Lesaka Technologies, a South African fintech company, is flying under the radar. While analysts are busy dissecting the company's recent acquisition of Adumo, a deeper dive into the Q3 2024 earnings call transcript reveals a hidden gem: the explosive growth and profitability of Lesaka's Consumer Division.

This isn't just a good quarter; it's a testament to a meticulously crafted strategy focused on a single, often overlooked customer segment: South Africa's grant beneficiaries. These individuals, reliant on government social grants, represent a substantial and loyal customer base, one that Lesaka has masterfully tapped into.

While Lesaka also serves a robust merchant segment, the Consumer Division's numbers are genuinely remarkable. Revenue is up a staggering 19% year-on-year, but the real kicker is the segment adjusted EBITDA, which has skyrocketed from a paltry ZAR 30 million a year ago to ZAR 82 million this quarter. That's a 178% increase, a figure that would make even the most jaded investor raise an eyebrow.

This extraordinary growth isn't a fluke. It's the result of two key levers that Lesaka has relentlessly pulled:

Expanding the EPE Account Base: Lesaka's EasyPay Everywhere (EPE) account is the gateway to its suite of financial services for grant recipients. The company has invested heavily in physical branches and digital channels, streamlining onboarding and creating a user-friendly experience, particularly for those unfamiliar with traditional banking. This focus is reflected in the impressive gross EPE account activations this quarter, reaching 63,000, a significant jump from 38,000 last year.

Mastering the Art of Cross-Selling: Once customers are onboarded, Lesaka leverages its diverse product suite, offering loans, insurance, and value-added services like airtime and electricity purchases. The company's success in cross-selling is evident in the remarkable growth of account holders utilizing multiple products. For instance, the number of EPE account holders who also have an EasyPay insurance policy has soared by over 30% compared to last year.

This translates into a substantial increase in Average Revenue Per User (ARPU), a critical metric for any subscription-based business. Despite no increase in EPE account fees and a significant rise in account numbers, Lesaka's ARPU has jumped by 15% to ZAR 90 over the past year. This highlights the power of cross-selling in driving profitability.

Lesaka's laser-like focus on grant beneficiaries gives it a unique edge in a crowded market. By understanding the specific needs and challenges of this demographic, Lesaka has tailored its products and services accordingly, creating a loyal and growing customer base.

Why This is a Game-Changer

Untapped Potential: While other financial service providers often shy away from the grant recipient market, Lesaka has identified it as a source of significant, untapped potential. With millions of grant recipients in South Africa alone, the opportunity for growth is vast.

Recession-Proof Revenue: Social grants are non-cyclical, providing a steady and predictable revenue stream, even during economic downturns. This makes Lesaka's Consumer Division particularly attractive in the current uncertain economic climate.

Scalability: Lesaka's business model is inherently scalable, allowing it to easily expand its reach and onboard new customers as it grows. This scalability will be crucial as it expands into new geographies through the Adumo acquisition, giving it access to a potential market of over 140 million people across five countries.

While the Adumo deal is undoubtedly significant, the Consumer Division's explosive growth is the real story here. It reveals a company that is not merely reacting to market trends, but actively shaping them, carving out a niche and establishing dominance in a lucrative and previously overlooked market segment.

"Hypothesis: Lesaka's Consumer Division growth is outpacing its Merchant Division growth, driven by a higher rate of EPE account activation and successful cross-selling initiatives."

Reference: Lesaka Technologies, Inc. (NASDAQ:LSAK) Q3 2024 Earnings Call Transcript

Revenue and EBITDA Growth Comparison

Lesaka's Consumer Division isn't just riding the wave of fintech; it's building its own, and investors who ignore it do so at their own peril. This small fintech is poised to become a financial powerhouse, not just in South Africa, but across the African continent. The question is, will the market wake up to this sleeping giant before it's too late?

"Fun Fact: The name "Lesaka" comes from the Sesotho language and means "to grow" or "to increase," perfectly reflecting the company's ambition and its focus on empowering its customers to achieve financial growth."