Lesaka Technologies Inc Q4 FY2022 Earnings Call

Hello everyone, and welcome to the Lesaka Fiscal Fourth Quarter and Year-End 2022 Earnings Webcast and Conference Call. Additionally, the company filed its Form 10-K after the U.S. market closed on Friday, September 9, 2022, which is also available on our IR site. As a reminder, during the 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. We analyze our results of operations and our press release in Rand to assist 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. I would now like to turn it over to Chris Meyer, Group CEO.

Thank you, Dora. Good morning, good afternoon, and welcome to our fourth quarter and fiscal year-end 2022 earnings webcast and conference call. Taking a quick look at today's agenda, I will start with a brief business overview and will also share a few performance highlights for our fiscal year 2022. Steve will provide an update on our Merchant Business and the integration of the Connect Group. Lincoln will focus on the ongoing progress we've made in transforming our Consumer Business. And Naeem will present the audited consolidated performance of the group for the 12-months ended June 30, 2022 and the three months for the quarter ended June 30, 2022. I will then conclude the results presentation with a few thoughts on the outlook for Lesaka, before we open up for Q&A, where we would obviously welcome any questions you may have. So as I reflect on our overall performance over the past four quarters, I want to recognize and thank each and every person in the Lesaka family who has remained laser focused on executing the key strategic priorities that we are committed to as a collective. We have moved a long way over the past 12 months and the changes have been profound, they've been bold, sometimes difficult, but undoubtedly transformational as we've laid the foundation for establishing a leading fintech focused on providing innovative digital solutions to merchants and consumers in Southern Africa. So, as Lesaka, our core purpose is to improve people's lives by bringing financial inclusion to South Africa's underserved consumers by helping small businesses access the financial services they need to prosper. And we achieve this through our ability to efficiently digitize the last mile of financial inclusion and by providing a full service fintech platform across cash and digital, serving the needs of both, while also facilitating the secular shift to digital that is currently taking place. So, there are real challenges to delivering financial inclusion and digitization in South Africa. And some of this is a product of our history and is manifested in a deep distrust in and a lack of understanding of cash alternatives. This is driven by low levels of financial literacy in our country and adding to this challenge are the relatively high connectivity costs in South Africa around airtime and data, which are expensive and price commodities, as well as smartphone penetration, which remains relatively low where many South Africans still use older style feature phones. Taken together, this all means that although over 80% of South Africans may have a bank account, many treat them as post boxes, withdrawing their money in one transaction. This has a real implication for both merchants and consumers. On the merchant side, less than 8% of merchants have access to formal credit and less than 4% of informal merchants can accept digital payments. For consumers, approximately 20% of South African consumers in LSM 1-6, which are our lower income groups, have access to credit and savings. Around 90% of the approximately 12 million permanent grant recipients require immediate cash withdrawal of their grant. These sources of friction and challenges present a significant market opportunity for Lesaka to provide innovative solutions to both merchants and consumers, and more importantly, to facilitate wider financial inclusion and digitization. Our dual-sided financial ecosystem has two overlapping segments, merchants and consumers. In our merchant business, we serve over 50,000 micro and small businesses with an offering that covers cash digitization, card acquiring, working capital, value-added services or VAS, bill payment, and supplier payments. In our merchant enterprise business, we operate one of the largest non-bank financial switches in the country and we provide bill payment solutions via most of the large retailers across the country. We also distribute and service POS devices and manufacture and distribute SIM cards. In our consumer business, where the focus is on the lower income groups in South Africa many of whom, as I said, rely on social grants, we serve just over 1.1 million customers and our offering covers banking, credits, and insurance. It is important to recognize that many of our merchants and consumers operate in the same space, which gives us the opportunity to create a mutually reinforcing business model that incentivizes and rewards both the merchants and the consumers for interacting in our dual-sided financial ecosystem. Our Lesaka platform serves micro and small merchants together with the consumers who typically shop in their stores. It is within this context that we think about our target addressable markets or TAM. First on the Merchant side, we divide the TAM into the informal and the formal sector. The informal sector is a large and hearty cash-driven economy. We estimate over 1.4 million informal merchants in our target market, which is largely unpenetrated by the traditional banks. Although we have a leading proposition, our 45,000 informal merchants represent less than 4% market share, which presents a significant and ongoing growth opportunity for Lesaka. In the formal merchant space, we estimate around 700,000 merchants in our target market and we currently serve over 6,500 merchants, mainly by having one of our smart vaults in a store or a card acceptance device in the business. The formal market is more competitive, but our leading cash digitization offering, which essentially places the bank in the merchant store means we are highly embedded in their business. As a result, we are very well placed to grow our offering through innovating and solving pain points such as with our merchant offering, Capital Connect. On the consumer side, the TAM is 26 million people in the lower LSM's 1-6, which really represent the lower income groups in our country. Within that, we estimate approximately 12 million people reliant on permanent grants. Our strategy is to build our ecosystem wherever our customers are located, often in townships and the rural areas of South Africa, creating points of presence that are convenient and accessible. Lesaka has over 58,500 touch points with our consumer and merchant customers in the form of branches, retailer pay points, ATMs, satellite kiosks, and merchant devices. In setting our vision for Lesaka, we looked across the globe at companies such as PayPal and observed that despite South Africa displaying many of the same characteristics as countries such as Brazil and Egypt, there is no dual-sided financial ecosystem for merchants and consumers akin to the likes of a PagSeguro. Today, with the combination of two complementary fintech platforms, we have created a unique dual-sided ecosystem in Southern Africa, powered by proprietary technology and coupled with proprietary data and insights, a platform focused on cash and digitization, serving the needs of both, facilitating the secular shift to digital taking place. Essentially, Lesaka is a self-reinforcing business model whereby the ecosystem creates the conditions for us to continuously spot our customer pain points and address their challenges by designing innovative products and solutions, which in turn allows us to deepen our customer relationships, incentivize, and reward loyalty, ultimately creating a flywheel effect in terms of growing our ecosystem and generating improved returns for our business and for our customers' businesses. A recent example of innovation and strategic distribution is the pilot we are running to enable our Kazang merchants to take deposits and process withdrawals for our consumer customers. This means that our consumers can walk into a Kazang store and withdraw their grant at the merchants' till their pay point, which is highly convenient for the consumer and has obvious benefits for the merchant in terms of increased spend in-store. Turning to the synergies we expect to capture from creating our unique dual-sided ecosystem. Both the merchant and consumer businesses have large addressable markets and significant growth opportunities in their own right. However, taken together, we have the opportunity to develop the self-reinforcing ecosystem I've spoken about, creating synergies and further opportunities to accelerate growth and expand Lesaka's value proposition. It's important to remind everyone that the Connect acquisition is about bringing together two complementary and mutually reinforcing businesses. This is a growth story, more so than a cost optimization opportunity. Connect fills the gaps in our MSME offering and completes the end-to-end financial ecosystem I've been describing. Our merchant and consumer businesses should both scale and grow in their target markets, benefiting from the synergies and opportunities created by this dual-sided ecosystem. We've taken a number of important synergistic steps already, for example, by merging EasyPay and Kazang under a single leadership team, delivering positive results. One being the launch of our EasyPay money market, which is in pilot stage to become our VAS offering in the formal market, similar to Kazang in the informal market. We are also piloting cash deposit and withdrawal functionality with our Kazang merchants as I previously mentioned. Additionally, we are combining our cash vault and ATM businesses, creating a complete cash solution proposition for key merchants. We believe this will create exciting synergies as we look to develop our merchant partnership model on the consumer side of the business. Moving to the Consumer business. We have reinvented our distribution model with a focus on building in-store partnerships with merchants, both national and independent players, bringing our consumer proposition to where our customers want to be, driving footfall into the merchant stores. Our mindset is to shift from traditional bricks and mortar towards install kiosks wherever possible. Looking at our group financial and operational highlights for fiscal year 2022 and the fourth quarter, we have successfully executed on our objectives for the year, demonstrated by the closing of the Connect acquisition and the progress made on the consumer turnaround. We reported total revenue of $223 million for the year, which increased from 131 million in the prior year. This is driven by the inclusion of the Connect Group for part of the fourth quarter, April 14, 2022, to June 30, 2022. The Connect Group added $86 million to the group's revenue, while our existing merchant business grew revenues by 13%. Group segment adjusted EBITDA improved significantly reducing from a $32 million loss in 2021 to a $5 million loss this year. On a quarterly basis, we reported a segment adjusted EBITDA profit of $6 million for Q4, compared to a $7 million loss in Q4 of FY 2021. This evidence of substantial progress in our turnaround strategy. Segment adjusted merchant EBITDA for FY 2022 improved to an $11 million profit, underpinned by the growth in our existing merchant business and the contribution made by Connect. Segment adjusted consumer EBITDA improved to a reduced loss of $16 million for the year, positively impacted by cost optimization through a rightsizing of operations via Project Spring, which we've spoken about previously. Project Spring has delivered cost savings in excess of our original guidance of $13.7 million realized in the financial year to June 30, 2022, translating to approximately $19.7 million in savings on an annualized basis. Our active EasyPay everywhere account numbers grew 11% during the year, ending with just over 1.1 million active accounts. We've invested in our sales and distribution network in terms of people, systems, and overall proposition, anticipating continued growth in new account activations and cross-selling benefits in the new financial year. It is important to note that FY 2022 includes the Connect Group from April 14, 2022, and thus does not reflect a full quarter of performance. With that, I'd like to turn over to Steve to provide an update on the Merchant Business, as well as the progress made on the integration of the Connect Group.

Thank you, Chris. As highlighted in our Q3 and Connect Group presentations recently where we described our products in detail, Lesaka today has a comprehensive offering to SME merchants in South Africa and now has a distinct dual-sided ecosystem driving financial inclusion and serving both merchants and consumers. We also have assets and technology in the enterprise space, which we are leveraging for growth across the Merchant segment. The Connect Group was an obvious, attractive, and transformative acquisition for Lesaka, due to the alignment of vision and the complementary product and customer sets. It is also a business unit that has managed to achieve significant growth and penetration in a fast-growing and underserved sector. We are incredibly pleased that the business has continued to grow in line with expectations and in sync with historical achievements. The initial integration work between the pre-existing merchant business and Connect has been encouraging and we expect synergies to exceed the expectations we had going into the acquisition. There are some exciting developments we are working on, which will positively impact customer acquisition and operational efficiencies, as well as improve value for our merchants. In our VAS and bill payments business, we have managed to grow our devices in the field to over 51,000 at year-end, representing a 36% year-on-year increase. Our Vault business, which effectively puts the bank in the merchant store, has grown by 13% this year to approximately 4,100 sites. Historically, we've been placing our Vaults into formal SME merchant stores, but we are now also penetrating the informal sector under the Kazang Connect Vault brand. This has provided significant operational and risk benefits for our Kazang informal merchant customer base. In our card acquiring business, we saw excellent growth rates during the year as we extend our offering into the informal market. The majority of our Kazang VAS and Bill Payment Devices are card acquiring enabled. These devices need to be activated through an onboarding process with the merchants. The 51,000 devices in the field have presented us with a significant growth opportunity. Actual card-enabled POS devices increased by over 100% this year to 22,600 at year-end. Our innovative offering providing merchants quick access to working capital continued to grow and showed good growth where we dispersed over $40 million during the year, a 49% year-on-year increase. We continue to anticipate strong growth in this arena. As evident from the above figures, the merchant business has delivered strong growth over the past year and with all the fundamentals remaining intact, we expect this performance to continue through FY 2023. Emphasizing the point already made, the Connect acquisition was an essential building block in expanding and transforming Lesaka’s merchant offering to what it is today. It has served the purpose of introducing new product services and customers, establishing Lesaka as a leading player in South Africa's merchant sector. We are excited about the opportunities this acquisition presents as it paves the way to scale and effectively deliver on Lesaka’s vision of being a key consolidator and driver of financial inclusion through a dual-sided fintech platform. It's important to note that going forward, the merchant will be presented as one integrated business. It's just for this quarter that we are showing separately the revenue drivers of the pre-existing merchant business and then updating you on how Connect performed since we last reported based on the audited results to Feb 2022. Turning to Slide 15, you can see that the pre-existing merchant business delivered strong revenue growth in the fourth quarter of 2022. This slide consolidates the performance of Lesaka’s merchant business post-acquisition of Connect. The pre-existing merchant business reported total revenue of 19.5 million, growing 35% on a constant currency basis to ZAR304 million, compared to Q4 2021. I will explain the revenue drivers for the pre-existing business in more detail on the slide that follows. Connect contributed 86.2 million in revenue in the fourth quarter, bringing the total revenue for Q4 to 105.7 million, significantly higher than the fourth quarter of 2021. Similarly, segment adjusted EBITDA for the merchant business was ZAR114 million with EBITDA from the pre-existing merchant business for Q4 increasing from ZAR4 million in Q4 2021 to ZAR24 million in Q4 2022; and Connect contributing ZAR90 million for the 2.5 months that Connect was consolidated into the group results for Q4. The pre-existing merchant business grew revenue by 35% on a constant currency basis in Q4 2022, compared to Q4 2021. This growth was primarily driven by key product areas, particularly the increase in our point of sale devices sold and terminals rented. In our EasyPay business, we saw an increase in VAS value processed with prepaid electricity growth of 9% and prepaid airtime significantly growing at greater than 100%. Our bill payment business volumes increased by 13%. The Connect Group presented to the market on the 1st of November 2021 and again on the 7th of July 2022, and you can refer to the Lesaka Investor Relations website for these presentations. Prior to the acquisition, Connect had a 28th of February year-end and its performance was presented up to the 28th of February 2022. In this Connect presentation, we demonstrated strong revenue performance based on a five-year compounded annual growth rate of 39% and a five-year compounded EBITDA growth of 41%. This slide provides an update on Connect's performance since we last reported on its audited results to the market. This business continues to present a strong growth trajectory supported by a stellar historical performance. The cash conversion rate is strong, and the business remains well-positioned for growth. Throughput is one of the fundamental measures of how this business is performing and supports ongoing growth. We have set out the year-on-year comparative cumulative throughput of Connect's offerings for the four-month period from March 2022 to the end of June 2022. Over this period, Kazang’s cumulative transactional throughput grew 29% to ZAR7.5 billion. This continued momentum demonstrates the value we bring to our informal merchants through our offering. We saw robust growth in our cash settlements, which grew 14% to 35.5 billion. Our card cumulative transactional throughput had exceptional growth of 116% to 2.6 billion. This is due to further traction in penetrating the informal market through Kazang Pay. We believe there's still very strong growth potential in this product. Finally, our Capital Connect solution continues to see demand with the loan capital we advanced growing by 41% to 223 million in the four months ended June 2022. Similarly, the loan book size grew 54% to ZAR229 million. In conclusion, the results reported for the Merchant Business, for the fourth quarter of 2022 are indicative of a great growth trajectory. We are excited about the growth prospects of our Merchant Business, of which Connect is the foundation and has a proven and profitable business model and track record. The integration process of Connect and the pre-existing merchant business has been very encouraging with tangible results already being achieved. We now have a differentiated merchant offering that is well-positioned for growth, unlocking the value for all stakeholders. This, coupled with synergistic opportunities via Lesaka’s dual-sided ecosystem, already outlined by Chris earlier in his presentation, further accelerates Lesaka’s growth potential. I'd like now to hand over to Lincoln Mali, CEO of Southern Africa, to discuss the Consumer Business.

Thank you, Steve, and good day everyone. Moving on to our Consumer Segment. The fourth quarter and indeed the last 12 months have been a very busy time for everyone, and we continue to make great progress on several fronts. On the consumer side, we currently provide transactional banking, short-term loans, and a digital wallet, as well as insurance and value-added services to underserved consumers in South Africa, aligning with our purpose of improving people's lives and increasing financial inclusion. We currently have a customer base of 1.14 million active EPE accounts and approximately 200,000 policyholders of our Smart Life insurance product, which has a significantly high cash collection rate of 98% and this has remained consistent quarter-after-quarter. Our loan book size as of June 30, 2022, was $21 million with a loss ratio of less than 4%. Our low loss rate and high cash collection rate in insurance emphasize our compelling value proposition in offering fit-for-purpose solutions to millions of consumers desperately needing financial services. Given our passion for financial inclusion, we realized that in order to design products and services that meet our customers' needs, it is very important to gain a deeper understanding of our customers, their spending and saving trends, why they choose us, and why they leave us. It's been a year of learnings, positioning, and testing to understand our customers better. Our refined value proposition is affordable and compelling. We are inspired by what we've learned and encouraged that market research conducted in this regard solidified our understanding of this market. Practically, we have focused our efforts into understanding what all our consumers are looking for, the best channel to engage them, and what competitors are offering, where we can disrupt this space by designing the right innovative products that truly meet their needs. Utilizing the knowledge we gained and the investments we've made to improve data analytics capabilities, we've developed effective marketing campaigns and incentives to drive customer growth. We've also streamlined our onboarding processes, including tech-enabled mobile sign-ups. These efforts are beginning to yield expected results. We made great progress towards implementing our revised consumer strategy focused on product and efficient distribution channels. I continue to be encouraged by the continued progress being made in the turnaround of our consumer business. We achieved significant cost savings while growing our active account base and maintaining transactional volumes and revenues. We saw good momentum in the rate of new account openings, resulting in an 11.4% increase in total EPE consumer accounts for fiscal year 2022, driven by performance-driven sales initiatives and our refined customer-centric focus mentioned earlier. We achieved approximately 59,000 EP account activations in Q4 of 2022, and our churn rate for the fourth quarter of 2022 was well below 5%, evidence in action in our focused consumer strategy. Churn predominantly relates to the impact of reactivations and deactivations in the SRD grant space. It is important to highlight that we apply a rigorous approach in our measurement criteria for an active account. We only classify an account as active if there was activity on that account during that specific month. We maintained our ARPU within our target range reporting $4.74 for FY 2022, mostly driven by our stable lending book. However, this result was slightly lower than expected given the impact of onboarding SRD grant recipients, as they do not qualify for our lending product. We remain committed to being a prominent provider in the grant recipient space, developing a value proposition that delivers competitive products and drives higher ARPU. The last lever in retaining the consumer business to profitability is cost optimization and restructuring the operations of the consumer business in 2022. A definite financial highlight for us in the consumer segment was progress made in our cost-cutting efforts under Project Spring. These initiatives delivered cost savings exceeding original expectations set out at the start of the year, with approximately $19.7 million in costs removed from the consumer business cost base on an annualized basis, of which $13.7 million was realized in the year ended June 30, 2022. To provide some color on the cost optimization outcomes achieved in FY 2022, this included rightsizing our staff complement. Encouragingly, this performance optimization is yielding better results and higher productivity. In optimizing our distribution model, we transformed to a more sales-focused organization; we sold more than 200 vehicles, decommissioned over 350 ATMs, and relocated 56% of our ATMs to retailers, being more productive locations, while closing approximately 30 branches. This graph on the right shows the impact on the cost-saving initiatives over the past 12 months, resulting in a significant contraction in the operating expense line, which includes staff costs in the consumer segment and a very encouraging trend in our cost-to-income ratio at 58% in Q4 2022, compared to over 100% in Q4 2021. While we have achieved a great deal in fiscal year 2022, I want to remind everyone that we're still early in our transformation journey and there's still a lot of work to be done. We've taken stringent measures to grow our active EPE consumers, and now with the right team in place, the right products, and having right-sized the business, we will focus our efforts on reaching breakeven in the consumer business by the second quarter of this financial year 2023. I will now hand over to Naeem, our Group CFO, to discuss our financial performance.

Thank you, Lincoln. As we close out the fiscal year 2022, I continue to be very pleased with our overall performance and the progress made over the past three quarters and what has been achieved in the fourth quarter with the ongoing positive trends in revenue, cost, and EBITDA being reported. With the close of the Connect Group acquisition on April 14, I’m delighted to provide fully audited consolidated financials for the Lesaka Group that includes Connect's performance in the fourth quarter. We achieved a consolidated Group revenue of $222.6 million for the year, with $86.2 million related to the revenue from Connect Group brought in for the fourth quarter. Positive turnaround of adjusted EBITDA loss of $20.7 million compared to an EBITDA loss for the financial year 2021 of $49.5 million, resulting in a $29 million turnaround. We released the pro forma Connect Group numbers in June for the period ending February 28, 2022. The consolidated Lesaka Group performance includes 12 months of performance for Lesaka, excluding Connect Group, including Connect Group for May and June and 17 days of April from April 14. I will now walk you through the details of the combined entity’s financial performance and provide more detail on the financial contribution of the Connect Group on our business. The fourth quarter is characterized by strong performance again in our Merchant Business, both on revenue and profitability, and the continued focus on the turnaround of our consumer segment consistently showing improvements. Total combined revenue for the quarter was $121.8 million. This includes $86.2 million contribution from Connect. We achieved a segment adjusted fourth quarter EBITDA profit of $6.1 million compared to an EBITDA loss of $6.7 million in Q4 of 2021, and a normalized EBITDA profit of $1.3 million. This performance is evidence of the significant performance turnaround the group has achieved through the cost reductions in the consumer business and the inclusion of the Connect Group performance. Turning to our business segments. I want to remind everyone that this segmental disclosure was initiated in our fiscal second quarter. We manage our business from a customer-centric perspective and have split it into a B2C Consumer Segment and a B2B Merchant Segment. I will start with the Merchant Segment, which was the main driver of higher revenue and EBITDA numbers for the quarter. Merchant business revenue and segment adjusted EBITDA performance changed transformationally with the inclusion of Connect Group results; we achieved revenue of $105.7 million and a segment adjusted EBITDA profit of $7.4 million. This included $86.2 million of revenue and adjusted EBITDA profit of $5.8 million related to the Connect Group. The Consumer business delivered a segment adjusted EBITDA loss of $1.4 million compared to the EBITDA loss of $6.9 million in Q1 of 2021, mainly coming from a reduction and rightsizing of the consumer cost base. We expect to deliver more than $19 million of cost savings on a full-year basis. We have included the performance of Lesaka pre-Connect consolidation for reference purposes. The consistent turnaround theme was delivered in the fourth quarter again, achieving a normalized EBITDA adjusted for one-off items of $1.3 million in the fourth quarter. This is an improvement compared to the normalized EBITDA loss of $3.1 million in the third quarter, evidencing the continued EBITDA positive evolution. This improvement was achieved mainly through the cost initiatives delivered in the consumer business, higher revenue in the pre-existing merchant business, and contribution from the consolidating of the Connect Group in our fourth quarter. Our operational cash flow utilization has decreased from $63 million in FY 2021 to $26.7 million for FY 2022. From a cash flow perspective, we continue to make improvements with a reduced reliance on our cash reserves to fund operations. This has been achieved through cost reductions and improved revenue. We have a net debt position at the end of the quarter of $103 million. This includes unrestricted cash reserves of $105 million and total debt of $208 million. The acquisition debt of $64 million was provided through a short-term bridge facility due in April 2024. We continue to review our capital structure and work with our bankers and advisers to ensure we achieve an efficient long-term sustainable capital structure for our business. As in the last quarter, we continue to hold our MobiKwik investment at $76 million in line with the last capital raise. Our Cell C investment is held at zero and Finbond investment at $5.8 million. These investments remain non-core. Overall, I'm very pleased with our Q4 achievement and excited about building this positive momentum as we continue to focus on rightsizing our consumer cost base and driving revenue across the organization. Our strategic initiatives are progressing well and delivering positive performance. I would now like to hand over back to Chris, who will address the group's outlook.

Thank you, Naeem. Looking ahead to FY 2023, our principal focus continues to be growing our merchant and consumer customer base. We've set up the overall market opportunity emphasizing the degree of under penetration in our market and the differentiators in our proposition that position us for growth. Our focus is on execution. Alongside client growth, we will develop the merchant-consumer ecosystem by developing incentives and rewards for our customers for transacting in the ecosystem, thereby developing the self-reinforcing business model and flywheel effect that I laid out earlier in this presentation. Thirdly, we will continue to develop new offerings for our clients as we identify and continue to solve for their pain points and needs. This has been a key element of the Connect growth story, focused on a culture of continuous innovation based on data insights. In closing, we wanted to provide some guidance on the near-term performance of the group. We have previously communicated to the market that we would start providing guidance once we had stabilized the consumer business and fully integrated the Connect acquisition; we believe now we can start providing you with high-level guidance of what we expect to see in the new financial year. I mentioned earlier that the group delivered $6 million in segment adjusted EBITDA for the fourth quarter of FY 2022, and we believe that this is a reasonable indicator of the EBITDA run rate that should be achieved in the near term, excluding growth, while noting that the Connect Group was included for 2.5 months of Q4 FY 2022. We saw significant outperformance in our POS sales division. As mentioned earlier, the consumer monthly EBITDA breakeven position is close, and we expect this to occur by the end of Q2 FY 2023. Within that context, Lesaka expects revenue between $130 million and $133 million for the first quarter of fiscal 2023, due September 30, 2022, and total segment adjusted EBITDA of between $6.1 million and $6.5 million for this period. With that, we'd like to turn to the Q&A session to answer your questions. Thank you.

Thank you. First, we will take Raj Sharma from B. Riley. Raj, please unmute yourself and ask your question. Thank you.

Hi, good morning. I wanted to ask you about, just in terms of the guidance, could you clarify the segment EBITDA before corporate – is it – is that before corporate allocations? I think it seems it is – is it hard to predict corporate allocations a quarter ahead?

Thank you for your question. Thanks for being on the floor. Yes. I’m going to ask Naeem to respond to that. Have you got any other questions you want to put to us before Naeem responds? Or should we just take...

Yeah. Sure. Just and also, just the merchant is doing pretty well, if you can talk a little bit about the contribution going forward to the EBITDA between consumer and merchant, that's my next question? And then I'd like to talk about the purpose behind the shelf that was just filed this morning.

Okay. Thank you. Naeem, if you want to take those first two questions, I'll take the last one.

Yes. Hi, Raj. Thank you for the question. So, Raj, we decided to put out the segment adjusted EBITDA as guidance. I mean, the corporate eliminations are fairly fixed and steady because those are the costs that are part of the U.S. consolidation and listing. From a business operations perspective, we felt that the segment adjusted EBITDA most closely reflects the run rate and really reflects the position of the business from a forecast perspective.

Got it. Thank you. And then, just a little bit of the breakdown between consumer and merchant going forward, in terms of the EBITDA performance?

Yes. Look, I think in terms of the forecasted guidance we've given, regarding the consumer business, as Chris has highlighted, we're getting close to a breakeven position. Our long-term view is to have a much more balanced contribution between the consumer and the EBITDA going forward, probably in the range of 70%-30%, but the first goal for us is to deliver on the breakeven and build from there through cost savings and revenue growth.

Yes. Thank you. And so, I just wanted to clarify that the guidance shows higher revenues, but flat EBITDA, given that Connect is going to be three months instead of 2.5, and then you're also seeing progress in cost cutting on the consumer group. Is it fair to assume that EBITDA guidance seems a little conservative?

If I could respond to that, Naeem will probably come in. Raj, what we were trying to convey is that Q4, the $6.1 million, is a reasonable run rate if you adjust for a number of things. We talked about, yes, the Connect Group is not in there for a full period, which would be a positive adjustment, but we also spoke about our POS sales and servicing business having a very strong quarter, which we wouldn't expect to repeat. And there are a few other smaller things. We don't believe it's overly conservative. We think that's the right range to express. If you adjust it by the examples I just gave, we would likely come in slightly below the $6 million, probably closer to the mid-5s.

Got it. Thank you. And then the...

And Raj, your question about the shelf registration, that's just a very standard renewal of an existing shelf. It's the shelf that's always in place for any potential capital issuance. So, nothing untoward or new or different. It comes up every three years or so, and we have to just renew a pre-existing mechanism for calculations.

Got it. Thank you for answering my questions. Great clarity on the results.

Thanks, Raj.

Thank you, Raj. Next, we'll take Jarred Houston from All Weather Capital. Jarred, please unmute yourself and ask your question. Thank you. And Jarred, you just have to unmute yourself?

Hi, guys. Sorry. I just got a couple of questions regarding your selling and administration expenses. So, I noticed that it was quite high. What percentage of your sales is commission-based for new businesses? And what do you expect the trend to be? On top of the commission base, I'm guessing there's because I'm sure that was included in one line item. How do you recognize the commission expense? Is that recognized as a payment, cash outflow to guys once-off to your sales staff and then you recognize it on the books separately over a peer contract period or am I not understanding something here? I hope that makes sense.

Hi, Jarred. I think – and I'll pass on to Steve, just to give a bit more understanding of how the remuneration of the Connect Group is. But largely for the consumer business, there isn't a significant amount of commission. There are incentive and performance targets in place for the sales staff relating to delivery and performance management, but a very small percentage is paid as a commission. It's more incentive per account, which is a fairly small amount, and these are generally one-off amounts that are paid. Broadly speaking, if you're looking at the SG&A or OpEx ratio, the saving is really from the rightsizing of our consumer business and the elimination of a significant amount of cost related to the branch and ATM network that we are now starting to see benefits from, which is reducing costs.

Again, commissions are expensed when a sale is made, so they're not deferred. When a sale is made, individuals are paid their commissions. Right across all the product sets, the commissions are nowhere near the fixed costs of individuals. Hopefully, that answers the question. Generally, commissions would not make up a very big portion of the reward mechanism.

So, I just don't understand.

Just one last point: it would obviously correlate. We've had a very strong – if you remember, we showed you a March to June cumulative performance for the business, and you can see if the sales have ramped quite significantly, the correlative commissions for those sales would have gone up proportionately.

Okay. Now that's fine. I just wanted to understand the commission structure related to new businesses. There might be a lot of sales staff and that might be quite high. But, yeah, that helped a lot.

I do not believe we have any more questions in the queue. I will turn it over to Chris to wrap up.

Great. So, thank you, Dora. Thank you very much. In many ways, it's been a watershed year for us at Lesaka. A lot of change, but we've been proud of what we've achieved over the last 12 months. We remain entirely committed and focused on building the leading fintech platform in South Africa focused on the underserved. Thank you once again, and we look forward to interacting with you all in the future. Thank you.