Lesaka Technologies, Inc.
Q2 2016 Earnings Call Transcript

Published: 6 Feb 2016

[Operator:]

Good day, ladies and gentlemen, and welcome to the Net 1 UEPS Second Quarter 2016 Earnings Conference. All participants are currently in listen-only mode. And there will be an opportunity for you to ask questions later during the conference. [Operator Instructions] Please also note that this conference is being recorded. I would now like to turn the conference over to Dhruv Chopra. Please go ahead, sir.

[Dhruv Chopra:]

Thank you, Chris. Welcome to our second quarter fiscal 2016 earnings call. With me today are Dr. Serge Belamant, our Chairman and CEO; and Herman Kotze, our CFO. Both, our press release and Form 10-Q, are available on our website www.net1.com. As a reminder, during this call, we will be making certain forward-looking statements. And I ask you to look at the cautionary language contained in our press release and Form 10-Quarter 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. 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 you know, the Company’s results can be significantly impacted by currency fluctuations between the U.S. dollar and the South African rand. With that, let me turn the call over to Serge.

[Dr. Serge Belamant:]

Thank you, Dhruv. Good morning to all of our shareholders. During our second quarter of 2016, our recurring and mature businesses continued to deliver according to plan. While our newer growth initiatives like EasyPay Everywhere, financial services and ZAZOO delivered results above our own expectations. Outside of the fundamental drivers of our business, over the past few months, one of the key events that has had an impact on the Company has been the rapid depreciation of the South African rand, and political and macro economic factors affecting emerging markets in general, and South Africa in particular. Our strategic initiatives are really starting to contribute to our top line with second quarter constant currency revenue growth accelerating to 23% from 19% in the first quarter. A number of these initiatives still require investment to scale, and therefore the commensurate contribution to profitability will lag until each of those initiatives achieve critical mass. The good news is that some of our South African initiatives should achieve this starting -- this starting point right now in the third quarter of fiscal 2016 and into the remainder of the year, while some of our international activities will potentially follow suit during the second half of calendar year 2016. Our fundamental EPS in quarter two was $0.42, which was lower, both in dollars and in constant currency terms. Excluding the impact of the repatriation of cash, which Herman will discuss in more detail. In quarter two 2016, we saw an opportunity to expand our branch network, ATM’s integration, and sales and support staff to capitalize on the demand of our products, particularly in advance of the festive season in December. These actions therefore resulted in additional cost, which we recognized during quarter two. During the second quarter, we repurchased roughly 750,000 shares for approximately $11 million, given the value we see in our stock. Earlier this week, our board replenished the authorization back up to $100 million, and as always, we will continue to be opportunistic with our share repurchases. We have sustained the momentum in establishing our EasyPay Everywhere initiative, expanding our financial services businesses and further developing ZAZOO, both in South Africa and internationally. We continue to scale all of our strategic businesses as we expect these to deliver higher revenue streams with improving margins, as we move through the remainder of fiscal 2016 and into fiscal 2017. I will now focus on the key strategic areas across our card and mobile centric activities, including EasyPay Everywhere and of course ZAZOO. Let me start with our EasyPay Everywhere initiative. Our strategy, which partly resulted from our decision not to participate directly in a new SASSA RFP, was to convert as many unbanked or under-banked customers as possible including grant beneficiaries to our new EasyPay Everywhere account. By the end of this weekend, we should have opened around 900,000 EPE accounts. Keeping in mind, we only started seven months ago, we are incredibly proud of this achievement. The momentum we have with this product remains very strong as we have now moved from 350,000 accounts in October to 850,000 accounts by the end of January. January is seasonally slower after the festive season in December, but February has already started-off with a renewed vigor. We now have in excess of 1,900 people across all nine provinces of South Africa focused on our financial inclusion product, handling sales, operations, and management, and on average, are meeting our targets of opening around 150,000 new accounts per month. Securing alternative independent accounts allows all EPE customers, including beneficiaries, to consume a broad and growing suite of products affordably and conveniently when, where and however they choose to do so. Additionally, our EPE customers enjoy reduced charges when using our EPE branded ATMs. We now have 110 physical branches and in excess of 850 ATMs deployed at the end of January, which process over 900,000 transactions with the value of ZAR 808 million. As we deploy more ATMs and sign up more EasyPay Everywhere accountholders, we should continue to increase the transaction volumes on our ATMs resulting in potentially active a four-fold increase in overall fees we generate, even though our fees are less than those charged by other banks. Our loan book after two quarters of being stable, as we took a conservative approach to implement a more stringent affordability criterion, imposed by regulators in March 2015, returned to growth during the second quarter 2016, and given a broader branch network and seasonability resulted in a sharp increase in the book particularly in December. For the quarter as a whole, the net loan book increased 40% sequentially from the first quarter and at December 31, 2015 stood at around ZAR 687 million. Our loan book has continued to grow and at the end of January was ZAR 750 million. One point to note, our loan products are not your typical unsecured loans, as offered by traditional microfinance companies, but more specific purpose driven loan such as for emergencies, medical cost, school fees and alike. As a result, the profile and repayment characteristics on our products are naturally different and give us a confidence to expand our offering as long as they meet our stringent risk management criteria. In addition, we believe that the demand for our products is strong and gathering momentum because they are the cheapest and much easier to access when compared to any other alternatives whether formal or informal. We have also deployed our sales force in some provinces to market and sell our new insurance products. The growth in this business is constrained by ability to identify and recruit very specialized skills and as required by the insurance regulator. At the end of January, we had over 34,000 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 our other financial inclusion business products. Another benefit permitting [ph] the large insurance license is that we are also offering our EasyPay Everywhere customers free basic life insurance cover which further differentiates us from our competitors and detractors. I’ll now spend a few minutes on our mobile centric business, name ZAZOO. ZAZOO from its beginning in 2013 has combined various mobile related businesses within the Net1 group, integrating them as one unit, driving a unified corporate and market strategy, and building a cohesive mobile centric [ph] company with multiple products, customers and geographies. ZAZOO today includes over 5.4 million customers of its various Manje and value added services, Pasavute in Malawi, which for the first time exceeded 1 million active customers in Q1 2016 and has now crossed more than 1.4 million active users in Q2 2016. Over 2,000 employers with close to 680,000 employees for payroll services through our company FIHRST, ZAZOO enterprise payment solutions business which where transactions increased 6% sequentially from quarter one to quarter two in 2016. ZAZOO remains the largest virtual top-off service provider to NTN across nine African countries including Nigeria and South Africa. And we are the largest suppliers of SIM card to Smart, the largest operator in Philippines. What is even more exciting however is when we look at ZAZOO as it is and all its accomplishments I just listed, exclude what is the future of the company, namely our patented technologies of mobile virtual card and variable PIN. The majority of developments we’ve announced and talked about in the past 12 months, relate to MVC or variable PIN and have either recently been launched or in the process of launching. These initiatives span the developing and developed worlds and solve the issues we have identified, namely interoperability, accessibility, and of course security, especially for card not present transactions. In South Africa, we remain focused on introducing and growing our B2C and B2B offering. During Q2 2016, we further expanded our UK ZAZOO office and have begun adding additional executives and staff in order to help us implement and deliver our current and future pipeline of projects. From a financial and metric perspective ZAZOO revenue grew 55% year-over-year in constant currency, while it processed more than a 100 million transaction for the first time in Q2 2016, 9% higher than in Q1 of 2016. As discussed last quarter, we’ve been trying to identify the best solution that will allow us to use plastic or virtual cards ourselves without paying a real large portion of the acquiring and issuing fees to third parties. We have applied for a license in one of the EU counties and are awaiting a decision on the same. Since we don’t have further control over that process, in the interim through Transact24, we have identified an alternative issuer through whom we will be able to issue virtual cards in Europe -- in the EU. In addition, we have now been approved as a MasterCard certified third-party processor in Europe and therefore are in a position to accelerate our business, development efforts and commence product rollout across Europe in the next three months including our own B2B and B2C offerings. Our Funifi project is now launched as product in South Africa and we expect to commence in Europe in the next few months. WorldRemit, which is a UK deal is expected to commence activities with us over the next month and we have already seen growing interest from remittance companies to evaluate how we can replicate our offering for them. In India, we are thrilled to have launched our MVC product with Oxigen and Visa, a little over three weeks ago. Well Oxigen has not yet commenced aggressive marketing, the solution as we are currently ironing out operational and technical issues, we are very pleased with the earlier response. Clearly through discovery, we are signing up in excess of 10,000 new customers a week and already have done transactions in excess of 3.5 million rupees. These are small numbers in the grand scheme of things as Oxigen already has 13 million and growing Wallet customers and more than 200,000 retail distribution outlets, gives us a very strong platform to kick start our activities in India. Oxigen also publicly said in India that they intend to grow their Wallet customer base many-fold over in the next two years and believe that virtual product will be a key differentiator and driver for them to achieve these targets. Our pipeline in India is further strengthened since our launch and now includes other prepaid providers, loyalty aggregators, private and public sector banks and transaction processes. And we are at various stages of discussion with multiple players. We will need to continue to invest in our operations in India, not only to appropriately service our existing customer base, but also to capitalize on the pipeline of activity. Meanwhile, our mobile value-added services in South Africa and elsewhere continued to grow from strength this strength. Umoya Manje posted 67% transaction growth over quarter two 2015, while Power Manje transaction grew 112%. Similarly, Pasavute in Malawi sustained its momentum with year-over-year transaction growth accelerating to 146% in quarter two 2016. To stress one point on our value-added services, the reason for our success with this project is because we provide a solution that is convenient and easy accessible through the mobile phone 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 the 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 January, we acquired 56% of Transact24 that we didn’t previously own. Transact24 based in Hong Kong offers debit, credit and prepaid processing and issuing services for Visa, MasterCard and China UnionPay in China and other territories across the Asia-Pacific, Europe and Africa, and United States. Outside of T24’s core businesses, we will seek to incorporate MVC into their card programs including with some of the large Chinese e-commerce companies. Built on the ACH processing capabilities in the U.S. by integrating payments resulting from our XeoHealth healthcare claim processing business, expand card showing activities across the Asia-Pacific and leverage our tokenization expertise in these core operations. Regarding WFP, during quarter one 2016, we had submitted the joint bid with MasterCard for the World Food Program distribution business in 81 countries. WFP is not yet awarded this tender, and unable to predict when they will do so. For the 12 countries in the SADC, we already -- that has been already awarded to us, we are close to finalizing our service level agreement and expect the implementation, the first country to commence within the next three months. The reason for the -- why the first country has taken as long as it is, is because this will form part of the blueprint of the model we will try to replicate across the other countries. And it requires a great deal of diligence. Lastly, I want to provide a brief update on our SASSA contract. As you know, in October 2015, SASSA decided not award its tender and therefore continued to operate under its 2012 award to us, which is currently in place until the end of March 2017. SASSA’s stated objective was to eventually take the distribution of social grant in-house and therefore has reiterated when they decided not to award a tender last year. We remain in close contact with SASSA regarding their strategy, timing and phase out plan beyond 2017. But so far, it’s appeared that SASSA has not finalized any of their plan, for the way forward. And therefore foreseeable future it remains business as usual, with steady increases in net beneficiaries and operationally sound distribution system, and ongoing elimination of fraud. While this perceived uncertainty due to matters outside of Company’s control, may not resonate well with some of our shareholders. Let me try to offer some context. One, there are enormous complexities in operating a system like ours to ensure smooth distribution of the right grant to the right person, any time and any way, especially in the deep rural areas. Two SASSA’s recently canceled RFP indicated a phase-out period of 9 to 18 months, and the further delays in the formulation of proposed plan, will further delay any transition. And three, SASSA proposed plan to the constitutional court, also highlights that even with the in-house solution, they intend to continue outsourcing, the cash payment component as well as distribution among other things. So in short, our SASSA business continues to operate smoothly and any in-sourcing plan proposed by SASSA in all practicality is likely to extend well beyond the March 2017 contract expiry date. And we remain well-placed to continue play an ongoing support role to SASSA through technology and distribution well after they eventually goal in-house. 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. 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’ll discuss the key results and trends within our operating segment for the second quarter of 2016 compared to a year ago. For Q2 of 2016, our average rand dollar exchange rate was ZAR 14.12 compared to ZAR 11.21 a year ago, which negatively impacted our U.S. dollar based results by approximately 26% and the South Korean won was 10% weaker compared to last year’s won rate. We continued to face significant currency headwinds in our operating geographies. The South African rand circled around the ZAR 14 rand to the dollar mark for few weeks, and then permitted through ‘15, briefly touching ZAR almost 18 to the dollar. It is currently in a holding pattern around the ZAR 16 to the dollar mark and this will of course have an adverse reporting impact on our results. Consistent with the first quarter, we have experienced good growth in our functional currencies, and this momentum continues through to Q3 and indeed through to the rest of fiscal 2016. While we do not hedge currency per se due to purely translational nature of its impact on our dollar denominated results, we are well aware of the associated risks with a weaker rand. It is for this reason on our last call that we highlighted that we have converted ZAR 500 million of our South African cash balances through a dividend to U.S. dollars at holding company level during October 2015, to reduce currency volatility on our cash reserves. This resulted in withholding and other tax rated adjustments as well as lower tax effected interest income due to the differential between rand and U.S. dollar deposit rates of approximately $0.06 to our earnings per share number. Revenue for Q2, 2016 grew 23% in constant currency. However, fundamental earnings per share declined by 8%. On a consolidated basis for the second quarter of 2016, we reported revenue of $150.3 million and fundamental earnings per share of $0.42. Our fully diluted weighted share count for Q2 2016 was 47.4 million shares. Now to our segments. In our South African transaction processing segment, we reported revenue of $52.8 million in Q2 2016, down 10% compared with Q2 2015 in U.S. dollars and up 14% on a constant currency basis. In South African rand, the increase in segment revenue and operating income was due to hire EPE revenue and as a result of increased ATM transactions, low margin transaction fees generated from cardholders using the South African National Payment System. And an increase in the number of social welfare grants distributed, offset by fewer inter-segment transaction processing activities. Our operating income margin for Q2 2016 and 2015 was 23% and 22%, respectively, and was higher primarily due to higher EPE revenue as a result of increased ATM transactions, an increase in the number of beneficiaries paid in fiscal 2016 and a modest increase in the margin of transaction fees generated from cardholders using the South African National Payment System. This was partially offset by annual salary increases granted to our South African employees. We continue to expect our South African processing segment margins to be in the low 20% 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. Inter-segment transaction processing activities are eliminated on consolidation but have a meaningful contribution to the segment in this quarter. International transaction processing generated revenue of $41 million in Q2 2016, up 27% compared to Q2 2015 on a constant currency basis, primarily due to higher transaction volume at KSNET during Q2 2016. Operating income during Q2 2016 was lower due to an increase in depreciation expenses at KSNET and ongoing ZAZOO start up costs in the UK and India but was partially offset by increase in revenue contribution from KSNET and a positive contribution by XeoHealth in the USA. Operating income margin for Q2 fiscal 2016 and 2015 were 10% and 14% respectively. For Q2 2016, KSNET net revenue grew 7% in Korean won to $39.7 million, while our EBITDA margin increased to 25.4% compared to 24.8% last year. KSNET has sustained local currency growth of high single to low double-digit for several quarters now, despite the slowing economy. Korean regulators have recently introduced specific regulations governing the fees charged on card transactions, as has been the case in most other developed economies that has a valid [ph] impact on card issuers in Korea. Consistent with global practices, we expect the card issuers to renegotiate their fees with VAN companies including KSNET, and if successful such actions may have an adverse impact on KSNET’s financial performance. Transaction processors and the acquirers in other international markets facing similar regulation have successfully navigated through the cycle. And we believe we are also well positioned over time to accommodate these changes and additionally implement initiatives that would further diversify KSNET’s existing business model. Our financial inclusion and applied technologies segment revenue was $66 million in Q2 2016, up 22% compared with Q2 2015 on a constant currency basis. Financial inclusion and applied technologies revenue and operating income increased primarily due to higher prepaid airtime and other value added services sales more ad hoc terminal and card sales and in South African rand an increase in inter-segment revenues, offset by lower lending service fees. Operating income for the second quarter of fiscal 2016 was adversely impacted by an increase in our allowance for doubtful finance loans receivable resulting from a commensurate increase in our lending book in the last lending cycle of calendar 2015 and establishment costs for Smart Life and expansion of our branch network. Driven by our expanded branch and ATM infrastructure, we experienced a significant increase in our lending book towards the end of Q2 2016. Our UEPS based lending book at the end of Q2 2016 was approximately ZAR 687 million compared to ZAR 490 million at the end of Q1 2016. We expect this growth in our lending book to translate to higher revenue and operating income during the third quarter of fiscal 2016. I want to emphasize that we have not changed our risk management or credit policies and we consider our book to be high quality. The rollout of our Smart Life insurance policies will gather momentum during the remainder of fiscal 2016, 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 political actions will become more pronounced in segment revenue. Operating income margin for the financial inclusion and applied technology segments was 21% and 26% respectively during Q2 2016 and 2015 and has decreased primarily due to increase in our allowance for doubtful finance loans receivable, the sale of more low margin prepaid airtime and establishment cost for Smart Life, expansion of our branch network and annual salary increases for our South African employees. The operating margin of this segment will continue to be affected by the relative contributions of the various businesses in this operating segment and introduction of our EasyPay Everywhere and Smart Life products. We will continue to spend on marketing and establishment costs for these exciting products during Q3 of fiscal 2016. Corporate elimination 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 impact of the stronger U.S. dollar on goods and services produced in other currencies, primarily the South African rand and lower amortization costs, partially offset by modest increases in U.S. dollar denominated goods and services purchased from third parties and directors’ fees. We expect our corporate expense to increase in Q3 2016 as a result of our new offices and related expenses in the United Kingdom. Our Q2 2016 net interest income increased to $2.6 million, driven primarily by lower average debt outstanding spending and higher average cash balances during the period offset by lower interest rates due to the distribution of our South African reserves on which we would have earned a higher return. Capital expenditures for Q2 2016 and 2015 were $9.9 million and $9.1 million respectively and have increased primarily due to the acquisition of more payment processing terminals in South Korea and ATMs in South Africa. At December 31, 2015, we had cash and cash equivalent of $101.4 million, down from $118 million at June 30, 2015. The decrease in our cash balances from June 30, 2015 was primarily due the strengthening of the U.S. dollar against our primary functional currencies, repurchase of shares of our common stock, growth in our lending book, provisional tax payment and capital expenditures offset by the expansion of all our core businesses. During Q2 2016, we acquired 749,213 shares of Net1 common stock for approximately $11.2 million. We continued to fund the Group’s operations and capital investments utilizing our cash reserves and cash generated from our business activities. During the next 12 months, we expect primary uses of cash to be the funding of 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 38.7% 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 $2.4 million attributable to the distribution from our South African subsidiary, which we intended to help produce the impact of weakening of South African 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 further distributions from our foreign operations. Our share count for Q2 2016 was 46.6 million shares, net of the stock repurchase but has now increased slightly to 47 million shares, as a result of the 400,000 shares issued pursuant to T24 acquisition. 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. We expect fundamental earnings per share of at least $2.45 for fiscal 2016, which includes a full year impact of $0.12 per share related to taxes and foregone interest income, as a result of the distribution of our South African cash reserves to our U.S. parent. Our fiscal 2016 guidance once again also assumes a constant currency base of ZAR 11.43 to the dollar and a share count of 46.7 million shares. With that, we will gladly take your questions.

[Operator:]

Thank you very much, sir. [Operator Instructions] Our first question is from Russell Anmuth from Gotham Holdings. Please go ahead.

[Russell Anmuth:]

Can you explain the tremendous success you’re having with EasyPay Everywhere, not being in South Africa? We’re not able really to understand the process and the marketing of the product.

[Dr. Serge Belamant:]

Sure. I think, yes Russell, we obviously employ and as you’d have seen also from the cost base that we put a big amount of efforts into expanding the branch network and to really boost and increase our number of dedicated staff members that are out in the field and are dedicated specifically and only to the sale and marketing of our financial services products, including obviously EasyPay Everywhere as well as our loans and our insurance products. Now, there is a reason why the great success that we’ve seen for EasyPay Everywhere in the last quarter, is also mirrored obviously by the increase that we’ve seen in our lending activities. And that is simply because we’ve invested quite a bit of money to expand the branch network. We have 110 branches now which we believe are very strategically placed. And on the other hand of course, we believe that all of our products whether it’s EPE, whether it’s insurance or whether it’s our loans are simply unique in the South African market in terms of the pricing and in terms of the ease of access. So, for us, the key or the core to the reason why we’ve seen the significant and ramp up in the number of accounts and the number of loans is a combination of all of those. Pricing, accessibility and distribution channel, which we believe is unrivaled in the market. And obviously we also believe that we better understand our customers and the financial needs of our customers than most of our -- than all of our other competitors in the South African market. We have been involved in this segment for the last 15 years, and so we have a very deep understanding of the financial needs. And as a result, we are able to build and design and price better products that also obviously enable us to cross-sell those as we roll out from the one to the other. So, that’s as shorter reason I can give you.

[Russell Anmuth:]

It makes sense you’re expanding the size of the market, given the range of services you offer. If you look out over two, three or four years, do you have a target in mind in terms of how many accounts do you think that you can ultimately bring on scale or are you talking 2 million, 5 million, what kind of penetration do you think you can have over next several years?

[Dr. Serge Belamant:]

We think that the addressable market for these specific products is around a 5 million level. So that’s our initial target for now. Obviously we would revisit that and revise it as we go along. But in terms of what we’ve seen out there, we think 5 million EPE card holders who then may or may not make use of our other financial products, on a monthly basis or a semi-annual basis would roughly be around a 5 million level.

[Russell Anmuth:]

Okay. And lastly, basically at roughly around $1 per month per account, revenue wise?

[Dr. Serge Belamant:]

Sorry. So, it obviously depends on the product mix that has a fairly major impact on what we would get out of our South African financial services offerings. And of course pricing it in dollars is very difficult as compared to doing it in rand. But the $1 a month, we think is really related to our ZAZOO initiatives more than it would be to our South African financial services offerings.

[Russell Anmuth:]

I lost that $1 a month will be more related to…

[Dr. Serge Belamant:]

The ZAZOO initiatives; so, the mobile centric actually.

[Russell Anmuth:]

Okay. Thanks.

[Operator:]

Thank you very much, sir. Our next question is from David Koning from Baird. Please go ahead, sir.

[David Koning:]

Great, thanks. Nice job guys, first of all. And I guess my first question is it seems like there is so many good things going on. I am just wondering, do you expect the 20% to 25% growth that you’ve seen in the financial inclusion business the last couple of quarters, and that number has been a little faster in the past, but is that really to really accelerate now already maybe by second half? I am just wondering because it feels like if anything there is as many or more good opportunities today than there have ever been that segment has been decelerating a little bit and if we are just ready to have that really accelerate nicely?

[Dr. Serge Belamant:]

It’s Serge. At this point in time, we believe that we are very much in the growth phase. In other words, we are certainly opening up our products, of course many different markets. And a lot of people said, well we may be targeting the poorest of the poor, which is not really our final focus. We’re doing that in sort of in ways. In other words, at the moment, we tackle certain parts of the country. We’ve expanded to the total country and obviously there is a little bit of a lag, because we haven’t penetrated some of the provinces as well as others. But more importantly, our focus is really to go after not so much the poorest of the poor population, which as you know represents 21 million, 22 million people. We are now going up the food chain a little bit where we believe that very much fewer people can generate far more revenue for us. So yes, to answer your question, I would be pretty disappointed if we did not see an acceleration in growth, not necessarily in a number of customers but certainly in terms of the profitability per customer, which is something that we rather focus on, rather than simply the number of transactions or simply the number of customers that sign up with us. So, yes, I think you’re right, I think because of our cross sections of products. And all of them by the way are priced in a way that are attractive to a huge range in South African people, and not only as I say, the poorest of the poor. We find that we are getting more and more people -- in fact some that we did not even plan for are entering the world of EasyPay Everywhere simply because they see something there that is better than what they currently have. Herman, for example did not mention the fact that a lot of people simply are opening up an account because our ATM cash withdrawal fees are cheaper than anyone else, which is interesting. And that of course allows us to put out more ATMs, but we put out more ATMs not only for them, we put it out for other South African people that in fact pay a higher fee because they belong -- they are customers of other banks. So, the whole thing becomes almost a self-perpetuating growth cycle where as soon as somebody enters the EasyPay Everywhere world, they continue to use another product or certainly another two or three products and therefore, all that really does as you can well imagine is it because all the systems are in place, the sales teams are in place, the branches are in place, sooner or later, every next person that comes in, every new product that they sign up for, simply something is that falls pretty much to the bottom-line. So you’re right, I think we are definitely believing there will be an acceleration in the profitability per customer and by definition also the number of customers. But I’m more aiming at the profit size per customer rather than simply pure the numbers.

[David Koning:]

So, basically operating profit growth in some of those fast growth segments should be really good coming up here after some of this investment phase, like into next year, we should have pretty good profit growth there?

[Dr. Serge Belamant:]

Absolutely, I mean investment base, if you think about the amount of money we’re investing, it’s next to nothing really in a greater scheme of things.

[David Koning:]

And then just I guess on the share count. It sounds -- well, I guess is incremental buybacks factored into your current guidance and is the tax rate, the higher tax rate than normal figuring in more repatriation taxes going forward?

[Dr. Serge Belamant:]

So, the share count doesn’t factor in any further repurchases. We’re keeping it at the level that we’ve done guidance at before. And as a result, we also haven’t factored in any additional spike that maybe the result of a further repatriation of dividend. So, we’re trying to compare apples with apples as much as possible. But obviously to the extent that there may be a further large dividend declared from South Africa, specifically that would have potentially an impact on our full year rate, depending on the utilization of our foreign tax credits et cetera and of course the use of that proceeds may include further repurchase of the shares. But that has not factored into the guidance that we’ve provided. And because you are aware that we are expanding aggressively outside of the South African territory, I think we’ve made a decision quite while back that we have to protect our cash and our cash earnings which are in rand and convert them as much as possible to a currency such as the dollar to make sure that we don’t get caught at the later stage by trying to make an acquisition or expanding in another territory and finding out that the number of rand that we need in order to do is grown by 20%. So, we will keep the cash flow we require for South Africa which we can judge pretty well and we will make sure that the rest will probably be repatriated into U.S. dollars. So, in my view that there will be further losses or leakages because of distribution and candidly asking that’s the correct decision for the company to have made.

[David Koning:]

And one final, just quick one. Transact24, what does that do to your income statement, now that you’re on the whole thing, like maybe you could just say how much revenue now? I think it will become a revenue item instead of just an affiliate item?

[Dr. Serge Belamant:]

Obviously, from 1st of January we’ll consolidate the results of T24. Before I think we did equity accounting of the investment for the last three months or so. So, that will change from being equity accounted to fully consolidated.

[David Koning:]

And how much revenue?

[Dr. Serge Belamant:]

We can’t disclose that right now, we are still in the process of completing the sort of opening accounts for the acquisition. But we’ll provide you with further details as soon as we got the consolidation ready.

[Operator:]

Thank you very much. Our next question is from Porter Collins from Seawolf Capital. Please go ahead.

[Porter Collins:]

Nice quarter, especially on a constant currency basis. I had a couple of random questions here. If I look at the EPE growth, what percentage of the customers are new to Net1? They are not grant beneficiaries but you’re actually getting new customers in the door.

[Dr. Serge Belamant:]

That’s a very important question to us because like I said we want to try to move away. Obviously, we can’t move away and ignore the 21.3 million beneficiaries but we obviously would like to have a big chunk of those which are not. Now, to give you an idea. You know when we first kicked off, it was zero. In other words, we had none of those because we were focusing on the low hanging fruit, in other words our current customers. Now, we are finding out that in fact through our marketing efforts or simply by word of mouth, a quite a substantial number of people are starting to move into the EPE net. But right now, it’s still a very low amount of people. On ATM, to give you an idea, the people that are using them started at 1% or 2%; that is grown now to between 15% and 17% that are using our ATMs. They are not in fact our customers at all; they are actually other bank’s customers. And we are starting to see the same sort of move on EPE. Right now, as we speak, out of the 900,000 people, you’ll probably find we have 30,000 or 40,000 people that are not beneficiaries, who are not part of our current customer base. But I would be disappointed. I am trying to build that up. And of course it’s going to build up a lot slower simply because the base potential customers are much lower compared to the 21 million people. But I believe that when things start stabilizing, we are hoping that at least 20% or 30% of the total EPE base will not be current customers of CPS, in other words current social welfare recipients.

[Porter Collins:]

Okay. The other question just to clarify, of the roughly $100 million in cash, U.S. dollar cash, equivalent U.S. dollar cash, what percentage of that is in actually dollars now versus rand equivalent?

[Dr. Serge Belamant:]

Approximately I would say 35% or so.

[Porter Collins:]

35% is in dollars? And do you have any hedges on top of that or is there any currency hedging going on top of that?

[Dr. Serge Belamant:]

No. So, it’s very difficult for us to do long term large scale outward hedges due to our unique exchange controls in South Africa. So, the easiest way for us is to do a natural hedge by declaring dividends out. Obviously and so far as we procure any foreign goods or services into South Africa that we pay for with rand, we obviously do that in terms of our hedging policies and most of those transactions especially for the acquisition of ATMs we take out forward cover.

[Porter Collins:]

And the last question, in terms of new RFPs out there, we’ve talked about the World Food Program before. Anything -- any other -- whole world’s been worried about what happens to SASSA when it rolls off and as you say it probably never will. But in terms of the new RFPs, what are you seeing out there?

[Dr. Serge Belamant:]

It’s actually quite interesting because it was a few -- obviously there are numbers in South Africa that come out all the time. But as you probably have found out from the history of the social welfare tender, these tender take a long-long time before they actually go out and get evaluated and they actually get awarded. We have the belief that because of what we’ve done for SASSA and with SASSA, we think that SASSA will become a much larger animal in the world of government whereby they will probably have far more distribution products, for example like unemployment insurance, which today is done separately. And it will move under the SASSA umbrella. And hopefully, if we continue of course to be the partners of SASSA, indirectly we would be getting that particular tender although that really is not a tender at all; it’s simply a government initiative. So, I think some of those things happening. We’ve also bid on the couple of other things that we are waiting to see what will happen, specifically producing EasyPay in our electricity payment solutions, which is quite large. And we believe that that can be quite a big impact on Net1, if the particular tender ever gets awarded.

[Porter Collins:]

What kind of scale would that be in terms of, if the electricity was 1 is it a quarter of SASSA in terms of size or…

[Dr. Serge Belamant:]

I don’t think it will be as much the quarter, but I would say pretty close to 20%. I think there is no doubt about that. And it depends of course what would be our role. I think it could be in 20% if the only thing we do is the payment piece of. If we take a little bit more than that for example the token generation which is something we are capable of doing and have very good systems to do that, it could be 1.5 times that; it could be 30%. So, they’re not insignificant tenders. And perhaps one thing that I am must say, I suppose it’s the normal thing, if you’re a very small company or a medium-size company, sometimes you can’t pick and choose the stuff you want; you just take what’s on the table. Right now, we’ve decided to focus on some pretty large initiatives, simply because otherwise we will not have the management bandwidth to actually do them properly and to give us a fair chance of success. So, we would rather -- so funny thing is sometimes it takes us much time to tender for small tenders than it does for a big tender; in fact sometimes it’s even more difficult to get the small than the big one. So, we have re-sharpened a little bit our pencils here and to be quite honest, canceled a number of projects that we were working on. And simply are now working, not only from a South African point of view and I’m going to stress this, right? We would rather now to some extent even give up on some of our South African initiatives in order to ensure that the company because more of the worldwide company and that our business is better distributed across different geographies and in different currencies. So, you will see little bit of change, a little bit more focus on some what I would call much bigger or larger deals. Of course we have to get them. But I think I feel quite comfortable that now that we have a great track record and we are becoming well known by many different governments around the world in terms of what we’ve achieved that I think we have a better chance than many other competitors to hit one or two of those quite successfully and rather quickly.

[Porter Collins:]

And do you expect the outcome of some of these tenders to occur this calendar year?

[Dr. Serge Belamant:]

Well, they are definitely meant to occur in the next few months but are certainly -- don’t hold your breath, because any of these things as you know they can be canceled. But if we had to follow the timetable, yes, there will be some outcomes we think in the next two to three months.

[Operator:]

Our next question is from Hymowitz, Jordan from Philadelphia Financial. Please go ahead.

[Jordan Hymowitz:]

First of all, a follow-up on Mr. Collins’ question. You mentioned the electricity contract in South Africa. It seems to me that we’ve gone from the South African SASSA contract is going away story to you’ve done such a good job that they’re thinking about awarding you other contracts because you’ve saved them so much money. My question is a little corollary to that is are other governments in the area seeing what a success you have been with the South African Social Security Government and saying gee, maybe we could use Net1 to manage our program better?

[Dr. Serge Belamant:]

I am pleased you mentioned that because I didn’t mention it. But I can assure you that SASSA continuously gets approached by other governments in developing economies. They spend a lot of time in South Africa looking at what SASSA has actually achieved vis-à-vis social welfare. And there is no doubt that normally SASSA will also make sure that when they come to get -- when they get a visit from elsewhere, they normally send them to us as well for us to be able to explain the technological solution in greater detail. So, there is no doubt in my mind and we are -- I’m not going to mention any specific country. But I can assure that there are a number of them that they have already approached us to actually say, well, look, we don’t really want to do exactly what SASSA is doing. Remember, South Africa is very much advanced when it comes to social distribution that does not really exist in many other African countries. But one thing that does is that they have other programs for example even medical aid or medical insurance, states driven initiatives whereby solution works equivalently as well. And there is one or two of those that they have been very, very keen in seeing what we’re doing. In fact we have filed a couple of proposals. But because they are government initiatives and we do understand government perhaps better than a lot of people, we don’t want to talk about those things until we know that the people have signed a contract with us and say, hey, we want you to commence this. If they do of course, then immediately that will give us the same power as SASSA has given us to deploy an infrastructure on which we can start cross-selling other products. So, you are right, it’s very fundamental to the plan is to use what we’ve done in order to get as much carry from it is possible. You will know that MasterCard has become, last time I saw a very interesting article which I actually smiled to myself because MasterCard was the 10th what they call disruptive technology in the world. And believe it or not, the whole article was about what MasterCard has done in South Africa with SASSA. Well, the answer is MasterCard did nothing with SASSA. There is nothing to do with it; we did it. Now funny enough, it might go down well whereby -- and we don’t really care if they get a lot of limelight, I am delighted to hear it. But the people, when they do a bit of due diligence, they know who did it. And they know they have nothing to do with it. So, we tend to get these referrals back to us on the regular basis. And we think that that will lead to some substantial government contracts from other regions in Africa at least and actually outside of Africa.

[Hymowitz Jordan:]

My second question is as we are on this conference call, there is a news story scrolling across the screen that Fin Bank [ph] which you own 25% of in South Africa is entering the U.S. business consumer finance more aggressively. Can you comment briefly, you have 25% ownership of Fin Bank [ph]. Are you thinking about increasing that stake and could that be a bigger channel to help you grow in South Africa or abroad?

[Dr. Serge Belamant:]

No, in South Africa we don’t need this Finbond [ph] to grow but we’ll certainly continue to be a -- we hope to keep our shareholding in Finbond [ph]. And they’re not expanding in United States without having fairly detailed discussions with us. And remember that with T24, we already have a bit of business in United States specifically in the card issuance and salary payment systems in different states. And the idea is to start looking at that although that our role might be passive, we’re obviously looking all the time at different synergies. Otherwise what would be the point of having an investment where we do not believe somehow that that technology could be used? So, once again Finbond [ph] I think like many South African companies are trying to diversify the earnings, trying to get them in dollars or in any other currency. I think their model has worked really well in South Africa. They believe they’ve got a very low risk model to actually penetrate or at least enter the U.S. and Canada and they also believe that their technology would be able and what we’ve already got in placing the states, could be a very, very good element of them being successful. So, we’re going to see as this continues to go but we see that as something that’s not taking a huge amount of our time because they’re capable of doing it on their own but something is certainly that we want to preserve our investment because we believe that investment is going to grow.

[Herman Kotze:]

And of course the reason why you us mention in the press releases, because we have decided to follow our right. So, Finbond’s [ph] expansion into the U.S. and North American markets will be financed through a rights issue in South Africa and we’ve undertaken that we will follow our full allocated rights, which means that our shareholding in Finbond [ph] will obviously not dilute.

[Hymowitz Jordan:]

And does that mean you are marking Finbond [ph] at almost very -- or almost more than 50%, less than what it would indicate by where it’s trading, will you be marking up Finbond [ph] on a mark to market basis after this rights offer?

[Dr. Serge Belamant:]

We’re evaluating the accounting treatment at the movement we’re showing Finbond [ph] at net asset value which you are right, is far below that current market value as restricted by share price. But with this right issue and some of the activities that might follow, we are reevaluating what that most appropriate accounting treatment will be going forward.

[Operator:]

Thank you very much, sir. Our final question is a follow-up question from Russell Anmuth. Please go ahead.

[Russell Anmuth:]

Could you update us -- two things, one, on the progress of the European bank that you’d contemplated establishing? And then two, are you able to work with your friend Naspers, for example on the new PayU initiative they’ve expanded that they’ve just initiated in Europe which sounds very complementary and synergistic with some of the technologies that you have at ZAZOO?

[Dr. Serge Belamant:]

Well, yes. On the application process that is underway, we believe that we’ve submitted all of the documentation that been required which is fairly extensive. We are now not obviously in control of how long the regulators will take to review and prove our application. But in the meantime of course we do have alternative methods and suppliers that assist us specifically with the issuance side on VCpay. It just cost us a little bit more obviously to pay it away. T24 by the way also brings to us the ability to issue virtual costs in the European space. So work in progress and we hope to have it finalized certainly by the time we have our next earnings call.

[Operator:]

Thank you very much, sir. Ladies and gentlemen, on behalf of Net 1 UEPS that concludes today’s conference. Thank you for joining us. And you may now disconnect your lines.