Network International Holdings PLC Q1 2020 And Current Trading Update

Network International plc, the leading enabler of digital commerce across the Middle East and Africa (MEA), announces a scheduled trading update to cover the first quarter period from the start of the financial year on 1st January 2020, including a current trading update.

• Payments and processing operations remain unaffected by the COVID-19 pandemic
• Delivery of a number of strategic and business initiatives: merchant wins and enabling online payments; alongside new issuer solutions and online wallet customers
• Group revenue broadly flat in Q1. Subsequent to lockdown measures being implemented; Merchant Solutions TPV and revenue declined c(60)% y/y, and Issuer Solutions more resilient with revenue down c(10-15)% y/y
• Taken prudent actions to protect cashflows including the deferral of the ordinary dividend (as previously announced) and pausing on capital expenditure related to Saudi Arabia expansion and the separation from Emirates NBD
• Strong balance sheet and liquidity position; further bolstered by our recent refinancing
• Long term industry and business fundamentals remain strong; seeing a rising awareness and demand for digital transactions amongst multiple stakeholders

Business operations

In light of the continued COVID-19 pandemic, our focus remains on colleague and customer wellbeing, and business continuity. Our colleagues are working from home, and payments and processing activities remain unaffected, enabled by the investments we have made in our technology platforms. We have implemented a number of practical support measures for customers across the business and our programme of cash support to micro-SMEs has been very well received.

Business model

We are a diversified payments business operating across the acquiring and issuing value chain, as a partner to over 70,000 merchants and 200 financial institutions. In the Middle East (73% of 2019 revenue, within which the United Arab Emirates represents 60% of group revenue), our business is broadly based across Merchant and Issuer solutions, whilst in Africa (27% of 2019 revenue) we have a much greater presence in Issuer Solutions. Over 96% of our revenues are either USD denominated or from currencies pegged to the USD, and in those countries where revenues are received in local currency, these are offset by a larger local cost base.

In Merchant Solutions, which comprised 46% of 2019 revenue; we provide direct acquiring services to merchants in the UAE and Jordan, as well as white-label and acquirer processing services to a number of customers across Africa and the Middle East. Our revenues are generated through fees dependent upon the value of transactions (Total Processed Volume, or TPV), as well as through value added services. We serve a diversified range of merchants and within the direct acquiring business, our sector exposures as a proportion of TPV in 2019 were: Government services, 17%; supermarkets, 12%; general retail, 19%; travel and entertainment, 29% (of which airlines and travel agents 11%, hotels 9%, duty free and other entertainment 9%); education and healthcare services, 6%; and other industries, 17%. In the current year, a further reduction in airline TPV was incorporated into our plans and budgets, even prior to COVID-19, as a result of our proactive strategy to reduce our exposure in this sector. Whilst tourism is an important driver of spending in our regions, 75-80% of TPV is represented by domestic transactions.

In Issuer Solutions, which comprised 53% of 2019 revenue, we generate revenue from three broadly proportional streams: fees linked with the number of cards hosted on our platform; fees linked to transaction volumes; and from value added services. Our customers are typically financial institutions, where we have multi-year contracts in place and a number have contractual minimums.

Trading update

We are pleased to have delivered on a number of strategic and business initiatives during the first quarter. In the Middle East, we have won a number of new direct acquiring merchant customers across POS and online. These include Zomato, the global online food delivery aggregator; Luxury Fashion Group, who operate Yves Saint Laurent stores; and Western Union, where we will enable the growing remittances sector. We also secured a tender to provide exclusive Issuer Solutions across five countries for Careem PAY (part of Careem/Uber), an online wallet, which is available to 35 million Careem users as an option to pay for taxi rides, food deliveries and transfer funds to one another. We have enabled the popular Chinese payments services, WeChat Pay and UnionPay, for our merchants; and have rolled out a total of 18,000 N-GeniusTM POS devices in the UAE. The migration of existing merchants onto our propriety N-GeniusTM online gateway is progressing well, alongside 650 new customers. We have a further gateway pipeline of nearly 2000 merchants, which reflects our recent marketing campaigns and the desire for merchants to develop ecommerce capabilities or enable PayByLink for consumers.

In Africa, we have secured new Issuer Solutions customers; including Globus Bank in Nigeria and Republic Bank in Ghana. We will also see a significant increase of around two million accounts hosted on our platform, for RCS Bank in South Africa. Additionally, Standard Bank has started to use our N-GeniusTM point of sale capabilities in two countries, with rollout planned in a further three countries over coming months.

Our Mastercard partnership is making progress and we expect to deliver on the agreed first year initiatives during 2020. This includes a corporate card solution for financial institutions, and enabling QR code payment acceptance for merchants through the use of their own smartphones.

Prior to the COVID-19 pandemic, the business continued its positive momentum from the prior year, however, the pandemic has impacted consumer spending patterns.  As a result, during the first quarter, total revenues were broadly flat compared with the prior year. This represented good performance across the majority of the period; a slowdown in tourism related spending from mid February; and a significant impact to trading in the last few weeks of March, linked to the social distancing and lockdown measures implemented across nearly all of the markets in which we operate and the closure of Dubai International Airport to commercial flights.

When the lockdown measures were implemented in the final weeks of March, we saw a c(60)% y/y reduction in acquiring TPV, and similar reduction in revenue, in the Merchant Solutions business. This has remained at a consistent level through to the current week. Whilst we have seen a significant increase in supermarket spending, and up to 20% growth in online transactions from a number of retail merchants, this has been more than offset by the overall reduction in transactions taking place. Issuer Solutions benefits from defensive fee streams, such as card hosting, alongside fixed revenue elements and/or minimums in some contracts. Taking this into account, we have seen more resilience and a c10-15% y/y reduction in Issuer Solutions revenue since the lockdown measures were implemented. We continue to monitor refunds and chargebacks for our direct acquiring customers, where we have not seen any significant increases in our losses to date. Whilst we would naturally expect to see some increase in refunds and chargebacks in the current environment, we have taken appropriate steps to manage our risk, including recovery from merchants and requesting cash reserves from customers where appropriate.

There has been no formal update on the announcement from the UAE Central Bank in relation to the potential regulation of fees incurred by merchants when consumers use debit or credit cards. As we have stated previously, interchange fees, charged by issuing banks, represent the largest proportion of fees paid by merchants. We therefore expect interchange fees will be regulated, which would have very little impact on our business, as it is typically a pass through cost. 

Management actions

Given the uncertainty surrounding the length of COVID-19 impact, we have taken a number of prudent measures to protect cashflows in the business, including the previously announced decision to defer the ordinary dividend in respect of the 2019 financial year. Whilst around two thirds of our operational expenditure is largely fixed, we are proactively taking action to reduce outgoings in the variable element. This includes a hiring freeze, strict controls around and reductions in discretionary spend, and an expected slowdown in variable costs associated with transaction and new business growth. In addition, our CEO, Simon Haslam, has advised the Board that he will forgo the following components of his compensation package for the 2020 financial year: the annual pay increase on base salary; any LTIP award; and any annual cash bonus (that would have been payable in 2021). Our Chairman and the rest of the Board will also reduce their fees by 25% for the remainder of the financial year.

We have decided to pause on capital expenditure related to the separation of shared services with Emirates NBD, and to support our entry to the Saudi Arabian market, which were anticipated to be USD40 million in total during 2020. Saudi Arabia remains an important future growth accelerator for the business and we are committed to entering this market when more normal circumstances resume.

Liquidity position 

We have a strong balance sheet and liquidity position, in particular following the successful refinancing of our syndicated debt facility. At the end of the Q1 period we have a cash balance of USD 40m and total available headroom on our revolver and new syndicated debt facility of cUSD 270m. These are distinct from the dedicated overdraft facilities used to fund settlement related working capital cash requirements, as is normal.

Simon Haslam, Chief Executive Officer, commented:

“I want to thank all of our colleagues, who are continuing to deliver an exceptional level of service to our longstanding merchant and financial institution customers during these challenging times. The speed of the COVID-19 pandemic has impacted individuals and businesses across the board and our focus is on supporting our colleagues, customers and the communities in which we operate. This includes measures to facilitate online merchant payments and cash relief to the micro SME sector. Whilst our business is seeing a significant impact from the downturn in consumer spending, some positive trends have emerged. In particular, e-commerce and supermarket retail have flourished and in line with WHO recommendations to go cash free, we are already seeing an increase in contactless payments and a rising demand for digital and online transaction acceptance amongst many stakeholders. Our business has a long established and highly successful track record, with a strong liquidity position which will support us as we navigate through this period. I am confident that the long term fundamentals remain strong, supported by secular tailwinds of cash to digital payments conversion across our regions.”