Lesaka Technologies Inc

NASDAQ:LSAK

Earnings Call Analysis

Lesaka Technologies Reports Strong Q1 Growth and Provides Optimistic Guidance

In Q1 2025, Lesaka Technologies showcased resilience with ZAR 2.6 billion in revenue, a 3% year-over-year increase, and a 12% rise in EBITDA to ZAR 168 million. The Consumer segment thrived, driving a 30% revenue boost, while net revenue surged 16% to ZAR 1.056 billion. Looking ahead, the company aims for FY '25 revenue of ZAR 10-11 billion, with net revenue estimated at ZAR 5.2-5.6 billion, reflecting a potential 35% growth. Additionally, the Merchant division anticipates a 23% growth in adjusted EBITDA【4:14†source】.

Transformative Quarter

Lesaka Technologies has delivered a transformative performance in the first quarter of FY 2025, reaffirming their growth trajectory. The company reported a total revenue of ZAR 2.6 billion, consistent with the midpoint of their guidance. Notably, the EBITDA stood at ZAR 168 million, marking a 12% year-over-year growth and continuing the trend of meeting earnings guidance for nine consecutive quarters. Fundamental earnings also flipped from a loss of ZAR 5 million in Q1 2024 to a profit of ZAR 43 million this quarter.

Introduction of Net Revenue

For the first time, Lesaka introduced a new net revenue metric, defined as gross revenue less the cost of prepaid airtime and commissions. The net revenue for Q1 2025 reached ZAR 1.056 billion, indicating a robust organic growth of 16% from the previous year. This metric aims to provide a clearer representation of top-line growth, moving away from traditional gross profit figures.

Consumer and Merchant Divisions Performance

The Consumer division saw substantial growth, with revenues skyrocketing 30% to ZAR 378 million. The high repeating customer rate in loans and insurance products showcases a sticky annuity base. The Merchant division experienced a more moderate growth of 9% in net revenue due to changes in the sales mix and increased competition. However, adjusted EBITDA decreased slightly by 1% to ZAR 142 million, indicating a strategic reshuffling rather than a downturn in performance.

Strategic Investments and Future Growth

The company remains committed to investing in its platform to improve unit economics and expand its product range. The focus lies heavily on creating an integrated multiproduct offering for both consumers and merchants. By the end of FY 2025, Lesaka expects the Consumer segment to contribute about one-third to the segmented adjusted EBITDA, with the remaining two-thirds from the Business segment.

Upcoming Guidance for FY 2025

Lesaka has reiterated its FY 2025 revenue guidance between ZAR 10 billion and ZAR 11 billion and adjusted EBITDA guidance of ZAR 900 million to ZAR 1 billion. The company projects a 35% year-on-year growth rate at the midpoint of net revenue guidance, estimating ZAR 5.2 billion to ZAR 5.6 billion for the fiscal year.

Cost Management and Debt Strategy

Group costs have risen to ZAR 53 million due to increased staffing and scaling efforts. Lesaka aims to keep these costs around 20% of total segment adjusted EBITDA. The net debt to group adjusted EBITDA ratio stands at 2.6x, slightly above the desired 2.0x, but down from 3.8x a year ago, reflecting ongoing efforts to reduce leverage while maintaining growth.

A Strategic M&A Approach

Lesaka's management highlighted their commitment to strategic mergers and acquisitions (M&A) as a growth lever, particularly following the Adumo acquisition. The aim is to engage in transactions that are capital accretive and to explore opportunities within neighboring geographies, alongside traditional funding methods including debt and equity.

Final Thoughts

As Lesaka positions itself to be a leading fintech platform in Southern Africa, stakeholder engagement remains crucial. The company's strategic focus on integration and innovation underlines its commitment to capturing market share in a rapidly digitizing landscape. The expectation of continued robust growth, coupled with sustainable management of costs and debt, makes Lesaka a potentially rewarding prospect for forward-looking investors.

Earnings Call Transcript 2025-Q1

[Bronwyn Nielsen]

Hello, everyone, and welcome to the Lesaka Technologies Webcast and Conference Call for the First Quarter of Fiscal 2025. 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 [Operator Instructions]. 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. Additionally, Lesaka filed its Form 10-Q after the U.S. market close yesterday, 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-Q 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 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 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. Taking a look at today's agenda, Ali Mazanderani, Chairman of Lesaka, will give an overview of the quarter. Steven Heilbron, Head of Corporate Development, will provide an update on the Merchant division, followed by Lincoln Mali, CEO of Lesaka Southern Africa, who will take us through the Consumer division's performance. Daniel Smith, Group CFO, will present an overview of our financial performance for the 3 months ended September 30, 2024, and provide an update on guidance. Thereafter, we will open the call for Q&A. I'd like to now turn the call over to Ali.

[Ali Zaynalabidin Mazanderani, executive]

Good morning, and good afternoon. FY 2025 is another transformative year for Lesaka. And I'm pleased that in the first quarter, we have delivered on our representations by meeting the midpoint of our guidance at both the revenue and EBITDA level. We achieved revenue of ZAR 2.6 billion and EBITDA of ZAR 168 million and excluding transaction costs from Modumo, operating income of ZAR 30 million compared to ZAR 4 million in Q1 2024 and fundamental earnings of ZAR 43 million from a loss of ZAR 5 million in Q1 2024. We sign posted last quarter that we would introduce in this quarter a new measure to help augment gross revenue as a representation of top line growth. In this respect, we are disclosing for the first time net revenue, which we believe will achieve the objective better than gross profit. Net revenue is defined as gross revenue less the cost of prepaid airtime sold by us and commissions paid to third parties selling our VAS products. Our net revenue for Q1 2025 was ZAR 1.056 billion, representing organic growth of 16% from Q1 2024. This indicates an average EBITDA to net revenue margin across the group of approximately 16% in Q1 2025. 



We see considerable opportunity to increase that margin over time as we further scale the platform, increase our competitive moat and evolve the multiproduct offering. We are building a multiproduct platform that is organized around the customer. As a reminder, we have 2 segments of customers, consumers and businesses. And within the business segment, we now further differentiate between micro merchants, merchants and enterprises. In FY 2025, we expect the Consumer segment to contribute approximately 1/3 of segmented adjusted EBITDA and the Business segment approximately 2/3. Today, we serve 1.7 million consumers and 122,000 merchants. And while there is an enormous opportunity for us to grow the base of customers materially in both, given the total addressable market in the markets we operate in, there is also an enormous opportunity to increase the value we provide to our customers by delivering an integrated multiproduct offering. 



Today, we don't just provide consumers with transactional accounts. We also offer loans and insurance as an example. We don't just provide merchants with card acceptance. We also offer cash management, credit, software and VAS services. The more integrated our product offering is to our customers, the more successful we will be. And the consequence of successfully executing on a multiproduct strategy organized around the customer will be to provide a truly differentiated service that disrupts an already scale and profitable market, enabling us to compete on value rather than price. It will allow us to transform unit economics and return on capital by reducing the cost of customer acquisition, increasing the take rate we generate and reducing customer churn. Within the Lesaka stable, we already had a range of products that addressed a number of customer needs. 



With the completion of the Adumo acquisition, that suite of products has substantially increased. Thus, in FY 2025, our operational focus is on integration. It is about ensuring we have the right foundation to deliver on our potential. It is about ensuring we are providing a standout value proposition with best-in-class economics rather than rapidly scaling the base, although that time is coming. We are truly fortunate that in a year where we're focused on integration, product offering and unit economics, we can still provide guidance for FY 2025 net revenue and EBITDA growth that is more than 30% year-on-year, as Dan will talk to in our guidance section. We are in the enviable position of being able to grow profitably while investing for our future and the future is bright. Africa represents the fastest-growing fintech opportunity in the world, and we are also wonderfully positioned to benefit from secular tailwinds and structural advantages. We are positioning the business to benefit from the continued digitization of the economies in which we operate. Cash is still a pervasive medium of exchange in Africa with a higher utilization than anywhere else in the world. 



Our bet is that it will decrease and that this will increase the need for merchant solutions, which traditional banks are poorly equipped to address. The combination of banks being generally product-centric organizations who have built their technology on legacy architecture, where they will cannibalize existing profit pools by disrupting the market and where they rely on generic rather than specialized distribution channels poorly positions them to solve the needs of merchants in a digitizing world. This is the global experience. In 2011, 97% of the 50 largest merchant acquirers in the world were banks. By 2022, this number reduced to 43%.



These are themes which we have seen happen time and time again in market after market, whether in the developed markets like the U.S., the UK or the European economic area or in emerging markets like Mexico, Brazil or Egypt. The story is the same. Seismic shifts have occurred in the industry globally, and we do not believe Southern Africa will be a unique outlier. While there is some uncertainty on the velocity of travel, the trajectory is clear. The markets we operate in will digitize. They are forecast to digitize faster than other parts of the world and traditional bank incumbents will capture an increasing share of that market. In South Africa, where there are already scaled and very profitable players, there is the opportunity to not just grow the market by providing augmented products, but there is also the opportunity to disrupt an existing profit pool. As the leading independent fintech in Southern Africa with the broadest product offering, our destiny should be to be at the vanguard of this transformation. Over to you, Steve.

[Steven Heilbron, executive]

Thank you, Ali. Firstly, I'd like to again formally welcome Paul Kent and the Adumo and Gov teams to Lesaka. The transaction closed on October 1, 2024. Adumo will form part of the group for the second quarter and will be reflected in our Q2 results presented in February next year. We have already held numerous sales and product workshops and leadership interactions, including having Paul join our Group Lesaka. We are encouraged by these initial engagements and look forward to further developing our formal market merchant offering. I'd like to support what Ali has spoken to in a merchant context. We operate in a large and growing market within which we believe global fintech trends will play out in Southern Africa. We have invested significantly over the past 2.5 years into building our platform comprising a unique comprehensive offering across the merchant spectrum. We continue to invest, innovate and evolve to position ourselves to optimize on the opportunities ahead of us. We operate in an estimated SAM of almost 900,000 merchants who experience daily pain points and inefficiencies in running their businesses. This includes limited access to digital payments, poor cash management solutions, limited access to capital and the lack of availability to a holistic offering.



Our comprehensive merchant solutions solve for these pain points, and we are making a real difference in the lives of our merchants. Critical to our strategy is the broad offering we have for our merchants. We have competitors on an individual product basis, but our comprehensive solution is proving to be both durable and an effective differentiator. With the closing of the Adumo transaction, Lesaka now has a leading position in both the micro merchant sector in the informal market and in the small to medium merchant sector in the formal market. This is complemented by a growing presence in the enterprise market. We now serve over 122,000 merchants processing in excess of ZAR 270 billion annually across Southern Africa. Success in fintech is predicated on capturing scale at compelling growth rates.



Through continuous innovation and investment in our ecosystem, we believe our platform is well positioned to take advantage of the secular fintech trends. As a fintech company, this comprehensive approach is unique and disruptive from cash vaults and immediate digitization, quick access to capital for growth opportunities, a comprehensive VAS product suite to attract customers to merchant stores, supplier payments and industry-leading payment technologies, we offer innovative solutions that make a meaningful difference to our merchants' daily trading, risk management and business administration. We will entrench and extend our position in the informal and formal micro and small to medium merchant markets by continuing to embed ourselves as their partner.



Turning to our KPIs. This quarter, we have split the throughput on our Kazang devices into traditional VAS, supplier payments and international money transfers, given that supplier payments have become a major contributor to our throughput, and we expect continued growth. We offer a wide range of VAS products through our Kazang devices, these are aimed at attracting customers into our merchant stores. These products include airtime, data, electricity, gaming, lotto, money transfers and bill payments. Our devices in field increased 16% year-on-year. This includes the touch side base of approximately 5,400 devices that we have not yet converted onto the Kazang platform. This presents an immediate opportunity. We have successfully converted approximately 1,500 Touchside sites to Kazang devices in Q1.



In addition to rolling out our traditional VAS offering, the more significant opportunity in the Touchside sites is in card acquiring and data monetization. Our total throughput increased 38% year-on-year, driven largely by our supplier payments and international money transfer offerings, each growing throughput by over ZAR 1 billion year-on-year. Our supplier payments throughput increased 60% to ZAR 3.2 billion for the quarter. We have over 1,000 suppliers on our platform, allowing our micro merchants to significantly reduce time-consuming administration and the inherent risks of dealing in large amounts of cash in their environment. Although attracting a lower margin than traditional VAS sales, this forms a key part of our strategy to attract merchants and increase their utilization of a broader spectrum of our product set, driving growth and increased flows in quarters to come.



Investment into growing our supplier payments ecosystem and vaulting infrastructure is integral to the strategy and facilitates the pull-through from cash to card. VAS throughput, excluding supplier payments and international money transfers, increased 10% year-on-year to ZAR 5.4 billion. We have seen increased competition in this space as expected, given that South Africa's merchant market remains underpenetrated with a meaningful addressable opportunity. Banks and other fintechs have been more active in the market. However, we remain agile and responsive to these changes, protecting our base and continuing to grow. Card-enabled devices grew 15% year-on-year to over 53,450 devices. 



Having switched on a large portion of our back book of Kazang devices for card acceptance during FY '23 and '24, this is now a factor of new-to-platform merchants as opposed to backfilling the existing VAS base. Throughput grew 18% to ZAR 4.2 billion for the quarter and is reflective of the opportunity going forward. We are also continuing our focus on higher ARPUs per device with many poorer performing sites being uplifted and deployed into higher turnover, more profitable merchants. We do see a significant opportunity in the tavern space as we bring the touchside sites onto our Kazang Pay service and further penetrate this vertical. As mentioned earlier, we are seeing good results in switching Touchsides taverns onto our platform. 



For our card business, the introduction of the Adumo business brings exciting opportunities with the scale and solution sets that this brings to our platform. Our cash offering is an important part of the ecosystem that we are building in both the formal and informal markets. Our vaulting solution brings significant efficiency gains to informal merchants as they don't have to travel to banks to deposit cash. They can go to their closest merchant in the community with the Kazang Vault and drop their cash. This is immediately available in their wallets for working capital, supplier payments or VAS purchases. We believe we make a real difference in our micro merchants operations as we build Kazang merchant communities, enhance risk management and facilitate immediate cash availability. 



Cash vaults in the field grew 2% year-on-year, driven by stronger growth in the Kazang Vaults in the informal market, offset by muted growth and upliftments due to bankruptcies in the formal small to medium merchant market, which continues to experience challenging conditions. Throughput increased 4% year-on-year, driven by Kazang Vaults in the informal market, which saw cash settlements doubling and now contributes approximately 10% of our cash settlements compared to 5% a year ago. Our credit business is primarily exposed to the formal small to medium merchant sector. As our merchants faced economic headwinds, their credit scores have suffered, leading to many not meeting our credit criteria in respect of relays. This has resulted in lower advances and book size. However, this has maintained the quality of the book. 



With the commencement of a down cycle in interest rates and a more positive economic outlook, we have seen an increase in lending activity. Disbursements in Q1 were ZAR 166 million with our loan book at ZAR 273 million. This represents an 8% increase in disbursements over the previous quarter. As a reminder, last year, we suspended Kazang Pay Advance, which focused on micro merchants. We are currently in the pilot phase of a relaunch, which we will hopefully be in a position to start commercial rollout in the second half of the year. With new lending products in the formal and informal markets and the cross-sell opportunities into the acquired merchant base that Adumo and GA present, supported by an improving interest rate environment, we anticipate an enhanced lending performance in FY 2025. 



Our enterprise market solution is strategically important to us and completes our merchant offering. Our nascent enterprise business brings an opportunity to leverage larger corporate customer relationships across our broader consumer and merchant ecosystems. We continue to invest in and enhance our technology and believe this will be an important contributor in future years. The new operating model with enterprise as a distinct pillar will increase our focus and improve performance of this business. We have a network of over 620 integrated billers and are one of the largest in the country, enabling enterprise clients to offer value-added services to their customers. 



We have seen a strengthening in our position in the formal BAS distribution market with healthy growth in throughput led by prepaid electricity purchases increasing by 36% year-on-year and bill payments up 18%. Our Prism solution is one of only a few providers of proprietary security technologies and opens a revenue opportunity with finance, retail, telecom and utility clients. This presents a meaningful growth opportunity, which we are looking to further invest in over the coming quarters. Turning to the financials. Our revenue for the quarter was flat year-on-year. As Ali mentioned, the sales mix between PIN and PINless airtime impacts our gross revenue growth rate. 



This change in mix is now captured in our net revenue metric. On a net revenue basis, we delivered a 9% year-on-year growth. At the adjusted EBITDA level, after normalizing for Nu, we recorded a 1% increase to ZAR 142 million for the quarter. We have not presented normalized figures for 2 additional line items, which are meaningful but intermittent. These include the bulk VAS opportunities, which impact our results from time to time. In addition, this year, we changed allocations of South African support costs. Normalizing for these items would result in a 10% increase in adjusted EBITDA. Our Q1 2025 performance reflects a scenario in which we have further invested organically and inorganically in the construction of our platform. 



This has resulted in increased expenditure this quarter compared to a year ago. In addition to this, when comparing the 2 relevant quarters, the sales mix in this quarter is skewed towards lower-margin products, contributing to a result that is not reflective of our forward-looking merchant division performance. As mentioned at the outset, we see a significant opportunity in the segments we serve, supported by the secular trends of digitalization and the resultant market share shift from banks to nonbank providers. The Merchant division has evolved and reflects a very different construct today than when compared to our point of departure. We are excited to continue on this trajectory. In micro merchant, we are entering our South Africa's festive season upon us. 



In the merchant pillar, we have commenced the Adumo and GAP integrations and are encouraged by engagements amongst our management and sales teams to date. As mentioned, there are new initiatives in the pipeline in our enterprise pillar. In closing, we are providing a view of the Merchant division outlook for FY 2025. We expect segment adjusted EBITDA between ZAR 725 million and ZAR 745 million, which at the midpoint represents a 23% growth for the year. As Ali addressed in his introduction, we are building the leading FinTech platform in Southern Africa with a broad solution set and significant scale opportunities in a market which is ripe for innovation and disruption. Thank you. Lincoln will take you through the consumer results and outlook.

[Lincoln Mali, executive]

Thank you, Steve. It has been another successful quarter for the consumer business as well as a business one. As we prepare for the rest of financial year 2025, we've already launched a new front-end platform to improve our sales capabilities and approved an enhanced lending product currently under consideration to be launched in quarter 2. We welcome Steve and the Adumo payouts team to the consumer business from the 1st of October 2024. As a reminder, our consumer business operates in the lower LSM segments in South Africa, which is estimated to be approximately 26 million consumers. Within that, our core focus is on the grant beneficiary market of approximately 12 million monthly grant recipients, where we estimate our market share to be approximately 11% of this market. Some examples of the pain points for grant beneficiaries include lower smartphone penetration and expensive data, preventing easy use of digital channels, expensive and opaque pricing structures, limited access to financial services and long wait at traditional branch networks.



We have invested heavily in understanding these pain points of our clients and are continually designing and adjusting our products and distribution networks to align with their needs. For these consumers, we provide a suite of financial services to help them access their money, make payments, buy essential services, get credit and protect their families. We service our existing base and attract new consumers through a national network of 220 branches, 450 ATMs, over 600 sales and service consultants and over 100 sales and service flexi consultants. Our USSD and voice branch options are becoming very popular choices for our consumers, which I will talk about shortly.



Looking at our KPIs, we've grown our EPE customer base by 14% over the past year to over 1.5 million customers, of which 1.3 million customers or 88% are permanent grant beneficiaries. These are customers who are able to cross-sell our lending and insurance products to and where we are able to place our focus on. Our EPA account base continues to grow at the new step change level post our marketing and distribution network improvements last year. We have had 62,000 gross new account activations in quarter 1, which was very pleasing in a traditionally quiet quarter for us. The higher-than-usual level of activations in quarter 1 last year of 76,000 gross activations was as a result of the post-bank liquidation rumors and significant issues encountered in the post bank grant distribution system. This led to a large migration of customers away from the post bank, of which we were one of the beneficiaries.



Net activations were 26,000 for this quarter. We are very pleased with the progress we're making on our cross-sell initiatives. We expect this to continue with the introduction of our sales front end and the improved lending product. We saw a greater than 20% year-on-year increase in bank account customers who also take a loan with us and a more than 30% increase in bank account customers that also have an insurance policy with us. EPE banking customers who have both a loan and insurance policy with us increased more than 35% year-on-year. Our gross lending book increased 34% year-on-year to ZAR 564 million. We advanced ZAR 451 million during this quarter, up 28% year-on-year.



Our penetration rate is over 40%, whilst our loan loss ratio has remained constant at approximately 6% per year. We currently have 466,000 active insurance policies, a 30% increase on last year. Our penetration rate increased from 30% a year ago to 34% in financial year 2025 quarter 1. As with micro loans, our insurance product has a big impact on our customers' lives, providing cover of up to 50,000 on the death of a beneficiary. We are maintaining our efficient payout rates in terms of the time taken to affect insurance claim payouts. 90% of claims were paid out within 24 hours and 95% within 48 hours. The value our customers place on these policies is reflected in our very high premium collection ratio of 96%, which is very good at this end of the market, where it is normally around 60%.



Further, our lapse ratio of approximately 7% is significantly better than the industry norm of over 20% in this market. The tailored product set for grant beneficiaries, combined with our service levels and extensive distribution network has led to further improvements in our cross-selling abilities as demonstrated earlier, resulting in our ARPU increasing to ZAR 91 per month from ZAR 83 a year ago. As mentioned, we now have over 220 branches conveniently located for grant beneficiaries and are opening a further 15 this year, supported by over 450 ATMs. In addition to enhancing our branch network, we continue to invest in our USSD and voice branch platforms. Our USSD channel is performing better than we had hoped, evident on the graphs on this slide. Both the usage and number of unique contact members utilizing our USSD channels have increased significantly from January 2023 to September 2024.



Our customers are using USSD channels for various purchases, including airtime, electricity and DSTV as well as for EPE loan applications. We received more than 60,000 loan applications through USSD in quarter 1, a 62% increase compared to a year ago. Our EPE customers no longer need to leave their homes and can receive money in their accounts in less than 5 minutes. When applying for loans in person, transport and related expenses might easily exceed ZAR 100, which is a significant sum given the loan values at this point.



This demonstrates our belief that fintech innovation has the potential to significantly impact people's lives. The financial results for quarter 1 were again very pleasing, demonstrating the effect of the strategy and hard work our teams have put in over the past 3 years. Revenue increased 30% year-on-year to ZAR 378 million. Segment-adjusted EBITDA was ZAR 79 million, which is an increase of 99% over the last year. It is important to note that the like-for-like growth rates would have been higher given our Consumer segment adjusted EBITDA for financial year 2025 quarter 1 includes a $15 million interest expense charge compared to 0 in prior periods.



The reason for this change is because we are currently engaging our funders to provide the consumer division with a specific debt facility to be utilized to fund our consumer lending book, which results in the interest expense charge being accounted for as a cost of sales item, which is within segment adjusted EBITDA. I'm extremely proud of the team. We continue to deliver against our strategic focus areas, including enhancing product and service delivery and cross-selling and upselling. We continue to make strides in launching new products and systems, all of which enhance our offering to our consumers.



On the product front, our VAS sales to our account base is being well received, and I'm also very excited by the launch of Boomware last month. This is our new sales front end we've been developing. It provides our sales and service consultant with a more detailed 360-degree view of each of our customers. They will be much more better equipped to efficiently service our client base, cross-sell our loan in insurance and VAS products as well as attract new EPE customers to our platform. Driven by our purpose to provide financial services and software to Southern Africa's underserviced consumers, improving people's lives and increasing financial inclusion, we continue to enhance our product offering to consumers based on their needs and at the same time, deliver on our strategy.



In our insurance business, research showed that EPE clients with other family members such as parents and siblings were dependent on the financial support of our clients. Often, our clients would be responsible for paying for a funeral policy of such family members. In order to address this, EasyPay Insurance launched a benefit where existing policyholders and new clients could elect to cover up to 6 of their dependent family members with cover ranging from ZAR 5,000 to ZAR 30,000. Since the launch of this benefit in April 2024, more than 25,000 clients have elected to cover their dependent family members with cover exceeding ZAR 650 million. Similarly, in our lending business, we've conducted extensive research into our customers' financial services needs.



We are looking to launch a loan product for qualifying consumers where the maximum loan and repayment terms increased from ZAR 2,000 in 6 months to ZAR 4,000 in 9 months. The research we commissioned showed that many of our customers were resorting to additional loans often on significantly worse terms and often from unregistered lenders. Our decision was also supported by the consistent and low loan loss ratio we have experienced in our book over the past 2 years. We will be applying the same affordability criteria to the new product and expect our average loan size to increase from ZAR 1,580 to ZAR 2,600 over time.



As I've outlined before and in more detail at our full-year results that we presented in September, we are not getting complacent because of the momentum we've achieved. We believe that we have a very large opportunity to grow our EPE base, and we are hard at work continually in enhancing our product, service and distribution to deliver the optimal customer experience in the most convenient manner to our existing and future grant beneficiary customers. On the 1st of October, the Adumo payouts business officially became part of the Consumer Division. We are looking forward to working with them as we build out the consumer offering beyond the grant beneficiary space. The Adumo payouts contribution will be reflected in quarter 2 results as it now forms part of the division for the full period.



I will end with an overview on our guidance for Consumer Division for financial year 2025. We expect the Consumer division to deliver between ZAR 325 million and ZAR 345 million in segment adjusted EBITDA for financial year 2025. This will be higher if one excludes the impact of the estimated ZAR 80 million interest expense charge now included in consumer adjusted EBITDA for financial year 2025 compared to 0 in financial year 2024. We expect the Consumer Division to continue the strong profitability growth. With that, I'd like to hand over and welcome my brother, Dan.

[Daniel Smith, executive]

Thank you, Lincoln. Good day, everyone. I'm delighted to be joining as CFO at this exciting stage of Lesaka's evolution. I have deep experience in M&A, capital markets and capital allocation and look forward to playing a key role in Lesaka's development as we add further scale and solutions to our platform. I've been fortunate to be closely involved with the Lesaka team over the past 3 years in establishing Lesaka as the leading independent fintech in Southern Africa. I will be working closely with our Board, investors, funders, and business leaders to ensure that Lesaka is optimally positioned to deliver on our organic and inorganic opportunities whilst adhering to optimal capital allocation principles, and a focus on shareholder value creation. As a reminder, Lesaka is a domestic file in the United States. We report in U.S. dollars and under U.S. GAAP. However, our operational currency is South African rand, and as such, we analyse our performance in South African rand. At the group level, our revenue was at the midpoint of our guidance provided, increasing 3% to ZAR 2.6 billion year-on-year. 



On a net revenue basis, we grew our top line by 16% year-on-year. To recap what Ani mentioned earlier, net revenue is calculated as GAAP revenue less the cost of prepaid airtime sold and commissions paid to third parties selling our products. This measure will eliminate fluctuations in revenue, primarily due to the mix in PINed versus PINless airtime sales, and provides a better representation of our top-line growth. Consumer continued delivering impressive growth with revenue increasing 30% year-on-year to ZAR 378 million. With the high repeat customer rate in our loan book and collection rate in our insurance book, our consumer division provides a sticky annuity base with high levels of predictability. 



As we add further EPE consumer accounts each month, increased cross-sell, and add further products, we anticipate continued good growth in the segment. In our Merchant division, we were impacted by the mix of PINed versus PINless sales of airtime when compared to a year ago. However, on a net revenue basis, we grew our top line 9% year-on-year. Group adjusted EBITDA grew 12% to ZAR 168 million against guidance of ZAR 160 million to ZAR 180 million. This was the ninth consecutive quarter of meeting earnings guidance. Consumer adjusted EBITDA almost doubled compared to last year as we added scale to our EPE account base and increased penetration of our lending and insurance products. 



Merchant-adjusted EBITDA was marginally low for the quarter, decreasing 1% to ZAR 142 million. As Steve mentioned in his merchant overview, this was due to a change of revenue mix, an increased competitive environment, and higher investment at an operating expense level in our platform. Adjusting for these items, growth would be 10% over last year, which is more reflective of this division's underlying performance. Group costs increased to $53 million for the quarter due to a combination of new hires at a group level and incremental operational costs, both of which relates to scaling our platform. 



Operating income for the quarter decreased by $4.5 million to a loss of $0.3 million. However, included in this is ZAR 30 million of one-off costs related to the Duma acquisition, without which we have shown healthy growth at an operating income level to ZAR 29.7 million on a like-for-like basis. Our interest expense remained fairly constant compared to last year. We are looking to reduce the significant expense and are in the process of optimizing our current funding arrangements with our banking partners. Turning to our per-share performance. We believe that fundamental earnings per share is the most appropriate measure of our performance. It adjusts for once-off items such as transaction costs and excludes amortization of intangibles, which is a noncash charge and stock-based compensation charges. 



Our fundamental earnings for the quarter improved from a loss of ZAR 5 million last year to a profit of ZAR 43 million. On a per-share basis, this translates to a ZAR 0.74 improvement to ZAR 0.66 from a loss of ZAR 0.08 a year ago. Our GAAP basic loss per share improved ZAR 0.40 or 24% to ZAR 1.26 for the quarter. Turning to our cash flow. Our cash generated from business operations, which is operating cash flow before interest paid, tax paid, working capital-related items, and movement in our loan book funding increased to ZAR 196 million compared to ZAR 184 million a year ago, and was slightly lower than ZAR 211 million in the previous quarter. 



Our interest paid was lower than the previous quarter as we took advantage of the opportunity to capitalize a portion of interest on our facilities as we optimize these funding arrangements. Our net cash generated from operations of the loan book funding and before CapEx is typically a good reflection of our conversion of EBITDA to cash. However, in this quarter, there was a significant working capital outflow related predominantly to 2 items. Firstly, the payment of annual staff bonuses and secondly, the unwind during the quarter of amounts payable to third parties that we provide VAS and bill payment services to. 



The previous quarter end fell on a weekend, resulting in significantly higher than usual cash and payables balances, which were then settled on the first business day of the current quarter. leading to a large cash outflow. This is simply a timing difference. We utilized a net ZAR 28 million to grow our loan books in the quarter, which overall resulted in net cash used in operating activities of ZAR 73 million. We spent ZAR 70 million on CapEx, resulting in net cash utilized of ZAR 143 million for the quarter. Cash generation, cash conversion, and optimal capital allocation will be a key priority of mine going forward. From a balance sheet perspective, our net debt to group adjusted EBITDA ratio is 2.6x at the end of this quarter compared to 3.8x a year ago. 2.6x is slightly higher than at year-end 30 June at 2.5x, primarily due to lower cash balances in our net debt calculation. 



We have previously communicated to the market that we are looking to continue reducing our net debt to group adjusted EBITDA ratio with a medium-term objective of a 2x ratio, which we believe is comfortably serviceable and the appropriate capital structure for the business. We have ZAR 1.3 billion of noncore assets on our balance sheet. The major noncore asset is our holding in MobiKwik and the valuation on balance sheet remains unchanged at $76.3 million. MobiKwik continues to improve its financial performance and still plans to list on the Indian Stock Exchange as soon as practical. We remain committed to realizing the value from this asset through an orderly disposal process in due course. Capital expenditure for the quarter amounted to ZAR 70 million with ZAR 41 million relating to growth CapEx, primarily in the Merchant division for Kazang devices and cash vaults. Both of these deliver strong IRRs and will support our growth over the medium term. We also made investments in our technology infrastructure.



Turning to our outlook and guidance. We reaffirm our FY '25 revenue guidance at ZAR 10 billion to ZAR 11 billion and the FY '25 group adjusted EBITDA guidance of ZAR 900 million to ZAR 1 billion. We are also introducing an additional measure being net revenue, which will provide an improved view of our top line performance on a comparative basis. Our net revenue guidance is ZAR 5.2 billion to ZAR 5.6 billion for FY '25, which implies a 35% year-on-year growth rate at the midpoint of this range. Our group adjusted EBITDA guidance for FY '25 implies 37% growth year-on-year at the midpoint of the range. Excluding the impact of Adumo and allocation of interest expense charges directly related to the consumer loan book in our FY '25 group adjusted EBITDA, the midpoint of the FY '25 group adjusted EBITDA implies a growth rate of more than 30% on a like-for-like basis.



For our second quarter ending 31 December 2024, we expect revenue between ZAR 2.4 billion and ZAR 2.6 billion and net revenue of between ZAR 1.2 billion and ZAR 1.4 billion. Group adjusted EBITDA is anticipated to be between ZAR 190 million and ZAR 210 million for the quarter. These figures are inclusive of Adumo from 1 October 2024. In terms of the composition of our FY '25 group adjusted EBITDA, this view reconciles back to the segment adjusted EBITDA contributions per division where Stephen Lincoln presented earlier. We expect that the Merchant division and Consumer division will contribute approximately 70% and 30%, respectively, to total segment adjusted EBITDA, with group costs at approximately 20% of total segment adjusted EBITDA.



Finally, as you can see from the growth trend in our group adjusted EBITDA, we have made great progress in the past few years since we started this journey. We have added and will continue to add scale and proprietary solutions to our platform, enhancing our ability to innovate and disrupt as we entrench ourselves as Southern Africa's leading independent fintech. With that, I would like to close the presentation and address questions you may have for management. Thank you.

[Bronwyn Nielsen]

Results Q&A with the executive management team led by Ali Mazanderani, Executive Chairman of Lesaka. He is joined by Lincoln Mali, CEO of Lesaka Southern Africa; Steven Heilbron, Head of Corporate Development; Dan Smith, Lesaka's Chief Financial Officer; and Naeem Kola, Chief Operations Officer. Thank you very much for your time. Please raise your hands or post in the question chat box as we proceed with this live Q&A. I'll first hand up today Raj Sharma from B. Riley Securities. Ali this is directed to you, please. Can you unpack what you mean as the huge pool of profits in the payment space currently sitting with the banks and waiting for disruption? How quickly will this materialize for fintechs in South Africa based on your experience and research?

[Ali Zaynalabidin Mazanderani, executive]

Thank you, Bronwyn, and thank you, Raj, for the question. Firstly, just to reiterate, our biggest competitor is really inefficiency. We strive to reduce the cost of the services we provide, and we strive to provide a suite of services that give our customers the offering that they deserve and that is the principal access of energy. However, there is a large existing profit pool in the banking space. And to give you a sense, I'll provide some sort of like referencing of what that could look like. And this is specific to the merchant acquiring business and ancillary services, so it doesn't represent the entirety of our TAM. But in the merchant acquiring space, the total process volume at retail of the big 5 South African banks is close to $100 billion today. And it's fair to assume a net margin for merchant acquiring and ancillary services of about 100 basis points, generally an industry reference, although it obviously differs by segments and by this nature of the offering. That would represent about $1 billion of annual contribution and you obviously would expect there to be growth in that base through the digitization over the coming years, and I would expect that growth to be double digit given that cash is still a dominant medium of exchange in the economy.



In terms of how South Africa will evolve, from a bank versus nonbank environment in that respect. I don't see any reason why it should follow a different trajectory than the trajectory that the U.K. or Europe or Brazil followed over the last decade in the coming decade and those trajectories have been fairly consistent. The nonbank and fintech disruptors have typically taken between 1/3 and 1/2 of the market over the last decade with varying degrees of speed in different markets. So I think we can expect a similar outcome.

[Bronwyn Nielsen]

Another question from Raj Sharma, B. Riley Securities. In the Merchant division, organic growth is slower than expected, especially compared to the 20% plus growth rates that Connect was growing at when acquired. How should we be thinking about the merchant business growth rates on an organic basis? What would it be for full year '25, excluding Adumo? Ali, I'll direct to you, and you can direct to your management team.

[Ali Zaynalabidin Mazanderani, executive]

Thank you, Bronwyn. And again, thanks, Raj, for the question. I just want to start by answering a few points from a group perspective, and then I'll ask Steven to give some specificity in the Merchant segment. So firstly, I don't think that it's softer than expected. We achieved the midpoint of our guidance and I'd just like to reiterate, we have achieved the midpoint of our guidance, not just this quarter, but for the last 9 consecutive quarters. I think we've demonstrated that we deliver on what we say. And in that respect, I think it was fully expected that, that would be the outcome for the quarter. In terms of organic versus inorganic growth, well, at a group level, we achieved EBITDA of ZAR 691 million in FY '25. Our guidance indicated 30% year-on-year organic growth on a like-for-like basis. If you take ZAR 691 million and you apply a 30% growth rate on it, you'll get to about ZAR 900 million. 



Our guidance also indicated that the interest charge in the consumer lending business that there was not there's an interest charge included in the consumer lending business this year that was not included in the prior years. and that's expected to equate to about ZAR 80 million. So ZAR 900 million minus ZAR 80 million gives you ZAR 820 million. And that's basically a 30% organic like-for-like growth rate for Lesaka for this year with a common base. Given that our guidance is between ZAR 900 million and ZAR 1 billion, I think from that, you can infer Dumo's contribution given the fact that it will be consolidated for 3 quarters of the year.

[Bronwyn Nielsen]

Steven?

[Steven Heilbron, executive]

Thanks, Bronwyn. I think if I take you back to our point of departure, we've been very clear right from the outset that we were going to construct a dynamic fintech platform that focused on merchants, micro merchants and enterprises. And that, that construct is going to be a function of both organic growth and inorganic activity. And I think as a starter, I think if you look back at our track record, we have delivered organic growth. And more recently, I think as well from an inorganic perspective, we have delivered all that we set out to do. Now having said that, if we look at the current quarter, we had a lot going on in this quarter. We grew our net revenues by 9%. We had strong throughputs. But I don't believe that this quarter, when we compare it to Q1 2024 is a proxy for growth. We've given clear guidance that to FY '25 June, we expect at the midpoint to hit 23% growth for the Merchant division. That's in line with our historic performance. I don't think that, that is slow. I think it could possibly be better. 



And in the construct, what I would also be saying, this is a period through which we are building the platform. And our focus is very much now around disruption, but specifically to creating bundled product as we've now deepened our merchant segments and broadened our product sets, and we're putting a very strong focus into unit economics, bundling and taking a broader offering to our clientele. And so I think the guidance that we've given is really the proxy for growth, and that puts the context around Q1 '24 to Q1 '25.

[Bronwyn Nielsen]

As a reminder, you're watching the live Lesaka Q1 FY 2025 results Q&A, and I'm joined by the Lesaka management team. Our next question on the webcast is from the Theo O'Neill from LHR Research. Again, Ali, for you to direct the consumer segment had an excellent performance. Congratulations to the team. You mentioned the launch of new products. What is in the pipeline? And can you cover the rationale and finding from your research behind considering increasing loan size and term.

[Ali Zaynalabidin Mazanderani, executive]

Thanks Theo, for the question. I think Lincoln is probably best placed to answer that one.

[Lincoln Mali, executive]

Thanks, Ali. Theo one of the things that we've made reference to is ongoing research and thinking about what's best for our clients. So one of the things we found in our research was that our clients were demanding more credit than we could offer. our limit was ZAR 2,000 over 6 months. And what is becoming clear was that our clients were demanding to get more of that credit. And what was also disturbing was that our clients were going to unscrupulous lenders to get more credit than what we could offer them. So we started thinking about what could we do to tweak our current product to meet some of the needs of our clients within the National Credit Act and in an environment where our clients can afford. So what we are working on now is to launch a product where we would move from the ZAR 2,000 limit and 6 months limit to a possible maximum limit of ZAR 4,000 to a client and a 9-month term. And we think that on average, we will be able to have loan sizes that will increase maybe to ZAR 2,600. And so that is what we're experimenting with. 



The second thing I'd like to maybe point to in our thinking about what we want to do going forward is that we now have the Adumo team that has joined us, Steve Malabi and his team, and they have 250,000 customers that are in that Adumo payout business. So what we're starting to do is to see what products would make sense to that customer base. Firstly, the most important thing is that this is our first bridge head into a consumer base that is not grant beneficiaries. And this is an important thing for us as we evolve our platform. And so we are thinking of doing a number of things in that space. Firstly is to see whether we can layer a VAS product into that customer base. Secondly, we're starting to think about a funeral product in that base, and we'll start to think about later on a lending product in that base. And this allows us to think of our customer base beyond the traditional base that we've had of grant beneficiaries. So these are some of the things that we've got in our pipeline.

[Bronwyn Nielsen]

Sven Thordsen from Anchor Securities asking, you mentioned opportunities in the enterprise business providing opportunity to leverage larger corporate customer relationships across the broader consumer and merchant ecosystem. Can you give us a practical example of this and explain some of the opportunities driving growth sentiment in this pillar?

[Ali Zaynalabidin Mazanderani, executive]

Thanks, Sven. I think maybe, Nine, if you can have a go at that.

[Nunthakumarin Pillay, executive]

Yes. Thank you. Thanks. Our Enterprise division, as we noted, evolved as a need to develop solutions and process transactions on behalf of ourselves. As a natural evolution, we're trying to move this function away from being a pure cost center but being a profit center as well. And we're going to do this through building solutions for both internally as well as our external clients. I think very practical solutions in relation to this is that we provide VAS and bill payment services today to our merchants. We're going to expand this to a broader customer base, which are third parties as well as corporate customers. We also do tokenization internally for security purposes, and we see a big need for this within the telcos as well as municipalities and third-party clients. So these are practical examples of where we think we can drive revenues within this enterprise division on a broader spectrum as an organization.

[Bronwyn Nielsen]

We have time for one more question, and that is from Jared Houston from -- all Weather Capital. He's got a couple of questions to put to the team here. Please spend some time unpacking the increase in group costs. And is this the quarterly run rate going forward? Secondly, what is included in once-off items in the appendix transaction costs, mainly Adumo and explain the large working capital outflow. I will reiterate if we start, please, with the unpacking of the increase in group costs.

[Ali Zaynalabidin Mazanderani, executive]

Thank you. I think Dan, take that one, please.

[Daniel Smith, executive]

Thanks, Hallie. Jared, our group costs increased to ZAR 53 million for the quarter. This was a combination of new hires at a group level as well as the costs of scaling our platform. We bought these costs at a group level rather than push them down into the underlying divisions. To give you some color around the nature of these costs, the staff costs, the costs relating to manage our compliance with Sarbanes-Oxley, directors' fees, legal fees and of course, our group and U.S. listed audit fees. There's some more disclosure around those in the 10-Q. In terms of our guidance, we expect our group costs to be approximately 20% of our total segment adjusted EBITDA. In other words, roughly ZAR 200 million for the year. So the run rate we're currently incurring is roughly a good approximation of what one could expect for the full year ahead.

[Bronwyn Nielsen]

So just again there, Dan, if you could repeat what is included in once-off items.

[Daniel Smith, executive]

In once-off items, 2 categories, EUR 30 million of that relates to the costs being incurred in the Adumo transaction. Those were due diligence costs, M&A and legal fees incurred in concluding the transaction. There's also a separate category of approximately 1.8 million of costs, and those related to some of the smaller M&A deals we did in the quarter in the period. So to sides, our ESOP, which as well as a couple of other smaller transactions.

[Bronwyn Nielsen]

And the large working capital outflow.

[Daniel Smith, executive]

So our net cash generated from operations after loan book funding and before CapEx is typically a good reflection of our conversion of EBITDA to cash. In this quarter, though, we did have a very significant outflow of approximately ZAR 193 million. I really simplify it to 2 categories. One is the payment of our annual staff bonuses. Those got paid in September of this year, obviously, don't come through in prior quarters. And the second is the unwind during the quarter of our amounts payable to third parties that we provide VAS and bill payment services to. So the previous quarter, so it was the one ending June of this year, fell on a weekend, which resulted in us holding significantly higher than usual cash and payables balances. These were settled on the following business day, which fell into the current quarter, leading to the large cash outflow. So this is really just simply a timing difference.

[Bronwyn Nielsen]

Final question, Per O'Neill from LHR Research again. Can you provide an update on your M&A strategy? You alluded to further bolt-on and transformative M&A. Is it slowly focused on South Africa or also on the rest of Africa? And how do you see yourself funding large acquisitions? Will it be mainly debt and shares? Or will you be asking for capital from shareholders?

[Ali Zaynalabidin Mazanderani, executive]

We see M&A as another lever of growth to our organic growth story. We see a material opportunity to scale the business. Indeed, many of the most successful fintechs on the continent have utilized M&A effectively in the fintech and payment space, I think it's been a very effective lever in aggregate. We were specific about saying we'll be disciplined in the process. We will only engage in material transactions that are going to be accretive. I think in terms of geographical focus area, I mean, our principal market is South Africa, but we are in a number of neighboring geographies. The Adumo transaction has increased our presence in a number of geographies. And so businesses that are operating in neighboring geographies would very much also be part of the ambit of opportunity. 



In terms of how we would fund that, I think we would be flexible depending on the particularities of that transaction. I think debt shares and capital from shareholders are all legitimate options. What I would say is that we've given a sense of where we want to be managing our debt, and we haven't got any change associated with that. But I am excited about what we can build by continuing to augment our offering. And we have 4 subsectors, each of which has attractive opportunities available in them that can increase and improve our offering and also expand our TAM and which we can drive synergies from. I would also just finally say that I think this is a business that has demonstrated effectively its capacity to execute and to integrate, and we hope to be able to continue that.

[Bronwyn Nielsen]

That's all we have time for today. Thank you very much for joining us for Lesaka's first quarter live Q&A FY '25. And if you do have any further questions, please direct them to Investor Relations at Lesaka. Thank you very much to the team.