Lesaka Technologies, Inc. (NASDAQ:LSAK) Q4 2023 Earnings Call Transcript

Lesaka Technologies, Inc. (NASDAQ:LSAK) Q4 2023 Earnings Call Transcript September 13, 2023

Matt Chesler: Hello, everyone, and welcome to the Lesaka Technologies Fiscal Fourth Quarter 2023 Webcast and Conference Call. As a reminder, the webcast is being recorded and the presentation can be accessed through the webcast link as well as dialing into the zoom conference call dial-in numbers provided. Management will address any questions you may during the Q&A session after prepared remarks. For those joining us via webcast live, you can ask your questions by raising your hand button in zoom, and for those joining via the zoom teleconference line, you cannot ask your questions live. 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.lesakatech.com.

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Additionally, Lesaka filed its Form 10-K after the U.S. market close yesterday, September 12, 2023, which is also available on our Investor Relations website. As a reminder, during this call, we will be making forward-looking statements, and I ask you to look at the cautionary language contained in our Form 10-K regarding the risks and uncertainties associated with forward-looking statements. Also, as a domestic filer in the United States, we report results in U.S. dollars, under U.S. GAAP. However, it is important to note that our operational currency is the South African rand and as such we analyze our performance in South African rand. In this presentation, we will discuss our results in South African rand, which is non-GAAP. This assists investors’ understanding of the underlying trends in our business.

As you know, the company’s results can be significantly affected by the currency fluctuations between the U.S. dollar and the South African rand. In the presentation that accompanies this call, we will provide all financial metrics as reported in U.S. dollars in the appendix. Now, taking a quick look at today’s agenda: Chris Meyer, Group CEO of Lesaka, will start with performance highlights of the fourth quarter of fiscal year 2023, and a review of Lesaka’s progress against its key strategic objectives; Steve Heilbron, CEO Connect and Head of Merchant Division, will provide an update on the Merchant Division, which has produced an excellent set of results; Lincoln Mali, CEO of Lesaka Southern Africa, will provide an update on the Consumer Division, which has delivered a third consecutive quarter of EBITDA profitability; and then Naeem Kola, Group CFO, will present an overview of our financial performance for the three months ended June 30, 2023; Chris will then conclude the results presentation with a discussion of the outlook for Lesaka, before the team opens up for Q&A, where we welcome any questions you may have.

I’d now like to turn the call over to Chris.

Chris Meyer: Good morning and good afternoon, and welcome to our fourth quarter 2023 earnings webcast and conference call. The fourth quarter was a strong ending to a transformative year for Lesaka. Excellent growth in the Merchant Division was driven by the Connect and Kazang businesses, and we delivered the third consecutive quarter of profitability in the consumer division, where we have executed on our turnaround strategy and are moving strongly onto the front foot. It has undoubtedly been a year of significant positive change at Lesaka, so I would like to contextualize these results. Only 16 months ago, we announced the finalization of the Connect Group acquisition and our rebranding as Lesaka, positioning us to build the leading Southern African Fintech platform focused on delivering financial inclusion to underserved merchants and consumers.

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Q&A Session

And today I’m delighted to report this robust set of results for the 12 months to 30 June, 2023, especially in light of the increasingly challenging operating environment. These results demonstrate not only the resilience of our business, but also the resilience of our business, and more importantly, the value they place on our services. The tireless dedication of our employees, from whom we have asked a great deal over this period, further underpins our success. So whether providing microloans to grant beneficiaries to help them in their daily lives, or giving merchants quick access to working capital and solutions that help them de-risk their businesses and enhance operational efficiencies, our financial products and services are positively impacting previously underserved communities.

We are delivering tangible evidence that our holistic financial service offerings are improving the lives of consumers and merchants across Southern Africa. And much has happened during this short period. Now, consumer and merchant customers have felt the negative effects of high inflation, high interest rates, and the escalating impact of power failures, or load shedding, as it is called in South Africa. Inflation has been debilitating for all South Africans who are not seeing corresponding increases in their monthly incomes. The South African Reserve Bank increased interest rates on six consecutive occasions during the past year, adding a further 3.5% to interest rates since the start of FY 2023. And power cuts have risen rapidly over the last six months, particularly in the fourth quarter, with 10-hour-per-day blackouts regularly experienced.

We must recognize the cumulative negative effect of these challenges on our merchant and consumer customers. So FY 2023 has also been a year of many milestones. We first issued revenue and group-adjusted EBITDA guidance for Lesaka as a group a year ago. And we have delivered on this guidance despite the tougher-than-expected trading environment, with revenue exceeding our guidance and group-adjusted EBITDA falling in line with our guidance. And as I’ve said before, the acquisition of the Connect Group was genuinely transformational for Lesaka. But integrations don’t just happen in the ordinary course of business. The work put in by our teams to bring the businesses together, while continuing to deliver the growth and performance they have achieved has been nothing short of remarkable.

As we previously reported, the Connect Group implied enterprise value to EBITDA multiple was approximately 12.8x at the time of the acquisition that’s using Connect’s February FY 2022 projected EBITDA. Notably, the Connect Group has surpassed the acquisition investment case, and this effective multiple, enterprise value to FY 2023 merchant segment adjusted EBITDA has become approximately 8x, with Connect contributing approximately 99% of the merchant segment adjusted EBITDA in FY 2023. So our vision to build the leading fintech providing cash and digital solutions to small merchants and consumers in Southern Africa remains. On the M&A front, we continue to evaluate opportunities in South Africa that will enhance our market positioning. And this includes built-on acquisitions that will provide scale to our existing offering or broaden our product offering in serving existing clients.

Our M&A focus is primarily in our merchant business. We have successfully turned around the consumer division from a performance perspective, achieving three consecutive quarters of profitability. We have also fundamentally transformed the division into a customer oriented sales focused business. And we still have work to do, but we are firmly on the right trajectory. From a balance sheet perspective, we have made significant progress with our lenders this year through restructuring our debt facilities, providing greater flexibility in managing our cash balances, as well as increasing our capacity for growth. Reducing our debt position is a key focus for Lesaka with numerous levers at play to achieve this. Our operating cash flows continue to improve with $9.7 million, which is ZAR 183 million in net cash provided by operating activities in Q4, compared to $6.7 million reported at ZAR 104 million of net cash used by operating activities in Q4 2022.

We have made some progress in the realization of our non-core assets with the signing of a share repurchase agreement in regard to our interest in Finbond for a cash consideration of approximately ZAR 64 million, which we intend to utilize to partially settle debt. The share buyback is subject to certain conditions precedent, including Finbond shareholder approval, and is expected to close in December, 2023. We continue to focus on our other non-core asset disposals, which should further improve our balance sheet strength and debt ratios when completed. From an operational perspective, we broke some new barriers this year. We processed over ZAR 26 billion of VAS products, including supplier payments, on behalf of our merchants. Within that number, the use of our supplier payments platform increased more than 300% year-on-year to almost ZAR 4 billion in FY 2023.