Ross Krige

Ross Krige from Investec posed several questions regarding the merchant division's declining ARPU, its future trend, the timing and impact of cross-sell and product penetration, and the short-term opportunity and penetration goals for acquiring cross-sell. He also asked about the drivers and expected growth rates for consumer lending originations and the estimated marketing costs for the One Lesaka rebrand.

Answer

Lincoln Mali, CEO of Lesaka Technologies, explained that merchant ARPU decline was primarily due to ADP and airtime volumes, expecting stabilization and eventual increase driven by collective product offerings. He clarified that product penetration had marginally increased, with active merchant growth driven by ADP in the community segment, where acquiring is a core cross-sell opportunity. For consumer lending, he attributed growth to increased loan sizes (ZAR 2,000 to ZAR 4,000) and tenure (6 to 9 months), with 40% of originations from medium-term loans and 8% from USSD channels. He highlighted that 78% of originations are to repeat borrowers and 80% to clients over two years, indicating strong credit risk insights and future growth potential. Dan Smith, CFO, added that rebrand costs for the next two quarters are estimated between ZAR 50 million and ZAR 75 million.

Ross Krige from Investec asked several questions regarding Lesaka's merchant division, including the future trend of declining ARPU, the timing for improvement in product penetration and cross-sell, and the short-term opportunity and penetration goals for acquiring cross-sell. He also inquired about the drivers and expected growth rates for consumer lending originations and the estimated cost of the "One Lesaka" rebranding.

Answer

CFO Dan Smith and CEO Lincoln Mali addressed the questions. Mr. Smith stated that merchant ARPU, primarily impacted by ADP and airtime, is expected to stabilize and increase over the next 12 months, driven by collective product offerings. He clarified that merchant product penetration has marginally increased, with active merchant growth in the community segment driven by ADP, employing a "land and expand" strategy. Mr. Smith confirmed acquiring as a core cross-sell opportunity in both community (ADP + acquiring) and corporate (software + acquiring) segments. Mr. Mali detailed consumer lending growth drivers, including increased loan sizes (ZAR 2,000 to ZAR 4,000) and tenure (6 to 9 months) for medium-term loans, which now account for 40% of originations. He also highlighted the success of the digital USSD channel (8% of new loans) and the strong profile of repeat borrowers (78%) and long-term clients (80% over two years), expecting continued growth. Mr. Mali estimated rebranding costs at ZAR 50 million-ZAR 75 million for the next two quarters, excluded from adjusted EBITDA.

Ross Krige from Investec Securities inquired about the sequential performance of the merchant segment's revenue and margin, asking about seasonality, mix effects, and non-recurring costs. He also asked for details on the impact of infrastructure rationalization on the cost base and milestones for cross-selling initiatives within the merchant business.

Answer

Executive Chairman Ali Mazanderani confirmed seasonality and non-core business exits impacting revenue, noting non-recurring costs affected margins but future guidance offers a clearer run rate. Group CFO Dan Smith elaborated on infrastructure rationalization, highlighting duplication removal and office consolidation for significant cost savings. Ali Mazanderani also mentioned that attachment rates for multiple products would be provided in the next quarter, with merchant acquiring and ADP already showing high attachment.

Ross Krige inquired about the sequential performance of the merchant segment's revenue and margin, asking if seasonality, mix effects, or non-core business closures contributed to a quarter-on-quarter decline. He also asked about the impact of infrastructure rationalization on the cost base and any milestones or data points regarding cross-sell within the merchant business.

Answer

Executive Chairman Ali Mazanderani confirmed seasonality and the closure of non-core businesses impacting revenue, and noted non-recurring costs affecting merchant margin. Group CFO Dan Smith added that merchant margins typically oscillate between 19%-25% and advised looking at a blended basis. Ali Mazanderani also stated that cross-sell attachment rates would be provided from the next quarter, noting that most merchants already use more than one product, with high attachment between merchant acquiring and ADP. Dan Smith elaborated on infrastructure rationalization, including consolidating 40 offices to 20, expecting significant cost savings in the short to medium term.

Ross Krige asked about the pending BankZero acquisition, specifically regarding the time and costs associated with its integration, and whether its year-one profitability contribution would be net of all factors or as a standalone entity. He also sought more details on the goodwill impairment, the competitive environment in light of Nedbank's and FirstRand's moves in the SME space, and any beneficial or adverse regulatory developments from the Association of South African Payment Providers.

Answer

Ali Mazanderani, Executive Chairman, stated that BankZero is expected to be profitable or near-profitable upon completion, with quick synergy realization. Steven Heilbron, Head - Mergers, Acquisitions & Corporate Development & Director, confirmed detailed integration plans, noting the small team size and complementary nature of BankZero's platform. Dan Smith, Group CFO & Director, explained goodwill impairment as an accounting adjustment at the cash-generating unit (CGU) level, where some CGUs required write-downs despite overall valuation appreciation. Ali Mazanderani and Steven Heilbron addressed the competitive landscape, emphasizing the market opportunity, Lesaka's differentiated multi-product offering, focus on underserved segments, and unique distribution. Lincoln Mali, CEO - Southern Africa & Director, provided an update on engagements with the Reserve Bank regarding the Banks Act exemption, noting positive sentiment and ongoing discussions on interchange and fintech participation.

Ross Krige asked about the integration timeline and associated costs for the BankZero acquisition, as well as the expectation for its first-year profitability. He also sought more details on the goodwill impairment, specifically the impacted Cash Generating Units (CGUs) and the reasons behind the write-downs. Finally, Krige inquired about any upcoming beneficial or challenging regulatory developments, particularly through the Association of South African Payment Providers.

Answer

Ali Mazanderani (Executive Chairman, Lesaka technologies) stated that BankZero is expected to be profitable or near-profitable upon completion, with quick synergy realization. Steven Heilbron (CEO, Connect Group South Africa) detailed that integration plans are well-developed, involving about 45 people, and the complementary nature of BankZero's platform makes integration straightforward. Dan Smith (Group CFO, Lesaka technologies) explained that goodwill impairment of roughly R300 million resulted from re-evaluating individual CGUs within acquired groups (e.g., Adumo's seven CGUs), where some had lower carrying values than initially ascribed, despite the overall valuation of acquired businesses appreciating. Lincoln Mali (CEO, Lesaka technologies) provided an update on engagements with the Reserve Bank regarding the draft exemption to the Banks Act, noting positive sentiment from fintechs and ongoing discussions on interchange and sector governance.

Ross Krige inquired about the integration timeline and costs for the pending BankZero acquisition, its year-one profitability contribution, details on the goodwill impairment (specifically impacted CGUs and reasons), an update on the competitive environment (including Nedbank's Equoka acquisition and FirstRand's SME success), and any beneficial or adverse regulatory developments from ASAPP engagements.

Answer

Ali Mazanderani (Executive Chairman, Lesaka technologies) stated BankZero is expected to be profitable or near-profitable upon completion, with quick synergy realization. Steven Heilbron (CEO, Connect Group South Africa) confirmed detailed integration plans for the complementary platform and small team. Dan Smith (Group CFO, Lesaka technologies) explained goodwill impairment resulted from re-evaluating individual cash-generating units (CGUs) within acquired groups, leading to write-downs for some (e.g., EPE's unprofitable lines) despite overall appreciation of acquired businesses. Ali Mazanderani and Steven Heilbron acknowledged the competitive landscape as validation of market opportunity, emphasizing Lesaka's differentiated integrated solutions and insurgent market position. Lincoln Mali (CEO, Lesaka technologies) reported positive sentiment from ASAPP members regarding the Reserve Bank's response to feedback on the draft Banks Act exemption, indicating a move towards more competition and innovation.