Business context and reporting period
Lesaka Technologies, Inc. filed this unaudited Form 10-Q for the three months ended September 30, 2023, its first quarter of fiscal 2024. The company operates Consumer and Merchant fintech businesses, primarily in South Africa. Amounts below are U.S. dollars unless stated otherwise.
Key financial metrics
| Metric | Q1 FY2024 | Q1 FY2023 |
|---|---|---|
| Revenue | $136.1 million | $124.8 million |
| Operating income (loss) | $0.2 million | ($4.7 million) |
| Net loss | ($5.7 million) | ($10.7 million) |
| Loss per share, basic and diluted | ($0.09) | ($0.17) |
| Operating cash flow | $3.4 million | ($7.7 million) |
| Capital expenditures | $2.8 million | $4.5 million |
- Revenue increased 9% in U.S. dollars and 19% in South African rand (ZAR). Operating margin improved to 0.2% from (3.7%). Gross margin was not separately stated.
- Group Adjusted EBITDA, a non-GAAP measure, was $8.7 million, up 108% from $4.2 million; in ZAR it rose 126%. Merchant Segment Adjusted EBITDA was $8.1 million versus $7.9 million; Consumer was $2.5 million versus a $1.4 million loss. These measures exclude specified costs and should be considered alongside GAAP results.
- Interest expense increased 22% to $4.9 million. Management attributed the higher net interest charge primarily to higher interest rates and borrowings.
- At September 30, cash and cash equivalents were $35.1 million and restricted cash was $19.9 million, largely for ATM funding. Long-term borrowings were $134.2 million, including $3.6 million current; short-term credit facilities totaled $28.7 million, including $19.8 million restricted to ATM funding. Total current assets were $172.8 million and current liabilities, including settlement obligations, were $109.4 million.
- Total assets were $546.8 million and total liabilities $292.1 million. Goodwill was $133.1 million and net intangible assets $117.6 million.
Material changes versus the prior comparable period
- Revenue growth reflected increased prepaid airtime and other value-added services, transaction fees, insurance and lending revenue; lower POS hardware sales partially offset growth. Airtime sales add substantial revenue but relatively little margin.
- Operating performance improved following Consumer cost reductions and the contribution from Connect. Consumer posted positive Segment Adjusted EBITDA for a fourth consecutive quarter.
- Operating cash flow improved to positive $3.4 million. Investing cash outflow was $13.9 million, including an $11.2 million increase in settlement assets; financing cash flow was positive $7.3 million. Cash, cash equivalents and restricted cash ended at $55.0 million, compared with $93.4 million a year earlier.
- Loss from equity-accounted investments declined to $1.4 million from $2.6 million. The current quarter included a $1.2 million impairment of the Finbond investment.
Outlook, management commentary, risks and unusual items
- Management said revenue was at the upper end of its guidance, but the filing does not provide the guidance range or a full-year earnings forecast. It expects Q2 fiscal 2024 capital spending mainly for POS devices, safe assets, software, ATM infrastructure and branches; $0.7 million of capital commitments were outstanding at quarter-end.
- Merchant activity: Kazang had approximately 77,000 devices deployed, up 34% year over year; card-enabled POS devices reached approximately 46,600, up 68%. Management cited a more selective device-placement approach. Merchant lending disbursements were ZAR 196 million, down 13%; Kazang Pay Advance was suspended while the company considers alternatives, and Capital Connect credit extension was tightened.
- Consumer activity: active EPE transactional accounts exceeded 1.3 million, including more than 1.1 million permanent grant recipients. The consumer loan book reached ZAR 423 million, up 20% year over year, with an approximately 6% annualized portfolio loss ratio. Active insurance policies grew 34% to approximately 359,000, and permanent-customer ARPU exceeded ZAR 83 versus approximately ZAR 74.
- Management described South Africa’s operating environment as challenging, citing elevated interest rates, inflation and unemployment, as well as power cuts. It expects higher interest rates to increase borrowing costs. The company is also exposed to ZAR/USD translation volatility.
- On August 10, 2023, Lesaka agreed to sell its remaining 27.8% Finbond stake for ZAR 64.2 million, subject to regulatory and shareholder approvals and other conditions due by December 31, 2023; otherwise, the agreement lapses. The quarter’s $1.2 million impairment used the agreed sale price to estimate fair value.
- Cell C airtime inventory included $8.5 million subject to resale restrictions. Cell C agreed to repurchase up to ZAR 10 million monthly from October 2023, reduced by Lesaka’s sales; actual sales and any required repurchases depend on market conditions. Lesaka valued its Cell C equity investment at zero.
- Guarantees issued for third parties had a maximum potential payment of ZAR 35.2 million (approximately $1.9 million); no related obligation was recorded. Management said ordinary-course claims were not expected to have a material adverse impact. No off-balance-sheet arrangements were reported.
- Management concluded disclosure controls were effective and reported no material changes in internal control over financial reporting. The filing reported no material changes to the risk factors in the prior annual report.
Important facts for investors to verify
- Whether the Finbond sale conditions were satisfied by the stated deadline and what cash proceeds were ultimately received.
- Whether merchant lending changes, especially the Kazang Pay Advance suspension, affect loan losses, disbursements and future revenue.
- Whether airtime sales or Cell C repurchases resolve the restricted-inventory exposure, and whether the inventory remains recoverable.
- How much borrowing is available and unrestricted after accounting for ATM funding, settlement needs, facility terms and higher South African interest rates.
- Whether improved operating income and cash flow are sustainable, considering foreign-exchange effects, working-capital swings, interest costs and the company’s non-GAAP EBITDA adjustments.
- Whether carrying values and impairment assumptions for Finbond, MobiKwik and other investments remain supportable.