Lesaka Technologies, Inc. (NASDAQ:LSAK) Q2 2023 Earnings Call Transcript

Lesaka Technologies, Inc. (NASDAQ:LSAK) Q2 2023 Earnings Call Transcript February 8, 2023

Rob Fink: Hello, everyone, and welcome to Lesaka’s Fiscal Second Quarter 2023 Earnings Webcast and Conference Call. My name is Rob Fink, and I’m part of the newly appointed IR team here in the U.S. As we get started, I just wanted to remind everyone that this webcast is being recorded and the presentation can be accessed through the webcast link, as well as by dialing into the Zoom conference call dial-in numbers provided. Management will address any questions you may have at the end of the presentation. To ask a question, you must be logged into the webcast and you can use the raise your hand button on the bottom of your screen to indicate your interest in participating in a Q&A session. If you have joined via the Zoom teleconference line, you cannot ask a question live, but we would encourage you to reach out to the IR team if you have questions following the completion of this call.

The webcast link Zoom conference call dial-in numbers, as well as the earnings press release, and supplementary investor presentation are available on Lesaka’s Investor Relations website at ir.lesakatech.com. Additionally, Lesaka filed its Form 10-Q after the U.S. market closed yesterday, Tuesday, February 7, 2023, which is also available on the Investor Relations website. As a reminder, during this call, management will be making forward-looking statements, and I ask you to look at the cautionary language contained in Lesaka’s Form 10-Q regarding the risks and uncertainties associated with forward-looking statements. Also, as a domestic filer in the United States, Lesaka reports result in U.S. dollars under U.S. GAAP. However, it is important to note that the company’s operational currency is South African Rand and as such management analyses their performance in South African Rand.

In this presentation, we will discuss results in South African Rand, which is non-GAAP. Doing so assist investors understanding the underlying trends in the business. As you know, the company’s results can significantly be affected by currency fluctuations between the U.S. dollar and the South African Rand. Take a quick look at today’s agenda. Chris Meyer, Group CEO of Lesaka will begin today’s call with performance highlights for the second quarter of fiscal year 2023 and review Lesaka’s progress against its key strategic objectives. Steve Heilbron, CEO, Connect & Head of the Merchant Division will provide an update on the Merchant Division, which has produced just stellar set of results this quarter. Lincoln Mali, CEO of Lesaka, South Africa, will then provide an update on the Consumer Division, which has passed the key milestone this quarter.

And then Naeem Kola, Group CFO, will present an overview of Lesaka’s financial performance for the three months ended December 31, 2022. Chris will then conclude the results presentation with a discussion on Lesaka’s outlook before opening the call for Q&A, where we welcome any questions, you may have.

Chris Meyer: Thank you, Rob. Good morning, good afternoon, and welcome to our second quarter 2023 earnings webcast and conference call. Our FY €˜23 Q2 results represent a significant milestone for Lesaka in a number of ways. Our performance this quarter provides clear evidence of the successful turnaround in our Consumer division, which has delivered its first adjusted EBITDA profitable quarter in years. At the same time, the strong outperformance in our Merchant division is testament to the robust growth fundamentals underpinning the Connect acquisition and the overall momentum we are seeing in our Merchant division. The Merchant division has delivered an excellent set of results this quarter, topping our guidance and showing growth of 19%, compared to a quarter ago being FY €˜23 Q1.

This has been driven by the Connect Group, which has become the cornerstone of our Merchant division as we rapidly expand our merchant customer base in Southern Africa. The Merchant division is at the forefront of our mission of providing financial inclusion through our full service offering across cash and digital serving the use of both, while also facilitating the shift towards digital that is taking place. We are seeing this play out in a number of areas. For example, in our card acceptance business where we’ve seen card payments through our merchants in the informal sector, more than double, compared to a year ago. And also, in terms of the growth in our credit offering to MSMEs, including Capital Connect and Kazang Pay Advance, where we’ve advanced ZAR22 million this quarter, an increase of 16%, compared to a quarter ago being FY €˜23 Q1.

The Merchant division has performed ahead of our expectations. The growth drivers and secular trends underpinning financial inclusion, cash management and digitization for MSMEs are clear. We therefore believe the conditions for continued growth remain firmly intact. So, turning to the performance of the Consumer division. We are very pleased to be able to deliver the first adjusted EBITDA positive quarter for the Consumer division in years. The Consumer division delivered segment adjusted EBITDA of ZAR10.1 million for Q2 FY 2023, compared to a segment adjusted EBITDA loss of ZAR23.9 million for Q1 FY 2023. This is a watershed moment for the business. And in reflecting on the work of the last 18-months where we have been very clear on how we plan to return the Consumer division to profitability; we view the set of results as testament to the successful implementation of a rigorous plan that was based on the complete transformation and optimization of our branch and distribution footprint and driven by a mission of delivering financial inclusion to our customers across South Africa.

Consumer division has been fundamentally transformed, and we have built a strong and stable foundation to grow our customer base and deepen our product offering. We will achieve our growth objectives through a combination of: Firstly, shifting our points of presence to where our customers want to be, which is in retailers. Secondly, by improving the customer journey through digitization and streamlining our processes. And thirdly, by further enhancing our value proposition as we shift our product and pricing proposition to recognize and reward our most loyal customer base. Lincoln will provide more detail on these focus areas later in our presentation. And, so the third area I would like to highlight is how our improved operating performance has also meant we are generating positive cash flow in the business and have been able to further optimize Lesaka’s capital structure.

Our banking partners have agreed to further extend the group’s lending facilities on more favourable terms, increasing flexibility, adding further liquidity and providing greater capacity to fund growth. For FY 2023 Q2, we saw ZAR60 million of cash generated from operations and we ended the quarter with ZAR722 million in unrestricted cash, compared to ZAR543 million a quarter ago. We continue to focus on reducing our net debt to EBITDA ratio, in step with the growth of the business, and with our net debt to EBITDA ratio reducing to 3.3 times from 5.9 times in FY €˜23 Q1. And Naeem will address this in greater detail later in the presentation. So given the momentum in our Merchant division and the strong foundation for growth in the Consumer division, we are reaffirming our guidance which we provided for FY ’23.

We believe the growth drivers remain intact and we are confident the momentum will continue. In September 2022, we provided further earnings guidance for the first time since the transformation and repositioning of Lesaka began. Our guidance was for group revenue to be in the range of ZAR2 billion to ZAR2.3 billion for FY €˜23 Q2. We are pleased to be able to report revenue of ZAR2.4 billion, which exceeds the upper end of our guidance. Revenue growth was driven predominantly by the stellar performance in the Merchant division, primarily the Connect Group. We also guided for group adjusted EBITDA to be in the range of ZAR116 million to ZAR123 million for Q2 FY 2023. And we have delivered ZAR130 million in group adjusted EBITDA for the quarter, which surpassed the upper end of the guidance provided by 6%.

This represents a significant turnaround on the loss of ZAR84 million recorded in Q2 FY 2022. Our performance specifically in the Consumer division and also across the group were supported by well controlled costs, including our group cost line. Lesaka is a full service fintech platform, serving the needs of consumers and merchants, and we are also facilitating the secular shift to digital that is currently taking place. We are increasing our points of presence across our ecosystem in the form of branches, retailer pay points, ATMs, satellite kiosks and merchant devices, and these increased to more than 72,000 by quarter end. Building momentum in our footprint raises our standing as a player of scale in the market and creates growth opportunities across our ecosystem.

Our Q2 FY 2023 results demonstrate that we have set a solid foundation for growth in this market and we are very excited about this. And with that, I will hand over to Steve to discuss the performance and opportunities in the Merchant division. And as a leadership team, we are very pleased that Steve has extended his contract with Lesaka for the next three years, continuing in his current role as Head of the Merchant Division and also taking on additional responsibilities at a group level. Lesaka certainly stands to benefit from his continued involvement. And Steve, over to you to take us to the Merchant division’s performance. Thank you.

Steven Heilbron: Thanks, Chris. At the outset, let me say that I’m very happy to have extended and broaden the scope of my activities within the group and I’m excited to work with you and the leadership team as we continue to optimize both revenue opportunities and cost synergies across our dual sided ecosystem. Focusing on our Q2 FY €˜23 performance in the Merchant division, as Chris has mentioned, the Merchant division outperformed expectations and guidance this quarter, driven largely by a very strong performance of the Connect Group of businesses. The Merchant segment compared to Q1 has grown Q2 revenues by 12% to ZAR2.1 billion and adjusted EBITDA by 19% to ZAR160 million. The transformative impact of the Connect acquisition is evident, when compared to revenues and adjusted EBITDA of ZAR223 million and ZAR15 million respectively in FY €˜22 Q2.

We have achieved growth across all products with standout performances in our Kazang VAS and Kazang Pay business units, as well as notable performance in both Merchant credit businesses, Capital Connect and Kazang Pay Advance. Focusing on the key activity drivers of revenue and EBITDA, the following lead indicators are highlighted: Kazang VAS throughput for the quarter of ZAR6.8 billion is up 40% year-on-year and up 17% for Q2 and Q1 for FY ’23. This is supported by solid growth in the onboarding of new merchants with circa 7,500 merchants being added in Q2, up 13% on Q1. The Kazang Merchant Estate closed Q2 at 64,500 merchants, this is up 47% year-on-year. Our business development team continues to focus on adding to the bouquet of products, vended by our merchants from the e-wallets, as well as broadening the added value solutions targeted at solving for our merchant’s pain points.

In our card acquiring businesses, Card Connect and Kazang Pay throughput for the quarter of ZAR3.1 billion is, up 106% year-on-year and up 35% for Q2 on Q1 for FY €˜23. This performance is almost entirely attributable to the incredible growth achieved by our Kazang Pay solution. This is evidence by the onboarding of circa 6,700 merchants in Q2, up 24% on Q1. The combined Card Connect and Kazang Pay Merchants Estate closed Q2 at 34,400 merchants versus up 129% year-on-year. The Cash Connect business throughput for the quarter of ZAR29.5 billion is up 9% year-on-year and up 7% for Q2 on Q1 for FY €˜23. The Merchant Estate closed Q2 at circa 4,300 volts, this is up 11% year-on-year. As mentioned at our last results presentation, we have integrated the ATM business into Cash Connect.

This has served to enhance our focus on the ATM business as a standalone ATM acquiring unit with a heightened focus on achieving scale and efficiencies. We continue innovating in the cash recycling space with the imminent rollout of our new ATM recyclers. This is still in pilot phase with proof-of-concept testing in a selection of our merchant clients. Lincoln will touch on this a little more later. In our Merchant Credit businesses, Capital Connect and Kazang Pay Advance. Credit dispersed for the quarter of ZAR262 million, is up 71% year-on-year. We have become a key provider of capital to the Vital MSME Merchant segment and have grown the receivable book from ZAR178 million to ZAR380 million, representing a 79% growth year-on-year. We are experiencing great momentum in Kazang Pay Advance and Capital Connect evidenced by strong uptake from our merchants.

We are excited about the opportunities in the Merchant division and are encouraged by our ability to scale our product sets within the respective target market. The integration of Connect Group into Lesaka serves in broadening the Merchant divisions reach into the informal market, which thanks to benefit from enhanced inclusion from an underserved customer base. This broadens consumer access to a range of services, as well as supporting the journey to an increasingly digitized world. As evidenced by the numbers presented, we continue to see strong demand and have achieved excellent growth in the onboarding of many new merchants, as well as increased usage of our solutions by our existing merchants for the quarter and year-to-date. Both consumer and merchant clients benefit from a more secure, convenient and efficient ecosystem enabled by our proprietary technology.

Supplier payments in our Kazang VAS business continue to grow and are becoming a larger composition of the Kazang VAS throughput. This slide shows an example of our strategic partnership initiatives, which continue to drive growth. This proposition supports customer acquisition by providing more value for our merchants. To illustrate the point, this image represents multiple points of value for our merchant customers and thus our business as a merchant can accept card payments from these customers at this time using Kazang Pay. The merchant can also sell a range of VAS products to their customers using the same device for cash or card tender. And using the same platform, the merchant can settle stock purchases like VAT, Clover, Coca-Cola, SAB, and others directly from their e-wallet, reducing reliance on and the risk of holding onto cash for payments.

It has scanning a unique supplier QR code when stock is delivered. This offering is quick and efficient for merchant and allows them 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. Now to our EasyPay business, where as expected, we continue to see a decrease in VAS throughput for prepaid electricity. This is due to the impact of load shedding and important to emphasize that it’s not due to a loss of customers. VAS throughput for prepaid airtime grew 4% year-on-year. In our EasyPay bill payments business, we are connecting approximately 650 billers through payment infrastructure. Revenue earned is on our transaction fee basis. Bill payment transaction volumes declined by 5%.

We continue to reposition our EasyPay business by prioritizing commercial revenue streams in relation to existing and new clients. In , our point-of-sale payment device business revenue generated from the sale of point-of-sale devices can be lumpy given the seasonality of bulk sales. As disclosed in our Q1 results, we have reflected a 12-month rolling average as a more meaningful metric in tracking the performance of this business. The rolling average for Q2 FY €˜23 was 9,763 devices sold, an increase of over 100% on a year-on-year comparison. Rented devices have continued a steady growth trajectory at 9 % year-on-year. In conclusion then, this has been a stellar period for the Merchant division. We are excited about the growth prospects and opportunities to derive more value from synergies across Lesaka, especially as we expand our footprint and deepen into the informal market.

We continue to focus on opportunities to deliver services that are of tangible value to our merchant base. We have an excellent merchant team in place with a proven track record, who continue executing against strategy and innovating in an underserved market. Lastly, but not least, thank you to all the people in the business for an incredible quarter. I would like now to hand over to Lincoln, CEO of Southern Africa to discuss the performance of the Consumer division.

Lincoln Mali: Thank you, Steven. It is so pleasing to see the growth and profitability coming out of the Merchant division and the progress we’ve made on the integration. Moving on to Consumer division, the last 18-months have been a very busy time for everyone. As we said, how to transform it, and return it to profitability and position for growth. I’m extremely proud of the Lesaka team and specifically all the staff in our Consumer division in achieving our first EBITDA profitable quarter in years. It was a critical milestone in our journey as it removes the drain on financial and human resources and allows us to focus on growth. We are pleased to report a ZAR10 million segment EBITDA profit for the Consumer division in quarter two, which was slightly under our guidance, but a vast improvement from a year ago when we reported a consumer segment EBITDA loss of ZAR67 million.

We marginally missed the guidance for Consumer segment EBITDA, due to a lower growth in our Easy Pay loan business that we had forecast. But we were encouraged by strong December growth, which has continued into January 2023. We do not need to change our guidance for the full-year and are confident we are on track to deliver. Over the past four quarters, I’ve been speaking about the three levers we have used to retain the Consumer division to profitability, which are cost optimization, increasing our ARPU through cross-selling and growing active EPE account numbers. This result achieved was primarily through the first two levers. Under Project Spring, we committed to annual cost savings of approximately ZAR350 million in the Consumer division.

Through the rightsizing and rationalizing of our infrastructure and staff complementing the consumer business, we’ve achieved ZAR222 million already in the first half of 2023. Our ARPU for our permanent client base has increased to ZAR74 from ZAR71 in quarter one and ZAR69 in quarter two of last year. We implemented our strategy to focus on product and efficient distribution channels, upgrading technology platforms, training staff, and we’re still pulling hard on this lever. As we enhance our cross-selling initiatives, and spend more time in front of our customers, we expect the upward ARPU trend to continue. The combined effect of the first two levers have got us to a point where we now have a strong and stable base from which we can grow our consumer division.

Lesaka is all about financial inclusion and offering affordable financial services to undersized consumers. Our products are specifically designed with permanent social grant recipients in mind, where we have an opportunity to build deeper relationships through lending and insurance. We do have products for people, who receive temporary grants. But we don’t offer the same breadth of service as permanent grant recipients. In the consumer market, approximately 19 million social grants are paid to 12 million grant recipients every month. Of which approximately 7 million grants are paid by Post Bank of South Africa. These numbers exclude the temporary SRD grants, which were instituted during COVID, which have recently been extended to the end of 2024.

Social grant form an integral part of South Africa’s lives. And for many, it is the only source of income to support their families. Approximately 90% of grant recipients in South Africa currently receive their grant and withdraw it all in one transaction and two to transact in cash. Further, only 20% of grant recipients have access to regulated insurance and lending products. Turning to the third lever, which is growing our active EPE account numbers. We ended quarter two with 1.2 million active EPE bank account customers of which just over 1 million at our target permanent grant recipients. For the first time, we are separately reporting on our core permanent grant customer base from the more temporary SRD customer base. As of the end of December 2022, we increased our overall customer base by 18%.

Within this result, the permanent grant account base grew by 4% on a net basis, which maintained our market share. Whilst this was slightly below what we had hoped for, it must be seen in the light of us going through a complete restructuring and cultural reset in the consumer division, particularly in the sales team and an entirely new national and provincial leadership. And a focus on cost optimization and cross-sell initiatives. As a reminder, we continue to apply a rigorous approach in our measurement criteria for an active account. We only classify an account as active, if we have charged a monthly account fee during that specific month. We have identified actions and strategies to now leverage off our firm base and improve our EPE growth.

These include, firstly, enhanced distribution model where we’re moving away from branches and now have stuffed kiosks and ATMs and retailers, where our customer base has more convenient access and longer trading hours. Secondly, marketing initiatives and incentives encouraging account openings and switching to Easy Pay. Thirdly, easing the friction in the onboarding of new clients with technology interventions, opposed incurring travel costs and specifically having to be in a branch to open an account. I mentioned in quarter one of our 2023 financial year, that Easy Pay loans, our lending product had grown at a slower rate than expected. I’m pleased that we have seen a recovery in this quarter with 18% growth in the number of loans originated.

In terms of our book size, we have grown 13% year-on-year. We’re encouraged by the positive results coming through already and continued momentum on loan growth in January 2023. Again, it is pleasing to see our loss ratio at less than 4% per year. Our customers place a high value in these loans to get them through difficult months and having the facility available to them leads to a good repayment experience. Our Easy Pay insurance product continued to outperform our expectations in quarter two, growing 15% to approximately 294,000 active insurance policies. It is encouraging that this new business is of good quality with a high premium collection rate of approximately 98% being maintained. Our move to more retail focused distribution strategy is paying off.

Our presence in the retail stores where our customer base shops has provided Easy Pay much more visibility and convenience for our customers with longer trading hours and easy access to our ATMs. We’ve seen an 18% increase in transactions per ATM, compared to three months ago, with a strong increase in other bank customers also using our ATM network now. We are continuing to implement our retail focused distribution strategy and our initiatives we’re exploring with Kazang will further accelerate and expand our retail presence. We see great potential in the mutual benefits for retailers and our consumers in terms of convenience and buying power for our own ecosystem. We continue to develop our strong relationship with SASSA through proactive engagement at a local, provincial and national level.

We’ve also made good progress on building relationships with our various key stakeholders, including Grindrod Bank and representative from its new owner, African Bank, who acquired 100% of Grindrod in May 2022. As highlighted by Chris earlier, the consumer division has been fundamentally transformed, and we’ve built a strong and stable base to grow our customer base and deepen our product offering. We’re well positioned for growth and in doing so continue to focus on establishing point of presence for our customers that are convenient and cost effective to access. We also strive to further improve the customer journey through digitization and further enhancing our value proposition, including plans that will reward and grow our loyal customer base.

Thank you, Naeem will now take you through our financial performance in more detail.

Naeem Kola: Thank you, Lincoln. I’m very excited to take you through the financial performance for quarter two 2023. Before I do that, as a reminder Lesaka as a domestic fighter in the United States will report results in U.S. dollars and the U.S. GAAP. However, 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 the underlying trends of our business. As you know, our results can be significantly affected by the currency fluctuations between the U.S. dollar and South African rand. Additionally, Q2 20 23, similarly to Q1 2023, includes pre-existing Lesaka and Connect Group for the full quarter, compared to Q2 20 22 that only includes a pre-existing Lesaka business.

And thus, FY €˜23 Q2 versus FY €˜22 Q2 is not meaningful comparison as Connect was not included in FY €˜22 Q2. However, FY €˜23 Q1 has Connect included for the full quarter and that is a useful sequential quarter comparison to focus on, demonstrating performance and growth rate for the quarter. I will now turn to the financial performance overview. As you have just heard, Lesaka is making significant progress in the transformation journey. And this is coming through in our improved financial performance and a strengthened financial position across the group. We are building on the momentum that started four quarters ago for both in Merchant and the Consumer division and we have also made great strides to improve our capital structure positioning us to support our growth plans.

We achieved a consolidated group revenue of ZAR2.4 billion for the quarter, compared to ZAR479 million in Q2 2022. This exceeded the upper end of our guidance in rands. This significant uplift in revenue was mainly related to the revenue for Connect Group being consolidated for the full quarter Q2 2023. Revenue increased by 11% from ZAR2.1 billion in fiscal Q1 2023.We delivered a group adjusted EBITDA of ZAR130 million, compared to the group adjusted EBITDA loss of ZAR84 million in Q2, 2022 and an EBITDA profit of ZAR72 million in Q1 2023. This is an 81% improvement in EBITDA from Q1 2023 to Q2 2023, validating the transformation of the Consumer division to a segment adjusted EBITDA profit and continued strong growth and robustness in our Merchant division.

Operating income before amortization of acquired assets is ZAR29 million, as compared to operating loss of ZAR13 million in Q1 2023. This is directly related to the positive performance of the Consumer division and the significant performance of the Merchant division. In addition, the operating loss after acquired asset amortization improved by ZAR42 million to a loss of ZAR38 million for the quarter. Fundamental earnings per share showed similar trend of positive turnaround, compared to the prior quarter. This is indicative of the positive EBITDA contribution from the acquisition of Connect Group, which has continued to exceed expectations, as well as the turnaround of the Consumer division. We generated ZAR60 million operating cash flow in the quarter, another significant landmark in the Lesaka Group being cash flow generating.

I will now turn to the group income statement. Looking at the group income statement, we achieved a consolidated group revenue of ZAR2.4 billion for the quarter, compared to ZAR2.1 billion in Q1 2023, representing a growth of 11%. In USD, consolidated revenue was $136 million for the quarter, compared to $125 million in Q1 2023, representing a growth of 9%. Operating loss for the quarter is ZAR38 million, an improvement of ZAR42 million, as compared to the previous quarter and fundamental loss per share is ZAR0.22, compared to ZAR1.36 in Q1 2023, a significant movement quarter-on-quarter. Looking at our segments, Q2 2023 reflected a positive performance across both business divisions, validating our efforts to transform the business to deliver growth and strong profitability.

Operating income before amortization of acquired intangible assets closed at ZAR29 million, as compared to a loss in Q1 2023 of ZAR13 million, a significant turnaround in three months. Consolidated revenue for the quarter was ZAR2.4 billion, 11% growth, compared to Q1 2023 attributed to a strong performance across the merchant business especially in the VES, card acquiring and merchant capital products as highlighted earlier by Steve. In addition, we recorded ZAR97 million in revenue from the POS devices sold to in the quarter. As previously highlighted, this business is often quite lumpy between quarters due to the nature of the underlying client order book. In the Consumer division, revenue growth has been mainly driven by the transactional and insurance products.

We achieved a group adjusted EBITDA of ZAR130 million, as compared to ZAR72 million in Q1 2023, an uplift of 81% quarter-on-quarter. The group adjusted EBITDA of ZAR130 million for the quarter was above the upper end of guidance for the quarter in rands. Group costs of ZAR40 million were consistent for guidance. The Merchant division, including Connect Group, continues its strong performance trajectory and achieved a revenue of ZAR2.1 billion in the segment adjusted EBITDA of ZAR160 million. The performance for the quarter includes (ph) million EBITDA from the sale of POS devices in the quarter that is lumpy and in line with expectations. We do not see this continuing the rest of the quarters for fiscal 2023. While the segment adjusted EBITDA profit in the Consumer division is an important landmark in our journey that we embarked on in Q2, 2022, where we are now reaping the benefits of a successful turnaround strategy.

Including the cost savings realized from the rightsizing consumer division, we delivered a segment adjusted EBITDA of ZAR10 million in the quarter, as compared to a segment adjusted EBITDA loss of ZAR24 million in Q1 2023. This is a ZAR34 million positive turnaround. Stock-based compensation charges increased in the quarter, compared to Q1 2023, mainly due to a one-off award of ZAR23 million issued to secure a longer-term contract with a key senior executive. Our further spend on how this will normalize going forward. At the Group adjusted EBITDA level, the impact of the turnaround continues to be evident and significant. We have turned around the group performance from an adjusted EBITDA loss of ZAR84 million in Q2 2022 to an adjusted EBITDA profit ZAR130 million in the current quarter, a ZAR215 million turnaround over 12-months.

This performance is evidence of the significant transformation, the group achieved through the acquisition of Connect Group and the cost rightsizing and restructuring in the consumer division. Turning to our cash flow and capital structure, you will note that we have made further progress in creating a stable and long-term capital structure for Lesaka, as well as generated a positive operating cash flow. Our operational cash flow before working capital and loan book funding generated ZAR53 million in the quarter. Improving from negative ZAR7 million in Q1 2023. From a cash flow perspective, we continue to make improvements with stable and well managed working capital requirements and a reduced reliance on cash reserves to fund operations and customer loan book growth.

Cash available in the quarter increased from ZAR541 million to ZAR722 million. Net debt to EBITDA ratio on an annualized basis has improved to 3.3 times, as compared to 5.9 times in Q1 2022. Working capital funding requirements are stable and we do not require significant changes to support growth. We do experience peaks and troughs, which arise when taking advantage of bulk order discounts in our VAS business. We expect future loan book funding to be largely self-funded along with the banking facilities that are sized appropriately and therefore we do not envisage loan book growth to be a constraint on our cash flow. Our capital expenditure in Q2 FY 2023 amounted to ZAR70 million of this ZAR64 million or 91% related to growth capital expenditure and ZAR6 million, 9% related to maintenance capital expenditure.

Capital expenditure in the business is mainly driven by growth in the merchant business. This growth CapEx is mainly in the form of point-of-sale terminals in the VES and Card Acquiring business, as well as the manufacturing of vaults in the Cash Connect business. In both these businesses, this growth CapEx is highly cash generative with short payback periods. I will now move on to analyze the stock-based compensation charges. Stock-based compensation is a critical part of the overall compensation proposition that enables Lesaka to attract the best talent to execute on the transformation strategy. To enable a better understanding of the stock-based compensation charge, we have divided this cost into three categories: namely executive sign on, Connect Group acquisition awards and long-term incentive plans.

The long-term incentive of plane awards are indicative of the continued run rate cost, whereas review the sign on awards in the Connect acquisition awards as largely one-off in nature incurred at the beginning of the transformation journey. The increase in stock-based compensation costs between fiscal 2022 and 2023 is mainly due to fiscal €˜22 only, includes part year charge whereas fiscal 2023 includes a full-year charge, as well as a ZAR23 million one-off for senior executive to secure a long-term commitment. We estimate that in the medium term, once the effect of sign-ons and the Connect acquisition amortized that annual stock-based compensation charges should be in the range of ZAR60 million to ZAR70 million per annum. This would imply that the stock-based compensation charge should trend towards a single-digit percent of group adjusted EBITDA as benchmark to market norms.

Overall, Q2 20 23 is evident of the efforts we implemented in fiscal 2022 and we are now reaping the positive results. Our continued focus on the strategic initiatives is progressing well and we are optimistic about delivering on positive performance for the remainder of the year. I would now like to hand over back to Chris, who will address the group’s outlook.

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Q&A Session

Chris Meyer: Turning to the outlook for Lesaka. We wanted to provide you with guidance on the near-term performance of the Group. And although we report results in U.S. dollars under U.S. GAAP, our operational currency is in South African rand and we analyze our performance in South African rand. And as such, we believe that providing guidance in rand is more useful. I’m very pleased to reaffirm our prior guidance provided for financial year 2023. Our outlook for group revenue is between ZAR8.7 billion and ZAR9.3 billion for the 12-months ending 30 June 2023. Merchant segment adjusted EBITDA between ZAR550 million and ZAR565 million. Consumer segment adjusted EBITDA between ZAR95 million and ZAR110 million. And adjusted for group costs, which we expect to be between ZAR165 million and ZAR150 million.

This implies an adjusted group EBITDA of between ZAR480 million and ZAR525 million for FY 2023. For Q3 FY €˜23, our outlook for group revenue is between ZAR2.5 billion and ZAR2.8 billion for the three months ending March 31, 2023. And we expect Merchant segment adjusted EBITDA between ZAR140 million and ZAR145 million. Consumer segment adjusted EBITDA between ZAR40 million and ZAR45 million and group costs between ZAR45 million and ZAR40 million for Q3 FY 2023, which taken together means group adjusted EBITDA of between ZAR135 million and ZAR150 million for Q3 FY 2023. It is important to note that the Merchant segment adjusted EBITDA of ZAR160 million for FY 2023 Q2 included ZAR22.1 million relating to point-of-sale devices in our NUETS business.

And this is not forecasted to repeat in FY €˜23, Q3 or Q4 given the lumpy nature of bulk sales in this business. And in addition, seasonal trends indicate that our Q2 is usually a slightly stronger quarter, due to higher -than-average transaction volumes in December. Looking forward, we expect the Connect Group to continue to maintain its strong growth trajectory in line with historical trends. And so taken together, we believe that should current trends continue, there is potential upside. And we will reevaluate this position in a few months’ time when we report Lesaka’s Q3 2023 results. Before I conclude, I want to give special thanks to Alex Smith, the Group’s Chief Accounting Officer. In January 2023, we announced that Alex would be leaving Lesaka to pursue other opportunities outside the group.

The past 18-months have been a time of significant transformation for Lesaka and Alex has played a key role in Lesaka’s growth journey and its transition from Net 1 to Lesaka. Prior to my appointment, Alex was Interim Group CEO for every year and served as the Group Chief Financial Officer for more than four years. And I would like to thank Alex for his valuable contribution to the company. So in conclusion, this past quarter represents a real milestone for Lesaka. Our results be a testament to the progress made since the transformation began. And we will continue building on the momentum created across the business to drive growth, including by realizing the benefits and synergies of our unique dual sided ecosystem. We believe there is tremendous scope for both our merchant and consumer divisions to grow and scale in their respective target markets in their own right, supported by the self -reinforcing business model we are building as part of Lesaka’s unique value proposition.

And with that, we’d like to open up the Q&A session and take your questions. Thank you.

A – Rob Fink: Thanks, Chris. The Q&A session will now begin. We’re going to take a minute to build the queue. And while we do, we’re going to read two questions that were submitted by of Anchor Securities. Chris, Spin wants to know what the impact of load shedding has been on the business and specifically in the Merchant division?

Chris Meyer: