price was received on completion, as $3.6 million was used to settle all and any outstanding liabilities between the group and Bank Frick. We believe this was the final major cost in the IPG closure process.

We continue to carry Finbond at the same value recorded in December 2020, which equates to around $0.84 per share. During the quarter, we saw some recovery in the Finbond share price.

And over the last month it has been trading around ZAR1.50 [ph] As an equity accounted investment, we are not able to write the value of our stake up to the market price.

We will only have visibility of Finbond’s trading performance for the latest fiscal year, which is to the end of February, towards the end of May, and this will be incorporated into our fourth quarter results.

In mid-March 2021, MobiKwik raised additional capital through the issuance of shares to new shareholders at a pre money valuation of $480 million. We use this March 2021 valuation as the basis for our adjustment to increase the carrying value of our investment in MobiKwik by $10.8 million from $42.1 million to $52.9 million as of March 31 2021.

Their financial performance continues to improve despite some of the challenges India is facing due to the pandemic. In particular, they're achieving rapid growth in their buy now pay later product and are positioning themselves as the leading player in India in that market.

We continue to carry the value of our Cell C investment at zero as of March 31. Cell C continues to make slow but steady progress on its recapitalisation plan, but is delivering improved operational results. While the slow progress is frustrating, this is a highly complex multi party restructuring.

If the capital structure can be right sized, we are confident there is a sustainable business that can emerge. And once again, I would just like to highlight that we currently hold about $16 million of Cell C airtime on our balance sheet, which is only likely to be realized after the recapitalisation is completed.

We did not have anything new to report this quarter in terms of clarifying our status under the Investment Company Act. But we will continue to keep our investors updated on our progress for this matter. And we can assure you, it remains a top priority for us.

The clearest way out of the uncertainty is through either acquisitions or the recovery of our core South African operations, both of which are focus areas for the team. At March 31 2021, we had unrestricted cash $208 million, and no debt. US dollar denominated balances were $171 million out of that total.

As soon as our Investment Company Act status is clarified, we will review the most effective use of the remaining capital, which may include a capital return for shareholders.

What the allocation of capital will look at will be governed by the circumstances at the time and where our capital is likely generally - likely to generate the best possible return for our shareholders. Finally, to spend a few minutes on the future of Net 1.

As I mentioned earlier, we announced the appointment of Lincoln Mali as Southern African CEO in February. He officially joined us on May the 1st and has certainly hit the ground running. This is a new position for the company, and we believe that Lincoln is the perfect candidate for the position.

He is a highly accomplished financial services executive, with over 25 years in the industry. He was most recently Head of Group Card and Payments at Standard Bank Group. And he chairs the board of directors with Diners Club South Africa and is a member of the Central and Eastern Europe, Middle East and Africa Business Council for visa.

The strong track record in consumer and merchant financial services across South Africa and 16 other African countries will be invaluable as we look to expand our consumer banking and merchant financial services businesses.

As a reminder, the consumer banking and financial services, TAM or total addressable market is estimated at approximately ZAR57 billion or $3.8 billion annually. And a merchants financial services TAM is estimated at approximately ZAR104 billion or $6.9 million - billion dollars annually.

Our primary product offering coupled with our superior distribution channels provides for an exceptionally competitive offering - both categories of market markets, wishing - to process cash and or transition to electronic or digital payment platform.

With the streamlining of the business that we've achieved over the last three quarters, we were able to dedicate more and more resources to focus on our activities in South Africa.

As a result, our corporate activity, as well as our M&A activity is fully focused on South Africa as currently - in progress to drive our strategy alongside our [Technical Difficulty] organic initiatives. We are continuing with our search for a group CEO and we will communicate progress on that process in due course.

Wrapping up, I just like to reiterate that while the financial results for this quarter have been disappointing, we have made good progress operationally, which has laid the groundwork for improved financial performance going forward.

We continue to engage in seeking to formally clarify our investment company x status [ph] and we are fully focused on exploiting this huge opportunity to grow Net 1 into the leading Fintech business in South Africa.

Before taking any questions, I just like to extend my appreciation to the entire Net 1 team and specifically to our customer [Technical Difficulty] employees who have continued to provide an excellent service to our customers - customers during an unprecedented and uncertain time.

With some of the developments in the last quarter, it really feels like we are at the start of an exciting new journey that can provide significant opportunities and returns for all of our stakeholders. Claudia, I can hand it back to you now for questions..

Thank you very much, sir. [Operator Instructions] The first quick question comes from Raj Sharma from B. Riley. Please go ahead, Raj..

Hi. Good morning, Alex..

Hi, Raj..

Good morning, Dara. So if you could give some little bit more – my questions related to the net account additions. Clearly there were lower than we expected and what changes that, you know, given South Africa was not necessarily in a very stricter lockdown level.

And you're saying that the - I think you said that the target of the 400,000 net new ads has been pushed out a few quarters or a few months.

What changes that going forward? How do you - how do you - how would you see this [Technical Difficulty] happening from 27,000 [Technical Difficulty] to significantly higher?.

I think we see the key catalyst here becoming much more proactive in terms of our marketing of the product and much more, I guess public engagement with our target market. Really the customer base that we're requiring at the moment comes out of people that are starting to accept grants.

Its people that are opening bank accounts because they are now entitled to [Technical Difficulty] from the government. That's a relatively small portion of the target customer base.

And as I said in the prepared remarks, I think we have been - we've never really [Technical Difficulty] not never but we've done very limited [Technical Difficulty] I think over the last two and a half years, and we [Technical Difficulty] much of the last quarter we’re preparing what we believe is a very compelling marketing campaign.

And we are going through the process now of lining up the start of that process. We see that as a as a major catalyst. And I think, you know, we're also planning on various stakeholder engagements that we believe can also assist in that process of enabling us to start ramping up customer acquisition at a faster level..

So, you know, the sequential - there was a sequential decline in net new ads and what would explain that or was it….

Trading in this last quarter [Technical Difficulty] and appropriate level of supervision of Cell C, given our limited involvement, and we don't want the current management or the board for that part distracted from the aim of rebuilding the African – the core South African business, which is where our core competency lies.

Cell C was far outside of that. We're focused on financial inclusion and funding - you know, in the financial services space for consumers and merchants. And, you know, I think if you want a more detailed discussion around where things lie, in respect of Cell C associate, then, you know, we're very happy to engage offline on that..

Thank you very much. Ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect your lines..