Lesaka Technologies, Inc.
Q1 2016 Earnings Call Transcript

Published: 12 May 2016

[Operator:]

Ladies and gentlemen, good day, and welcome to the Net 1 Q3 2016 results conference call. [Operator Instructions]. Please note that this call is being recorded. At this time, I'd like to turn the call over to Dhruv Chopra, Head of Investor Relations. Please go ahead.

[Dhruv Chopra:]

Thank you, Ari. Welcome to our third quarter fiscal 2016 earnings call. With me today are Serge Belamant, our Chairman and CEO, and Herman Kotze, our CFO. Our press release is available on our Web site, www.net1.com. And our Form 10-Q should be available shortly. 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 press release and Form 10-Q regarding the risks and uncertainties associated with forward looking statements. In addition, during this call, we will be using certain non-GAAP financial measures. And we have provided a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures. We will discuss our results in South African rand, which is a non-GAAP measure. And we analyze our results of operations in our 10-Q and our press release in rand to assist investors in understanding the underlying trends of our business. As, the Company's results can be significantly impacted by currency fluctuations between the U.S. dollar and the South African rand. So, with that, let me turn the call over to Serge.

[Serge Belamant:]

Thank you very much, Dhruv. Good morning to all of our shareholders. During our third quarter of 2016, we continued to make meaningful strides in safeguarding the long term strategic but sustainable growth of Net 1, through the ongoing execution of our mature and newer businesses, the in production of new products and services, our new partnership with the IFC, and the acquisition of a number of small but focused acquisitions. The weaker rand had its most significant impact on our year over year dollar based results so far, creating a 55% headwind this quarter. Fortunately, the rand has recovered to some extent from its lows but still remains a material headwind for the next few quarters. As the rand remains unpredictable, it is clear for the company to accelerate its plan to achieve internationalization. Quarter three 2016 revenues of $135 million grew 20% in constant currency and was driven by a combination of our stable, recurring businesses, aided by further expansion of our newer initiatives. A number of these initiatives still require investment to scale. And therefore, the expected contribution to profitability will lag until each of those initiatives achieves critical mass. The good news is that some of our South African initiatives started scaling during the third quarter of fiscal 2016 and should continue into the remainder of the year, while some of our international activities should follow suit during the second half of calendar 2016. Our fundamental EPS in Q3 was $0.43, which was meaningfully lower in dollar terms and 1% higher on a constant currency basis. During the third quarter, we continued the investment we began in quarter two, given an opportunity to expand our branch networks, ATMs installation, and sales and support staff to capitalize on the demand for our products. These actions, therefore resulted in additional costs, which we recognized within quarter three through, though these costs were sequentially less than those incurred in quarter two. During the third quarter, we also repurchased roughly 1.3 million shares for approximately $13 million and, for this year have purchased 2.1 million for roughly $24 million. The company execution authorization remaining and will thus, when possible and at the Board's discretion, continue to effect buybacks when these are deemed to be in the best interest of the Group. EasyPay Everywhere has begun to achieve meaningful scale as we see increased transaction volume growth and expansion of our financial services offerings. EPE has now registered 1.2 million clients with totality therefore more than 6 million transactions a month with a value of approximately 2 billion. On average, each of our clients makes use of our ATMs, points of sale, and USSD portal as well as both our macro finance and insurance products. I'm pleased that we are now reaching the stage where customers look to us as a service provider through whom they can access any financial product or services which are easily accessible and at costs which are the lowest in the market. When combined with our biometric authorization solution, our clients can enjoy the highest level of security. They're protected against any attempts to perform unauthorized or illegal transactions. Security has become a key factor, as many of our clients who were previously excluded from accessing financial products and services are often targeted by individuals and companies whose intentions are not always honorable. Biometric verification leaves another trail of both the client as well as the service provider that cannot be repudiated by either party, thus eliminating illegal transactions and creating an ecosystem that is transparent and auditable. I'm excited that we can now enter into Phase 2 of our EPE expansion strategy by activating our mobile units. These units will provide us with the footprint we require to accept the many millions who do not reside in close proximity of our branch network. We expect a new acceleration in EPE registrations as we can now tackle the population that we do not currently access. We estimate that we should be able to triple our customer base over time using our mobile network. As our branch network becomes saturated, it must be mentioned that our mobile teams have been trained to not only register EPE clients, but also to offer our financial services, including our macro finance and insurance products. By definition, we expect accelerated growth in these two areas as well. Next week, we will close our transaction with the IFC. And I look forward to our association going forward. We believe that the combination of IFC's footprint and expertise together with our proven technology will fully allow us to address the needs of the global unbanked population in a far more aggressive manner. Far too much time has been wasted due to many organizations protecting their turf and thus thwarting innovation and, as a result, preventing financial [indiscernible] for all. We believe that our mission to continue to disrupt existing business models and technological platforms will be easier to accomplish simply because of the IFC's reputation and commercial investments. To leverage our relationship as much as possible, we are creating an advisory committee comprising of senior individuals from both entities to identify and evaluate organic and inorganic opportunities in emerging countries around the world. Herman will give you the numbers. But, let me spend a few minutes on our card and mobile-centric activities, including EasyPay Everywhere and ZAZOO, as well as highlight some of our new products and what they mean for the Company. This quarter, we developed certain new products which will continue to supplement our core offering to all of our clients. These products have been incubated over a period of time and are ready to roll out and have been tested in a lab environment. The four I want to highlight for now are, A, medical insurance; B, mobile educational services; and C, our Cloud-based [indiscernible] [STS6] certified solution for electricity [and] transportation. A, our medical insurance product is designed to provide the most [dominable] access to the first level of medical care in [indiscernible] where they reside. Our sophisticated solution will interoperate with a client's mobile device, allowing them to be alerted of close proximity [visits], times, and locations. This medical insurance will allow for clients to consult medical staff, who will ascertain the nature of the possible health problem with experience and provide a way forward for the client. In many cases, the medical care can be provided immediately. If the case required, our staff will make [indiscernible] appointments and, if required, provide the means, including the funds for clients to be examined in the most humane and dignified manner possible. The system will assist hospitals, clinics, and pharmacies with scheduling, stock management, medicine distribution, and other fundamental facets of medical service. We believe that we have the ability and infrastructure to provide such a service and have identified numerous partners that wish to assist with this ambitious and socially responsible and life-enhancing solution. We are currently investigating the latitude afforded by medical insurance acts the government health insurance as well as medical [age] in South Africa. This initiative is an [orderly] extension of our vision to provide a complete service to our clients throughout South Africa. B, our educational product is based on leveraging our USSD mobile platform, which services in excess of 5 million clients monthly. Educational content is readily available in South Africa and includes both informative as well as educational content. For example, HIV/AIDS information, recognizing malaria symptoms, filling in bank application forms, and the like will be provided as well as basic skills program, such as literacy and numeracy. The system will allow clients to subscribe for a range of specific programs, affording them the ability to acquire basic skills or improve the understanding of many day-to-day functions and processes. They system allows for sponsors to provide content or educational institutions to sell their courses via our distribution channel. Once courses or modules are completed, the result as well as a candidate's basic contact information will be shared with [macro jobbing] and recruitment companies to assist our customer base in finding employment. CSTS, which is a secure standard that allows information exchange between point of sale devices and electricity or water meters, such a standard has been approved and implemented widely in countries such as South Africa, Nigeria, and the Philippines Africa, Nigeria and Philippine. We are in excess of [60] million electricity prepaid meters that have incorporated the STS standard. We are the sole provider worldwide of STS hardware security modules used by utilities, meter manufacturers as well as vending platform providers across all of these territories, which use our technology to securely manage the sale, distribution, and payment for electricity, gas, and water. The maker's modification to the STS standard were necessitated by the fact that all existing meters would need to be updated before November of 2023, after which existing tokens would not be accepted. To solve this massive potential problem, we have developed a new standard for our security module called the STS6 as well as offering a Cloud-based interface solution for all solution providers, including token generators, providers of -- and payments of system operators. This solution installed on a transaction fee basis when compared to existing one, which is based on the [1C] model and thus such a new solution could directly or indirectly generate substantial revenue for us over time. Our security solutions have become the Windows or Android operating system in the field of STS base solutions for all participating country. South Africa is largely serviced by taxi, not the yellow New York cabs or Uber but 15 to 20 seater mini buses which provide the primary mode of transportation across most of the country. Our solutions will help bridge the gap between taxi owners and drivers [indiscernible] and reduce shrinkage, all while starting to accept electronic payments including contactless cards. Our new SASSA and EPE cards will be contactless and aim to potentially allow more than 10 million people to pay for their primary mode of transportation electronically across 100,000 different taxis. Shifting to EasyPay Everywhere, our strategy is to convert as many unbanked and underbanked customers as possible including grant beneficiaries to our new EasyPay Everywhere accounts. We have now in excess of 1.2 million EPE accounts just 10 short months since we introduced the product. We also have approximately 2,000 people across all nine provinces of South Africa focused on our financial inclusion product and in sales, operations and management. The value proposition for an EPE customers is summarizes as follows. One, access to a fully transactional and functional bank account at no cost, two, access to a wide area of products that they require but at a fraction of the cost and in a significantly more convenient manner, three, the ability to build a formal credit history, thereby enabling them to be included in the formal financial services sector with anyone and anywhere in the country, and four, increasing their savings and having the knowledge that their bank will continue to find ways to introduce products that will make their lives simpler, cheaper and safer. Our EPE customers also enjoy reduced charges when using our EPE branded ATM network. We now have 118 physical launches and 827 ATMs deployed at the end of April, we've posted 900,000 transactions with a value of over ZAR 800 million. As we deployed more ATMs and sign up more EasyPay Everywhere account holders, we should continue to increase the transaction volumes of our ATMs, resulting in potentially up to a fourfold increase in the overall fees we generate even though our fees are less than those charged by other banks. Moving on to our financial services offering, you might recall in March 2015 new regulation was passed to introduce more stringent affordability assessment criteria, which we welcomed and introduced immediately. That did, however, result in a sharp reduction of our loan book during -- at the end of quarter three 2015, due to a larger number of decline applications as they did not meet the new standard. The book remained at about ZAR 490 million to ZAR 495 million in Q4 2015 and Q1 2016. However, with an extended branch network, a larger EPE customer base and favorable seasonal trend in December, we saw a sharp increase sequentially in the loan book during quarter two 2016 and ended the quarter with a loan book of approximately ZAR 687 million, despite the lack of [ineffective] season in Q3 2016 and a more challenging macroeconomic environment driven by drought induced food inflation, our loan book remained healthy at around ZAR 662 million. Starting with our current June quarter, we will anniversary the regulatory change and our lending business should return to demonstrating strong year-over-year growth. In addition, our sales force in some provinces are actively marketing and selling our new insurance products. The growth in this business remain constrained by ability to identify and recruit very specialized skills and as required by the insurance regulator. At the end of April, we had over 85,000 policies and although these numbers are not significant as yet, we believe that once we have deployed the required staff in all provinces, the contribution from insurance should become more meaningful, as we have experienced with all of other financial inclusion business products. Another benefit from having a life insurance license is that we were able to differentiate EPE while providing customers free basic life insurance cover. I will now spend a few minutes on our mobile-centric business ZAZOO. ZAZOO has made demonstrable strides, particularly internationally, during the last quarter. We have become a certified third-party processor in EU with MasterCard, which combined with our recent deal with Master Payment and strategic partnership with Bank Frick will provide the foundation required to own the entire value chain and to control and operate our customer-centric and enterprise payment product end to end in the EU. As a result, we look forward to launching into this market with this offering in the next few months. The quiet launch of our seamless mobile-based remitting solution has showed great result today with WorldRemit in the UK being our first client. We commenced our WorldRemit project, initiating international remitting services to South Africa during February 2016. And the initial beta programs update has been very encouraging. In three short months, we have seen $8 million move through the platform. We will continue to build this product roadmap and focus heavily in the coming months on customer acquisition for money sending into the [select] region. What is also important to note about this product is that the revenue we earn on this project is largely through fees paid by the sender, which in our case means hard currency revenues. Our Uber relationship continues to strengthen, so much so that we are now the only virtual card program operating with a taxi service. In South Africa, we have enabled riders cumulatively to take the equivalent of two trips around the world on Uber. All the world would never have been able to use the services without our virtual card offering. Our program in India continues as our Oxigen wallet partnership gains momentum. We launched our MVC technology in India with Oxigen in January 2016. We started with a beta version of the solution a little over three months ago. And we were very pleased to have gained 180,000 users purely through self-discovery or word of mouth. Oxigen wallet has over 15 million users and has now only just begun advertising the product. We are excited to see the take-up rates in India over the next 6 to 12 months. All of our mobile initiatives span the developing and developed world and solve the issues we have identified, namely interoperability, accessibility and security, especially for [Indiscernible] transactions. Our international operations, barring Korea, of course, are still in development stage and will continue to require some investment for the foreseeable future. In South Africa, we remain focused on introducing and growing our B2C and B2B offering and extending our value-added services. From a financial and metric perspective, ZAZOO's revenue grew 31% year over year in constant currency and for the second successive quarter posted more than 100 million transactions in Q3 of 2016. Meanwhile, our mobile value-added services in South Africa and elsewhere continue to grow. Umoya Manje posted 36% transaction growth over quarter three of 2015, while Power Manje transaction grew 82%. We've now light up more than 800,000 households on a monthly basis. Similarly, Pasavute in Malawi sustained its momentum with year-over-year transaction growth of 67% in Q3 2016. To stress again, on our value-added services, the reason for our success with these projects is because we provide a solution that is convenient, easily accessible, and affordable, and it is by far the cheapest of any formal or informal alternatives. To reiterate, on our mobile-centric business, we remain intent on building ZAZOO into one of leading mobile fintech companies globally. We already have built sufficient scale in this business, both in terms of revenue and more importantly profitability. And with its current and rapidly growing pipeline, we continue to hold ZAZOO to an extremely high standard of delivery. In April, we acquired a 60% of Master Payment in Germany and entered a long-term strategic relationship with Bank Frick. Master Payment provides payment to -- in acquiring services for all major European debit and credit cards involved in invoicing for online retail, digital [indiscernible] content and, through Bank Frick, flexible working capital financing through its fine-trading solution. Master Payment has a client portfolio of approximately 5,000 registered merchants. We recently concluded a workshop with a Master Payment team and look forward to rolling out an aggressive customer acquisition plan as well as the integration of our core technology to bolster the market positions through our world-leading technical offering. I'm pleased to announce that we have finally received the first order for our smart cards from the WFP. The first country in which our technology will be deployed is Zimbabwe. It's exciting that, after almost 14 months of negotiating and waiting, we are finally being tested on the grounds where we know we will perform successfully. This third project will no doubt open the door for other countries to follow suit in the very near future. Lastly, I would like to update you on SASSA. We have had one meeting with SASSA regarding their plans to start to take the payment system over in house, as directed by the Constitutional Courts of South Africa. The task of taking the system in house is complicated and complex. For example, if the system has to remain open as defined by the SARB, or the South African Reserve Bank, a bank would have to be used to issue the SASSA-operated cards, resulting in the same situation that SASSA is currently in. That is, they would be subject to the South African Reserve Bank and by the rule Payment Association of South African rules and thus not being involved in any way in providing the solution. The system would just not be deemed to be in house, but simply outsourced. This would require a new tender and possibly condemnation by the Constitutional Court. Implementing a closed system is technically possible due to our [indiscernible] solution but possibly not desirable from the South African Reserve Bank or Payment Association of South Africa's point of view. Of course, a closed system solution would offer SASSA a real in-house based solution which they would -- could operate and control in all ways possible. These issues and many related others make this transition extremely difficult for SASSA, as the priority remains as per the Constitutional Court's directive to be in the best interest of the beneficiaries. We will keep all of our shareholders updated as this process unfolds over time. To conclude, outside of the impact of repatriating our South African cash reserves, the Company remains poised to deliver sustained growth over the years to come in many of its businesses, including internationally. We will continue to strive to extend the longevity of our business contracts and to improve the quality of our earnings for the benefit of all of our shareholders. Thank you very much for your time, and over to you, Herman.

[Herman Kotze:]

Thank you, Serge. I will discuss the key results and trends within our operating segments for the third quarter of 2016 compared to a year ago. For Q3 of 2016, our average rand-dollar exchange rate was ZAR15.82 compared to ZAR11.74 a year ago, which negatively impacted our U.S. dollar-based results by approximately 35%. And the South Korean won was 9% weaker compared to last year's won rate. We continued to face significant currency headwinds in our operating geographies. True to form, the rand has maintained its status as one of the world's most volatile currencies. And after trending well below ZAR15 for a few weeks, the ongoing volatile macroeconomic news has resulted in current trading at the ZAR15 level again, which will obviously influence our Q4 results. Consistent with the first three quarters of this year, we have experienced good growth in our functional currencies. And this momentum continues through to Q4. As I mentioned previously, while we do not specifically hedge currency into the purely translational nature of its impact on our dollar-denominated results, we are well aware of the associated risks of a weaker rand. We therefore decided to convert a further ZAR500 million of our South African cash balances through a dividend to U.S. dollars at holding company level during February 2016 to reduce currency volatility on our cash reserves. Predictably, this has again resulted in withholding and other tax-related adjustments as well as lower tax effective interest income due to the differential between South African rand and U.S. dollar deposit rates, which impacted us by approximately $0.05 of EPS this quarter. For the full year, we expect a total impact of approximately $0.18 on EPS, including the prior distributions and assuming no further distributions through to June 2016. Revenue for Q3 2016 grew 20% in constant currency, while fundamental earnings per share increased by 1%. On a consolidated basis, for Q3 2016, we reported revenue of $134.8 million and fundamental earnings per share of $0.43. Our fully diluted weighted share count for Q3 2016 was 46.4 million shares, which was positively impacted by share buybacks in February 2016. For clarity, there was no impact on our Q3 2016 share count as a result of the IFC transaction, as this transaction will only close next week. Now, to our segments, in our South African transaction processing segment, we reported revenue of $50.6 million in Q3 2016, down 13% compared with Q3 2015 in U.S. dollars, but an increase of 18% on a constant currency basis. In South African rand, the increase in segment revenue and operating income was primarily due to higher EPE transaction revenues and as a result of increased usage of our ATMs, more low-margin transaction fees generated from cardholders using the South African National Payment System, increased intersegment transaction processing activities, and a modest increase in the number of social welfare grants distributed. Our operating income margin for Q3 2016 and 2015 were 26% and 23%, respectively, and was higher primarily due to higher EPE revenue as a result of increased ATM transactions, an increase in intersegment transaction processing activities, an increase in the number of beneficiaries paid in Q3 2016, and a modest increase in the margin of transaction fees generated from cardholders using the South African National Payment System. And this was partially offset by annual salary increases granted to our South African employee base. We continue to expect our South African processing segment margins to be in the low to mid 20% range for the remainder of fiscal 2016. The margin will be affected by continued rollout of our ATMs during 2016 and inflationary pressures on our cost base in South Africa. Intersegment transaction processing activities are eliminated on consolidation, but have a meaningful contribution to the segment during this quarter. International transaction processing generated revenue of $30.6 million in Q3 2016, up 43% compared with Q3 2015 on a constant currency basis. Revenue increase in constant currency primarily due to higher transaction volume at KSNET during Q3 2016 and a contribution of approximately $2 million from T24 from January 2016. Operating income during Q3 2016 was lower due to an increase in depreciation expenses at KSNET and ongoing ZAZOO startup costs in the UK and India, but was partially offset by an increase in revenue contribution from KSNET and positive contributions from T24 and XeoHealth. Operating income margin for Q3 2016 and 2015 were 12% and 17%, respectively. The result of our newly acquired 60% interest in Master Payments will be included mainly in this segment in the fourth quarter of fiscal 2016. These results are expected to be modest initially, but we hope to scale these operations through collaborations with our business units, primarily ZAZOO and T24. Operating income and operating income margin for last year's Q3 results was positively impacted by a refund of approximately $1.7 million that had been paid several years ago in connection with industry wide litigation in Korea. For Q3 2016, KSNET's revenue grew 8% in Korean won to $36 million, while EBITDA margin was 29% compared to 50% last year, which included the settlement received in Q3 2015. Excluding such settlement, EBITDA margin improved from 26% in Q3 2015. KSNET has sustained local currency growth of high single to low double digits for several quarters now, despite a slowing economy. Our financial inclusion and applied technologies segment revenue was $54.3 million in Q3 2016, up 9% compared with Q3 2015 on a constant currency basis. In South African rand, financial inclusion and applied technologies revenue and operating income increased primarily due to higher prepaid airtime and other value added services sales, and in rand an increase in intersegment revenues offset by fewer ad hoc terminal and court sales and lower lending service fees. Although lending fees were lower year-over-year, as Serge alluded to, we did experience sequential growth due to the significant expansion of our book in Q2 in 2016. Operating income for Q3 2016 was also adversely impacted by establishment costs for Smart Life and expansion of our branch network as well as an increase in intersegment charges. Our UEPS base lending book at the end of Q3 2016 was approximately ZAR662 million compared to ZAR687 million at the end of Q2 2016 and has decreased moderately due to the seasonal nature of this book. We believe that our lending book can be grown through further expansion of our financial services brand and ATM networks. And as expected, the rollout of our Smart Life insurance policies continues to gather momentum. And we look to it to contribute more meaningfully as we scale our operations and employ the appropriately qualified staff members as required by the regulator. As our insurance business grows, we will build the appropriate reserves on our balance sheet while the impact of policy collections will become more pronounced in segment revenue. Operating income margins for the financial inclusion and applied technologies segment were 21% and 27%, respectively, during Q3 2016 and 2015 and has decreased primarily due to establishment costs for Smart Life, expansion of our branch network, annual salary increases for our South African employees, and an increase in intersegment charges. The operating margin of the segment will continue to be affected by the relative contributions of the various businesses in this operating segment and the introduction of our EasyPay Everywhere and Smart Life products. We will continue to spend on marketing and establishment costs for these exciting products during Q4 of fiscal 2016. Corporate and eliminations includes amortization of intangibles, stock based compensation, U.S. legal expenses, and general corporate and overhead costs. In U.S. dollars, our corporate expenses have decreased primarily due to the fair value adjustment gain of $1.9 million related to the acquisition of T24, the impact of the stronger U.S. dollar on goods and services procured in other currencies, primarily the rand, and lower amortization costs partially offset by modest increases in U.S. dollar denominated goods and services purchased from third parties, director's fees, and M&A transaction costs. We expect our corporate expense to increase in Q4 2016 as a result of our new offices and related expenses in the United Kingdom. Our Q3 2016 net interest income increased to $2.5 million, driven primarily by higher average daily South African rand cash balances and South African rand interest rates and lower interest rates on our Korean debt, partially offset by the lower interest earned on the U.S. dollar cash reserves that we converted from rand through distributions from our South African subsidiary. Capital expenditures for Q3 2016 and 2015 were $8.1 million and $6.3 million, respectively and have increased primarily due to the acquisition of more payment processing terminals in South Korea and ATMs in South Africa. At March 31, 2016, we had cash and cash equivalent of $123.3 million up from $118 million at June 30, 2015. The increase in our cash balances from June 30, 2015 was primarily due the expansion of all our core businesses partially offset by the strengthening of the U.S. dollar against our primary functional currencies, repurchases of shares of our common stock, provisional tax payments, acquisitions and capital expenditures. During Q3 2016, we acquired 1,328,699 shares of common stock for approximately $12.7 million which bring our total repurchases for fiscal 2016 to approximately 2.1 million shares at an average price per share were approximately $11.51. We continue to fund the Group's operations and capital investments utilizing our cash reserves and cash generated from our business activities. We also expect to receive approximately $107.7 million related to the IFC transaction next week and expect to use the proceeds primarily for the expansion of our business and technological solutions deployed in emerging markets across the globe. In addition, during the next 12 months, we expect to use our existing surplus cash reserves and additional cash generated to fund our financial services offerings, investments in our new and high growth businesses such as EasyPay Everywhere and Smart Life ATMs and international expansion, the servicing of our debt, share repurchases and strategic acquisitions. Our effective tax rate for fiscal 2016 was 34.6% and was higher than the South African statutory rate, as a result of non-deductable expenses including consulting and legal fees and the tax impact including withholding taxes of approximately $2.1 million attributable to a further distribution from our South African subsidiary, which we intended to further help produce the impact of weakening rand on our reported cash balances. We expect our effective rate for 2016 to be in the mid-30% range and remind you that it may be impacted by any further distributions from our foreign operations. Our weighted share count for Q3 2016 was 46.4 million shares, our share count as of March 31, 2016 was 45.6 million shares net of the stock repurchase but have increased to 55.6 million shares, as a result of the issuance of 9.98 million shares to the IFC next week. We also anticipate our Q4 2016 weighted average share counts to be approximately 51.1 million shares and our fiscal 2016 weighted share count to be approximately [47.9] million shares. The fundamental drivers of our business activities remain strong and robust and we continue to make tangible progress with diversifying our customer, currency and product base. On a like-for-like basis, we expect fundamental earnings per share of at least $2.40 for fiscal 2016, which includes a full year impact of $0.18 per share related to taxes and foregone interest income, as a result of the distribution of cash with South Africa to our U.S. parent. Our fiscal 2016 guidance once again also assumes a constant currency base of ZAR 11.43/$1 and a share count of 57.6 million shares. With that, we will gladly take your questions.

[Operator:]

Thank you. [Operator Instructions] Our first question is from Dave Koning of Baird. Please go ahead.

[Dave Koning:]

Hi guys, nice job across a lot of fronts. My first question, I guess the EasyPay accounts, we're really starting to see the impact really for the first time the last couple quarters on the South African transaction segment, up to 18% growth. That had been growing kind of in the 10% range. Is that now expected just continue to accelerate as EasyPay Everywhere accounts keep coming on? And is 18% the starting point? Like, should that be a 20% grower the next several quarters?

[Unidentified Company Representative:]

Dave I think, impact of the EasyPay Everywhere accounts is obviously assumption also of the rate of the rollout and I think in Q3 obviously, it's the first time that it's really become visible, simply because of the exponential growth that we saw during Q1 and Q2 of the fiscal year. So, as you look at the take up rates, it's not a continued exponential growth as we obviously saw from the launch date but will be still a pretty aggressive curve going forward and obviously as the cards are issued and people start using them and getting used to them, I think we should see continued growth in our South African transaction processing segment as a result of the use of those cards. And but also to remind that some of the revenue that you've seen in that segment is a result of the intersegment reallocations. To conclude, we expect the take-up rate of EasyPay Everywhere to continue and we expect the impact of that's on the segment revenues and incomes to be evident going forward until the end of at least this calendar year. I think we'll see a pretty good growth rate.

[Dave Koning:]

Okay.

[Serge Belamant:]

David, it's Serge here. Just to add on what Herman was saying, I think it's quite important is that, when we kicked off EasyPay Everywhere, we were expecting around the registration of about 120,000 people a month with the infrastructure that we were using at the time. Now, obviously, we've been maintaining that number. But, we can see that that's -- from week to week, we can see it dropping to 90 like 100 and then 90 and then 80. And the reason for that is because, at the moment, we have pushed EPE through our physical branches. And by doing that, it's quite obvious that the people that have access to these branches do not live 150 kilometers away from a branch. So, we can see that that number is now becoming -- is reduced because we pretty much are getting to the end of that registration. The exciting thing I can mention is that we are now activating our mobile systems, in other words that we are now going to start going away from the mortar, brick and mortar branches, and we're going to grow far much further than what the brick and mortar branch can actually give you. And we believe that that is going to rejuvenate the entire uptake of EPE and getting back to the numbers of 120,000, 140,000 people a month. Now, that will ensure that we get well over the 2 million customers that we had mentioned before by April of next year or probably will be 2.2 million, 2.4 million, maybe a little bit higher than that. But, more importantly, these customers are starting to transact. And they're starting to transact more and more in our own infrastructures, in other words, in our own ATMs, at our own point of sales, through our own USSD portals, which means they are generating more and more processable transactions for us as we are taking these transactions from the opposition. So, we see EPE to be very much a driving force economically for the Company even near term.

[Dave Koning:]

Okay. That's great. I guess, and secondly, you mentioned in the press release, you used the words a watershed year for fiscal 2017. We just saw the financial inclusion business, the high-growth business, actually decelerate to about 10% growth. It had been 20%-plus for several quarters. But, yet, you're talking about net year's a watershed year. Are we going to reaccelerate back to 20%-plus, or maybe even does watershed mean better than what it's been? Like, so, should we get even better growth next year than the last couple years in the financial inclusion?

[Serge Belamant:]

Okay. So, David, again, it's a very, very good question. And there are two parts to the answer to the question. Part A is that, because we are activating now what we call our non-branch infrastructure, we believe that we are going to see new acceleration in all of our financial products, simply because of the fact that we are now targeting a much larger segment of the population. Even if you look at today at the 10 million people or 11 million people that we actually service, at the moment, we basically have around well 5 million people use our USSD portals, but around 1.-something, 1.3 million people use Visa alone. Only 1.2 million people have got EPE cards. Now, there is no reason for that limitation except for one thing is that we have to be able to get to those people. And we believe that our mobile solutions now are going to give us the ability to access many more people that today simply can't get to us. And we want to get to them. So, that's part of one of what I'm saying is a watershed, in other words, a new impetus in our ability to be able to access more customers and therefore to be able to sell more financial products and other services, like the ones that I've just mentioned, things like, for example, medical insurance, certainly our educational portal. All of us have got -- could have a fundamental change to our earnings over the next year or two years, three years, without a shadow of a doubt. The second part of the answer in terms of being a watershed is that we have been looking for a while for a partner like the IFC to give us the opportunity to accelerate our extension into the rest of the world. In other words, we know, and I mentioned this before that before we were really busy, MasterCard is the driver to implement our UEPS technology. In other words, where MasterCard went and could not provide a solution that was really differentiating themselves from Visa as an example they would rather bring in UEPS as the so-called mix factor to be able to say yes, you should have a MasterCard logo, not because the logo meant too much, but because UEPS functionality was present. We now with the IFC can achieve the same thing without having to have somebody else like MasterCard or Visa actually promoting us in any way. And already, we are seeing -- although the [indiscernible] not received the $107 million yet, and we have not issued the shares, the IFC in good faith have already opened up a couple of doors for us in a number of areas. And we believe because of that, that we will be able to accelerate the implementation of UEPS technology with many other developing economies which we have not been able to do at the speed that we were hoping to be able to achieve. I think that is over. I think there is a very good chance that we are going to be able to do this right now.

[Dave Koning:]

Okay. No, that's helpful. And I guess, finally, just my last question, just because next quarter we're going to walk in and we're going to see guidance for next year for the first time, but there's nothing that you would say should decelerate growth next year. If the last two years in total have been about 20% constant currency growth, you see no reason based on all the opportunities for next year not to be at least that good if you think of it as a watershed year. Is that fair to say?

[Serge Belamant:]

I think it is fair, David, is that if we ignore -- I know it's difficult to ignore it. But, if we ignore things like exchange rates, the rand, for example, which certainly has hurt us in many, many different ways, but if you look at the expansion program and what we're starting to do, specifically with ZAZOO as well, which has yet to really create a huge amount of impact on our bottom line, we still believe that, without a shadow of a doubt, there is no reason to believe that we cannot continue to grow at the 20% mark next year because we're seeing it as almost a new fresh start for our technology and our systems simply because we are more ready now to be able to attack the markets with our European and enterprise that allows us to do things that issuers of card or products or merchants that we could not do last year. So, we really believe that 20% is without a shadow of a doubt achievable. And I would be disappointed if that number does not grow over the next two years or so.

[Operator:]

[Operator Instructions] We have a question from Jordan Hymowitz from Philadelphia Financial. Please go ahead.

[Jordan Hymowitz:]

Hi. Thanks, guys. And thanks for taking the call. Can you hear me okay?

[Serge Belamant:]

No.

[Operator:]

The sound is not so good, Mr. Hymowitz. Could you speak a little bit louder maybe?

[Jordan Hymowitz:]

Is that any better?

[Operator:]

No, unfortunately, your line is not very good. If you want to start, you can take it to handset maybe.

[Jordan Hymowitz:]

Is this any better?

[Operator:]

Yes.

[Serge Belamant:]

Yes.

[Jordan Hymowitz:]

Perfect. Thank you. Can you guys update us on the status of any other contracts being bid on in South Africa? There's a water contract. There's an electricity contract. There's a contract with small business vendors. Can you just update us on the status of any other tenders? Are you guys in the finals? Are you working on towards that, or what's the status there, please?

[Operator:]

Apologies, Mr. Hymowitz, we have lost our main speakers. If you can just standby while we connect them. Please standby. We'll reconnect Mr. Belamant. Please standby, ladies and gentlemen. Mr. Belamant, please go ahead, sir. Mr. Belamant, you've rejoined the call, if you can go ahead.

[Serge Belamant:]

Hello?

[Operator:]

Yes, please go ahead. This is the operator. You have rejoined the call.

[Serge Belamant:]

Oh, wonderful. We were doing a -- we were going through the question and answer session.

[Operator:]

That's correct, sir. We did have a question from Mr. Jordan Hymowitz of Philadelphia Financial. Mr. Hymowitz, if you can please repeat your question.

[Jordan Hymowitz:]

Sure. First of all, thanks for taking my question and congratulations on a good quarter. Could you be kind enough to update us on the status of existing tenders in South Africa? There's water tender. There's an electricity tender. There's a small business tender. Do you know when any of those decisions will be made and how we're looking?

[Serge Belamant:]

Yes, I can answer the question. There are a number of tenders, mainly around the electricity infrastructure in South Africa. In fact, at least two of them that I'm aware of. We've obviously tendered for both. The first one, which went out a little while back, for lack of a better word, we are still waiting. My understanding is that there's not too many people left in the tender. And we are waiting for province to actually make a decision. The second tender, which is very, very similar to the first one, is relatively new. And we've obviously tendered for that as well. And we're waiting for the next step. As mentioned during the sorry, Jordan?

[Jordan Hymowitz:]

The first tender's in which province you said, I'm sorry?

[Serge Belamant:]

The two tenders are electricity based. And both of them the first one was filed. In other words, everybody replied. And we are waiting the outcome. In other words, it has been delayed in terms of the outcome, which is not surprising with tenders. And the second one, which is a similar size, we've tendered as well. And we're also waiting for that tender to close. So, as I mentioned in my.

[Jordan Hymowitz:]

You said it was a province.

[Serge Belamant:]

Yes, they're both massive projects.

[Jordan Hymowitz:]

Are they with a specific province or with the whole country?

[Serge Belamant:]

No, this is not for the whole country. We're talking about normally municipalities. In other words, you could be looking around for each of them anything between 0.5 million to sometimes 600,000 meters that have got to be installed and obviously managed and for that and for the payment system to be implemented in order to service or to generate the totals. So, they're both very, very, very large tenders. But, as I mentioned before Jordan, the importance in here is that we are now the provider of security modules, which are the only ones that are now useful going forward to prevent the meltdown of the total generation in South Africa because by 2023, which is I know it sounds like a long way away, but it's actually not that far away. When we have to update millions and millions of meters, we believe that we are now well placed, in a better place than before, to play a major role if not to win a number of those tenders.

[Jordan Hymowitz:]

And I'm sorry. Are these tenders with the whole country or with just a region?

[Serge Belamant:]

No, it's only for a region of the country. So, it could even be a region within a province.

[Jordan Hymowitz:]

And can you say what regions the tenders are for now?

[Serge Belamant:]

No, at this point in time, I think if Nanda is around, he will know the exact regions. I don't see why it cannot be mentioned. Let me see if I can, I can see him in the corner of my screen. So, maybe he will know what the regions are. Nanda, are you around?

[Nanda Pillay:]

I am, Serge. It's in Gauteng. The one is in Gauteng, specifically Tshwane, the city of Tshwane. And the second one is also Gauteng, but it's the western area of Gauteng, which is the Mogale City environment.

[Jordan Hymowitz:]

Perfect. Thank you very much. My second question, you guys have been very good on buying back the stock. And I know there has been some restrictions because of the IFC. With those and the stock is such an attractive price, could we hope that management will join our shareholders in buying some stock personally?

[Herman Kotze:]

Hi, Jordan. This is Herman. Obviously, we have to be aware of the company's blackout periods and other periods where we are precluded from buying the stock, but it's something that we obviously consider whenever the opportunity presents itself. That opportunity hasn't presented itself for quite some time now, unfortunately. But, it is something that we do take under ongoing consideration.

[Operator:]

Thank you. We have a question from Dave Koning of Baird. Please go ahead.

[Dave Koning:]

Yes, hey, guys, again. My question, I guess, on the SASSA commentary that you made that you had a meeting with it sounds like they want to take it in house. I was a little unclear. Did you make it sound like they want to take the entire process in house? I know you made it that that was very difficult to do, or does it sound like they might still need to outsource a good chunk to you guys?

[Serge Belamant:]

David, again, it's a very, very good point. As, it's something that was discussed during the Constitutional Court's action, was in fact, what does that mean, SASSA taking the process in house, the payment process in house? At the moment, we are the one doing the payment process in totality, from A to Z. So, the question is, if SASSA wanted to take the payment process in house, which piece of the payment process would they actually take? Now, we know that, right now, SASSA is not a bank. So, SASSA could not act as a bank. SASSA is not an insurance company. So, they would not be able to act as an insurance company. SASSA is not a macro lending entity. They don't have a lending license. So, they would not be able to act as a under the credit regulation. So, at the end of the day, if SASSA decided to want the system to remain open and what we mean by open means that it would work as if it were part of the banking network, a national payment system, the problem with that is that that means cards under the South African Reserve Bank and the Payment Association of South African regulation. Cards must be issued by a bank, which means if cards are issued by a bank, the account that is associated with the card belongs to the bank, which means that, by definition, SASSA would be as far as the banking piece is concerned, SASSA would be in exactly the same position as they are today working with us and having the accounts provided by [indiscernible] bank. There would be no difference. In other words, they would not be able to take any of that in house. Once you've removed those two elements, what is left? Well, what is left is obviously the payment infrastructure in rural areas, which is the pay points. Now, there is no doubt that SASSA could decide to take that in house. But, at this point in time, we know how complex that is to visit these 10,000 pay points with 600 trucks and 2,000 ATMs built on top of those trucks. So, we're not sure that SASSA would have necessarily the appetite to actually go ahead and just say, we're going to be buying [indiscernible] infrastructure [indiscernible] trying to build on simply because it would be actually probably more expensive for them to actually run it than to outsource it. So, assuming that they speak to outsourcing it, then what would be left over for SASSA to take in house? And that's the question that we are facing at the moment. Well, if of course SASSA decided to say, we want the system to be closed the way that it used to be a number of years ago, closed but interoperable, in other words, you do not require a bank to issue a card. You do not have to worry about interoperability because our [morphing] technology, our UEPS [EMV] card, would be able to be accepted by bank ATMs and points of sale, but it does not have to be branded Visa or MasterCard and [indiscernible] to be a white label card. That would allow SASSA to other outsource technology in terms of providing the backend banking system, but they would not have to outsource anything else. In other words, they in fact could actually run it almost like a PPP or what they call a build, operate -- build, sell, and operate. And they would be able to operate the system in the way that they see fit without falling under the jurisdiction of the Banks Act or the Payment Association of South Africa Act. So, it's a very, very difficult decision for them because the Constitutional Court, as we all know, said, either you're going to award the tender, or you're going to take it in house. But, no one has yet explained to either party what taking it in house would actually mean. So, I think it's quite a lot of water to go under the bridge before SASSA actually decides strategically what it is that they want to do and, two, to make sure that what it is that they want to do would be in line with the Constitutional Court ruling, number one, otherwise, they would have to go back and get some [conversation] and number two, that what they want to is in fact possible and would result in them being able to say

[Dave Koning:]

Got you, okay, that's helpful. I think I'm good then. Thanks for that.

[Operator:]

Our final question comes from Porter Collins of Seawolf Capital. Please go ahead.

[Porter Collins:]

Hi. Do you mind just talking a bit about the strategic investment by IFC? Prior to this, the Company had $125 million, $140 million of cash on the balance sheet, generates roughly $80 million in cash flow a year. And now, we have an extra $107 million. So, this is a Company sitting on a lot of cash and a lot of free cash flow. So, can you just talk about your thought process of how you're going to -- because you have, obviously, a lot of organic stuff going on. But, just can you talk about how you're going to use all this cash and how you're thinking about things more strategically? Thanks.

[Serge Belamant:]

Again it's a very good question, number one when we entered into the negotiating with IFC, we actually discussed the issue of the fact that, are we really interested in $107 million, and the answer was, well, no, we're not. And the money was not the reason why we did the deal with IFC, it could have been somebody else that could have come forward and said, we'll give you a $107 million at a 20% premium, would we have taken the money, and the answer is no. Why? Because we didn't need the money, now the big thing is we went to the IFC because of the fact that number one, they recognized what we had achieved in South Africa and elsewhere number one. Number two, they have recognized that our technology is some of the most advanced technology in the world and number three, that it is something that they can assist us to [rent] in many other countries, developing countries in the world, where people have attempted to do what we have done and failed miserably. This is what we're exciting about the IFC not the money, not of course, it's bit of money as well because of the fact that they would not invest in our company simply for the sake of assisting us, although they might have done so. So, now the question is what are we going to do with the cash? Well, there is no doubt that, with the amount of projects that the IFC believes that we can get involved in there might be a different business model that we can put together that gives us much longer contracts but longer contracts means we might have to have much larger investments upfront. For example, if we had to move into a country like Nigeria and we decided to say, now we want to have a 20 year concession on implementing electricity meters in households, but also to be able to control the distribution of any token, any generation tokens to those meters, there is no doubt that that would probably cost billions to actually get into. And then of course, to have that extra $100 million would assist us to look at certain projects very differently, in other words, to [trade] how much money do we invest upfront, but for a much longer -- not a three-year tender or five-year tender, like the SASSA contract, but let's rather go for 15, or 20-year concession. So, that's one of the fundamentals about having to use this or being able to use this cash. And there are a number of other ways, these opportunities that we have not taken in the past simply because we were not in the position to be able to say, well, we have got an extra $100 million, and therefore, we can actually take a chance in putting in a $20 million or $30 million investment in any infrastructure in any secondary or tertiary country. So, that's really what we're going to do with this money. And because you are quite right, we do generate a lot of cash flow, if we have to do nothing, we'll end up with $300 million in cash in the very, very short term. And that of course fits hand in glove with Jordan's point, which was to say, is the Company likely to do share buybacks? Well, there's absolutely no doubt that, as we accelerate, we're at the level that we are still trading, for whatever the reason may be. And it would be silly for our Board that has approved a few months back $100 million of share buybacks, and I think we've still got about $75 million that we can utilize, I think that there is a good chance that, once we are able to buy back, there is no reason to believe [indiscernible] into the market and do a much more aggressive buyback strategy, to mention the investment, obviously, intending on getting up, actually have the chance to do so.

[Porter Collins:]

I appreciate the answers. And I agree. I'm not a huge fan of stock buybacks -- a lot of runway. But, the stock is very cheap at five, six times earnings. It's a great use of shareholder money, given the fact that your payout ratio on existing cash flow is just still so low. So, either increase the dividend and increase share buybacks is probably a great shareholder friendly approach at this point. So -- thanks so much.

[Serge Belamant:]

Thanks.

[Operator:]

Ladies and gentlemen, that concludes the question-and-answer session. Our call is also finished for today. On behalf of Net 1, thank you for joining us. You may now disconnect your lines.