Good day, ladies and gentlemen, and welcome to Net 1 UEPS Q2 2020 Earnings Call. All participants will be in listen-only mode. Please note that this call is being recorded. I would now like to hand the conference over to Dhruv Chopra. Please go ahead, sir.

Thank you, Claudia. Welcome to our second quarter 2020 earnings call. With me today is our CEO, Herman Kotzé, and our CFO, Alex Smith. Our press release is 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...

Sorry, everybody. We had a temporary technical glitch. But thank you to Dhruv, and good day to everybody again. We have continued to execute toward our strategy and corporate actions outlined in our fourth quarter 2019 earnings call. I would like to focus today's discussion on our three strategic areas, namely South Africa, Europe, and Africa, as well as the progress of our various corporate actions related to capital allocation. The highlights of our Q2 2020 results include: We reported revenue of $74 million, which was down 2% in constant currency. We reported adjusted EBITDA of negative $0.7 million, primarily due to the lack of top-line growth in South Africa and higher losses in IPG as a result of delays in new product launches. EPE accounts remained relatively stable at 1.04 million as did related financial services. KSNET EBITDA margin remained stable at 22%. And we sold our payroll processing business for $12 million in December 2019 and more recently announced the sale of KSNET for $257 million in January 2020. We have previously outlined four key objectives for 2020. However, now that we have completed the sale of KSNET, we will focus on the three remaining objectives for the rest of the year. The first objective for fiscal 2020 was the transition of our South African businesses to a B2C model. Our target was to grow our active account base and our loan book by at least 10% from the 1.1 million customer level we had in Q4 2019. With the anticipated availability of liquidity in Q4, we now expect to add 120,000 accounts and increase the loan book by at least 30% by the end of Q4 2020, the benefits of which will be visible in the first half of fiscal 2021. Our distribution, technology, years of experience, and affordable financial services offering are the key differentiators in the market and play a critical role in driving account growth. Our current loan book has been steady around $24 million for the past few quarters, which is down from the peak of $80 million two years ago. We intend to inject meaningful liquidity into this business during Q4 2020, which we believe will drive higher growth in financial services, account growth and fee income, and in turn, return our South African operations to being a meaningfully profitable and cash-generative business. We expect the EPE base to naturally churn over time, and new account growth to be driven by the Finbond offerings. EPE accounts were approximately 1.04 million and continued to observe natural accretion in line with our expectations. As we noted, we are well underway with the transition of our South African business to a B2C model. We have largely completed all the technical product and marketing developments required to scale this business. In the second quarter of 2020, we commenced a soft launch of our new Finbond banking offerings. Without any investment in marketing and in a limited number of branches, we opened 13,000 new accounts over the holiday period. In the quarter, we also introduced a new variable loan product to the market, which allows complete flexibility within preset limits regarding the amount and repayment period. We have seen good demand for these products, and during Q2, we issued more than 60,000 of these loans. During the quarter, Finbond also launched a new loan product where we provide the technical, operational, and distribution support in return for a commission. These loans have two points of differentiation compared to our traditional business. First, the bank deploys its own capital and second, the customers are higher income earners than our traditional customer base. We continue to see volume increases in our ATM infrastructure and, in Q2, we continued with the rollout of ATMs in the country and installed 73 new machines, bringing our total deployed base to 1,430. EasyPay continued to gain market share both with retailers and billers, winning a number of mandates during Q2, growing 7% compared to a year ago. We also made significant strides in our R&D to build a cloud-based UEPS/EMV issuing and acquiring system that can significantly accelerate time to market for any new issuing banks anywhere in the world. Our second objective for 2020 is to introduce on scale our new payments, crypto, and Blockchain offerings in Europe. On our first quarter 2020 earnings call, I outlined our European strategy with Bank Frick and IPG in detail, and therefore, I will not go into depth on that again today. We expect to launch the first-of-its-kind brand-new crypto and Blockchain products along with a new brand as well as IPG's new issuing and acquiring products in the second half of fiscal 2020. Many of these products are rolled out in close cooperation with Bank Frick. In order to accelerate time to market, we have also begun discussions with additional financial institutions across Europe and we are optimistic that one or more of these initiatives will bear fruit. As our European products scale, we expect IPG revenues to grow, in turn reducing losses and then becoming accretive to the group. In October 2019, we exercised our option to acquire an additional 35% interest in Bank Frick. The transaction is subject to approval from the Liechtenstein Financial Market Authority and is expected to close in April 2020. Outside of our option exercise, we do not anticipate any material investments required for our European strategy other than in business development and sales resources. Most of the investments needed to create IPG and its products have already been incurred and expensed over the past two years. Visa concluded its onsite audit of IPG's nerve center in Malta on November 29, 2019. They provided positive verbal feedback instantly but have yet to grant an official clearance. We depend on Visa and their time frames to provide unconditional approval in order to commence with the full-scale onboarding of new clients. Lastly, regarding India, in fiscal 2019, MobiKwik applied for direct membership with Visa and became an associate member in Q4 2019. In October 2019, the Reserve Bank of India approved the application by MobiKwik and Visa to launch card programs with MobiKwik as the issuer. We are currently working with MobiKwik to relaunch our virtual card offering on a much larger scale across their qualified customer base, which has in excess of 10 million users. MobiKwik itself has performed ahead of expectations, primarily due to its successful transition to being a digital financial services provider. In the quarter ending December 31, 2019, MobiKwik recorded unaudited annualized revenues of $66 million, up from $28 million last year. It has been contribution margin positive since October 2018 and achieved cash EBITDA breakeven in August 2019. Digital financial services now account for approximately 25% of MobiKwik's total monthly revenue compared to zero during the previous fiscal year and it is currently disbursing in excess of 110,000 new loans per month. Our third strategic objective for 2020 is to rapidly grow payment solution sales in Africa. We aim to accelerate market penetration in Africa through Net 1, ZappGroup, and Carbon. We expect ZappGroup to start generating revenue and enter at least one other country outside Ghana during fiscal 2020. ZappGroup has largely completed all development and testing work for their first live product in Ghana and expect the commercial launch with one of the largest banks in the country before the end of Q3 2020. Additional customers are expected to be rolled out over the remainder of calendar 2020. Meanwhile, ZappGroup has also made meaningful progress with potential customers to expand in Nigeria, Africa's most populous country. In addition to the progress they have made, we are also particularly pleased with the sales leads for Net 1 products they have begun to generate. Carbon continues to report exponential sequential growth across all the key indicators of its business – number of app installations, unique customers, loans disbursed, and number of value-added transactions. Several new products and services have been launched, including an SME financing platform and a healthcare financing platform for the treatment of malaria. Carbon's main business unit in Nigeria, One-Fi, also reported another full-year net profit for its year ended December 31, 2019. Carbon's continued growth will be driven by its ability to access capital and/or funding in order to meet the demand for its suite of products. Let me now spend a few minutes on the progress we have made on the corporate actions we outlined at the start of the fiscal year. First, KSNET. On January 23, 2020, we signed an agreement with Payletter and Stonebridge Capital for the sale of KSNET for total proceeds of $237 million. In addition to the above, we also took out a $10 million dividend in early January. Therefore, the total proceeds broadly are $237 million plus the $10 million dividend, less the permitted adjustments including cash in Korea, resulting in net proceeds of $217 million. Second, regarding DNI, we have already sold down our stake in DNI from 55% to 30% and the option we have granted to sell the remaining 30% for approximately $59 million is valid until March 31, 2020. Operationally, DNI has continued to grow and it's cash generative. It has also made good progress in raising the financing for its previously announced acquisitions, which are expected to close by June 2020. Concurrently, they have also been actively working on placing our shares with select institutional investors. We therefore continue to believe that DNI will be in a position to call our option. Third, on FIHRST, in December 2019, we sold our payroll processing business FIHRST for approximately $12 million. We utilized the proceeds to settle a portion of our long-term borrowings, which, at December 31, 2019, has left only $4 million outstanding in that facility. Now that I have outlined the sources of liquidity, I would like to focus on capital allocation. It is important to note that we are an operating company and not an investment company. Therefore, it is imperative we are able to reinvest in our businesses to ensure they are able to reach sufficient scale where they can generate sustainable profits and cash flow. So, first, looking at investments in South Africa, we anticipate investing $40 million to $50 million primarily towards expanding our loan book back toward our historical levels. With an average duration of less than six months, we are able to turn the book over twice in a year, resulting in larger financial services revenue, account growth, transaction fees, and therefore, profitability and positive cash flow. Second, investments in Europe. As one of our few primary focus areas, we anticipate spending approximately $50 million in Europe, primarily for the exercise of our Bank Frick option. And third, returning capital to shareholders. We will initiate a meaningful return of capital to shareholders in the form of a stock repurchase. We will only be able to communicate the exact nature, quantum, and timing of the repurchase program when we have received the proceeds from the asset disposals mentioned before. In preparation for this corporate activity, which is likely to commence in Q4, our board replenished our share repurchase authorization to $100 million this week. Regarding the remaining legal matters with SASSA, both our claim and the counterclaim are at various stages within the respective courts. To conclude, we are excited about the new products, markets, and business models we have developed and look forward to focusing on execution, rather than being tied up with legacy and non-productive issues we have endured over the past 18 months.

Thank you, Herman. And good day to everybody. I'll discuss the key results and trends within our operating segments for the second quarter of fiscal 2020 compared to a year ago as well as compared to quarter one 2020 as sequential comparisons are more relevant today, given the changes endured by the group over the past year. For the second quarter of 2020, our average rand-dollar exchange rate was ZAR 14.60 compared to ZAR 14.32 a year ago and ZAR 14.75 in the first quarter. We recorded a fundamental loss per share of $0.10 this quarter compared to the $0.90 fundamental loss per share a year ago, which includes a substantial impairment of our loan book as well as a contribution from DNI. This compares to a fundamental loss per share in the first quarter of $0.02. This deterioration in performance against the previous quarter was mainly due to a reduction in ad hoc revenues in the South African business. By segment, South African transaction and processing reported revenue of $20.4 million in the second quarter of 2020, down 6% compared with the second quarter of 2019, but up 4% from the first quarter of 2020 on a constant currency basis. The year-over-year decrease is primarily due to the combination of the SASSA contract, including those with SASSA Grindrod cards, and, to a lesser extent, the reduction in the number of EPE accounts. The decreases in revenue and the resulting impact on operating income were partially offset by a higher transaction revenue as a result of increased usage of our ATMs. Our operating margin for the second quarter of 2020 and 2019 was negative 14.6% and negative 53.8%, compared to a negative 17.4% in the first quarter of 2020. The improvement in the operating margin in the latest quarter is encouraging, but we remain subscale at this level of accounts, and the focus is on lifting revenue. International transaction processing generated revenue of $34.4 million in the second quarter of 2020, which was down 10% compared to the second quarter of 2019 and flat compared to the first quarter of 2020 in US dollar terms. The year-over-year decrease in revenue in the segment was contributed equally by the Korean operations and IPG. Segment operating margin improved to 8.2% in the second quarter of 2020 compared to the negative 10.6% a year ago, but down from the 11.1% recorded in the first quarter. For the second quarter of 2020, KSNET revenue in Korean won was down 1% year-over-year to $33.5 million and consistent with the first quarter of 2020. EBITDA margins were the same as the second quarter last year at around 22%, although slightly lower than what was achieved in the first quarter. KSNET's cash conversion remains strong, with limited need for capital investment in what is now a relatively capital-lite business. With the expected closing of the disposal transaction, we will stop consolidating KSNET from March 2020. In respect to the transaction, it is worth covering off some of the tax effects. We will be required to pay withholding taxes of approximately $19 million on closing the transaction, but these should be recoverable over a period of 6 to 12 months. In addition, we have a US tax liability arising from the disposal, which we currently estimate at between $15 million and $21 million. We will also incur a transaction-related cost of around $7 million in respect of the disposal. Returning to operational performance, IPG's legacy businesses have continued to decline. Once we roll out our new products, we expect the business to return to growth and pare its current losses. IPG losses also include approximately $100,000 of development costs in respect of the crypto asset storage product incurred during Q2, on top of the $1.7 million invested prior to this quarter, meaning development costs will start to reduce during fiscal 2020 once we launch the product. Financial inclusion and applied technologies generated revenue of $22 million in the second quarter of 2020, which was up 15% compared with the same period last year, but 27% lower compared to the first quarter of 2020. The increase in revenue over the prior fiscal year is primarily due to higher accountancy income, though this will reduce over time and needs to be replaced with new customer accounts. Ad hoc sales reduced from $8 million in the previous quarter to around $3 million, comprising airtime sales and higher-than-normal hardware sales. In addition, fee income reduced by approximately $2 million against the previous quarter as non-recurring fee sources diminished. Operating margin was a negative 4% compared to negative 142% in the same period last year and 5% in quarter one of 2020. The operating margin in this business is heavily influenced by the revenue level as there is a significant fixed cost component in this segment, primarily related to the costs incurred to operate our financial services branch infrastructure. Active EPE accounts remained fairly steady through the first quarter. With a stable EPE base, our lending and insurance businesses have also returned to more normalized operating performance levels. Our new Finbond-sponsored products have grown over the last quarter and the acceleration of this growth is critical for the South African operation. Our net loan book increased by about ZAR 25 million or 7% over the quarter and default rates remain in line with the historical levels seen prior to the loss of our customers last year. Our new variable loan products are proving popular with the existing customer base and we need to expand the take-up of this product into new customers for the group. Our micro insurance policyholders have also remained largely flat at around 220,000 over the last three quarters, and we are progressing in this to expand the distribution channels, though with limited success to date. Our corporate expenses in the second quarter of 2020 were slightly higher than the first quarter. They were also slightly higher than the equivalent quarter last year due to higher advisor fees related to some of our strategic initiatives, but this is offset by lower acquired intangible asset amortization following the deconsolidation of DNI and the fact that IPG's acquired intangible assets are now fully amortized. We continue to assess the fair value of our investment in Cell C at a zero value. We do not see any likelihood of increasing that fair value until the recapitalization has been completed. Cell C itself is seeing some benefits from an increasing focus on the core operations, but needs to complete the recapitalization to create a sustainable business. We're continuing to provide support to the management team and are working on providing access to our distribution network for Cell C's benefit. We recognized income from equity accounted investments of $0.5 million during the second quarter of 2020 compared to a loss of $1.3 million in the same period last year. Within that amount, we saw a contribution of $0.4 million from our 30% investment in DNI, a business that was consolidated in the equivalent period last year. Bank Frick's contribution lifted in the quarter, but its near-term profitability continues to be impacted by its investment in people to expand its operations. We expect to see a stronger performance in the next fiscal year as some of the investments start to deliver, but their earnings will move into the group's statement of operations once the exercise of the option closes. Finbond did not contribute to earnings in the quarter as they only report earnings in our first and fourth quarters. We expect the contribution from our equity-accounted investments to be positive on an annual basis as it is impacted by the timing of reported results by our various investments. At December 31, 2019, our unrestricted cash was approximately $50.7 million compared to $46.1 million at the end of June. Setting these amounts off against short-term credit facilities of $13.9 million and $9.5 million respectively means our net unrestricted cash increased marginally from $36.6 million to $36.8 million. However, this cash position was distorted by the early settlement of the January micro loan repayments of approximately $8 million, meaning the underlying cash balance was approximately $28.5 million. The decrease in our cash balances was lower in this quarter than we experienced in the last quarter as some investment in working capital reversed and largely reflects the impact of the current operating performance. Adjusting from the loan book cash flows, there was a $4 million outflow from operating activities which includes a $2 million release from working capital. Capital expenditures in the quarter of $0.8 million was well below all the comparative periods, but is not expected to change significantly going forward as capital expenditure is largely limited to replacement. We had short-term banking facilities available to us in various territories of $32.2 million at December 31, 2019, $13.9 million of which have been utilized. This excludes the facilities used to fund the ATMs. As of December 31, 2019, we had restricted cash of $84.4 million and associated short-term facilities utilization of $84.4 million. We have in place short-term credit facilities of ZAR 1.45 billion or $103.2 million specifically to fund our ATMs in South Africa and represented cash drawn under these facilities and in the processing system as restricted cash on the balance sheet. The only debt on the balance sheet of $4.1 million relates to the funding of Cell C airtime purchases, which we expect to be able to settle once Cell C's recapitalization is complete or under the terms of our borrowing arrangements. This has reduced from $14.5 million at the end of last quarter as the proceeds from the first disposal were required to be used to partially settle these borrowings. As Herman has discussed, the sale of our Korean operations will release significant capital into the business, allowing us to settle all borrowings, reinvest in our businesses that have been starved of liquidity over the last 12 months, and return capital to shareholders. Our second-quarter 2020 tax expense was $1.7 million compared to a tax benefit of $4.4 million in Q2 2019. Our effective tax rate continues to be impacted by the losses incurred by certain South African businesses, as we have effectively not recorded a deferred tax asset benefit related to these net operating losses. Our effective tax rate will likely continue to be distorted by the losses incurred by certain of our businesses. Our weighted average share count has remained relatively constant at 56.6 million shares through quarter two 2020. Given the timing of our various corporate actions and availability of liquidity as well as certain pending European regulatory approvals, there are a number of moving parts in our business this year. Using the same assumption of a constant currency base of ZAR 14.27 to the dollar, we believe fiscal 2020 adjusted EBITDA is likely to be a loss of approximately $3 million, a decrease from my previous guidance of $16 million profit. This decrease is primarily due to an $11 million reduction related to foregone contributions as a result of the sale of KSNET and FIHRST, as well as an $8 million negative impact related to the delayed liquidity injection in South Africa due to the timing of our asset realizations and IPG's inability to launch its new product due to dependencies on Visa's certification. Our focus following the injection of liquidity during the fourth quarter of 2020 will be to drive new account growth and financial services in South Africa and commence with the scaling up of our new initiatives in Europe, returning the group to a positive adjusted EBITDA position in fiscal 2021. We can now open up the call for Q&A.

Thank you. We have a question from Scott Buck of B. Riley. Please go ahead.

Yeah. Good morning, guys. I'm curious, in the 2020 adjusted EBITDA guide, whether or not there's any contribution from Bank Frick in that $3 million loss number?

No. We haven't incorporated any Bank Frick contribution in that guidance. We'll bring that in once the deal effectively closes.

Okay. But you will be consolidating results beginning in the June quarter, I guess?

Yeah, that's right. So, expect it to close in April. So, from April onwards.

Yeah.

Okay, perfect. And then, second, can you remind us of what returns have looked like historically in the core South African business, maybe when you were at kind of a 3 million active account level?

Scott, it depends across which products and businesses you measure the total returns. I guess the easiest way for us to outline the revenues and the returns is to look at it on a per customer basis. The average sort of revenue realized from, let's say, margin from our South African customers and cardholders, obviously excluding the old pension welfare distribution component, is focused on the provision of a bank account, transactional services, loans, insurance products, etc., across the entire base. We would anticipate probably around ZAR 25 to ZAR 50 contribution from each one of our cardholders. The margin, obviously, increases exponentially with the amount of clients that are increased because the cost base is relatively fixed as far as the South African core business is concerned. If you look at the 3 million people we had roughly two years ago, I think the revenues at that point was approximately $250 million. That, obviously, excludes KSNET and the SASSA business. EBITDA probably in the region of $50 million on that number. So, roughly a margin of 20%.

Great, that's really helpful. Third, what gives you confidence that without having the SASSA contract as kind of a distribution feeder that you'll be able to grow the account base from just over a million now to 2 million to 3 million over time?

It's purely our distribution network that we haven't scaled down as a result of the loss of that contract. So, we have retained – in fact, we've grown our financial services branch infrastructure. We have also deployed semi-portable branches through the use of customized containers. Combining this with the Finbond branch infrastructure, if we look at physical brick-and-mortar branches, we are just between 700 and 800. These are mainly distributed in the rural and semi-rural areas, which in the South African context is fairly unique and gives us access to a part of the market that few of the other banks or our competitors actually service. The second thing is that we have the technology enabling us to operate in these rural and deep rural areas offline when required. We also have the experience of having serviced our customer base for the last 20 years, giving us a unique advantage. Finally, when you look at the product slate that we offer in terms of bank accounts, functionality, and pricing, combined with the financial services specifically designed for our target market, we know through regular benchmarking that we are still by far the cheapest product set on offer to that customer base. These factors provide me with the confidence that we'll be able to grow this business.

Super. I appreciate the color there. Last one from me. If I'm doing my math right, it looks like you guys should have roughly $160 million or so. If all the proceeds work out with DNI and you stick to the investment or capital allocation schedule that you've laid out, how much cash do you need on the balance sheet to run the business? What I'm really asking is, how much of that $160 million is actually available for repurchases?

I think it's – great question, obviously. The $160 million is also a factor of the combination of the KSNET and the DNI proceeds. Net 1 historically has been a business that is more comfortable having a net cash position and a safety cushion to grow specifically the working capital side of things when it comes to the growing of the book, etc. At this stage, we don't foresee any specific need for further meaningful material acquisitions. Most of our businesses are CapEx lite. Or the CapEx that we require has been invested. We would be comfortable with a cash buffer between $30 million to $50 million to grow any of our initiatives over time. At the same time, we obviously have to assume that we've extinguished all of the debt that remains within the group, which is not a material number but something we will also be attending to. So, we've set up the repurchase limit up to $100 million. As we realize proceeds from the various investments, I hope in the early part of Q4, we will provide more color on the exact quantum and nature of the repurchase program.

Great. I appreciate the time today, guys.

Thank you, Scott.

We have a question from Bill Gordon from Gordon Capital. Please go ahead, sir.

When we complete the Bank Frick deal, what do you see the prospects are for Bank Frick, Visa, and the other payments?

The answer is that we will become, as Net 1, a principal member through Bank Frick of both Visa and MasterCard. We will have unfettered access as a principal member to both the issuing and acquiring licenses. That enables us to price our products and offerings to merchants specifically for acquiring at a level competitive to those offered by our competitors. This compared to a situation where we need to leverage other third-party financial institutions, where you are provided with a buy rate and you still have to markup your offering from that buy rate. For us, that is one of the key important and differentiating matters. It also allows us to launch all of our new technologies that we've been developing over the last two years, ranging from instant onboarding to virtual bank account issuance in a fully regulated environment within the EEA. Finally, the products that we've developed for Blockchain and virtual financial assets side, we will be able to offer through a bank that is a member of the group, which is widely regarded as the leader in the European space within the Blockchain and virtual financial asset space. So, that, in a nutshell, is the benefits we see – the immediate benefits of completing the transaction.

And how do you see DNI working now?

We granted the option. It expires on 30 March. The process – we granted the option effectively to the management team of DNI, and they are very advanced in finding institutional investors interested in acquiring our 30% stake. The process is relatively advanced and we have no reason to believe that the option will not be completed by March 30.

We have no further questions. Ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect your lines.