Lesaka Technologies Inc (LSAK) 2012 Q4 法說會逐字稿

Good day and welcome to the Net1 fourth-quarter and full-year results 2012.

All participants will be in listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (Operator Instructions) Please also note that this conference is being recorded.

I would now like to hand the conference over to Dhruv Chopra. Please go ahead, sir.

Thank you, Chris. Good morning and good afternoon to our investors around the world. Thank you for joining us on our fourth-quarter and full-year 2012 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-K are available on our website at www.Net1.com.

As a reminder, during this call we will be making forward-looking statements and I request you to look at the cautionary language contained in our press release and Form 10-K 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-K 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 affected by currency fluctuations between the dollar and the rand.

With that let me turn the call over to Serge.

Thank you very much, Dhruv. Good day to all of our shareholders. During this call I will provide an update to the key trends of our business and address certain strategic initiatives before I hand over to Herman that will discuss our financial results in greater detail.

First of all, I am delighted with the number of milestones we have achieved this quarter, including the execution of our new SASSA contract that became effective April 1, 2012. Also, for the first time we have exceeded $100 million in revenue in a quarter. And thirdly, our successful pursuit of certain partnerships that we believe can drive long-term, sustainable value for the Company.

Since April 1, 2012, we have been paying 9.2 million beneficiaries in excess of ZAR7 billion per month using four different payment methodologies. The first which is our own MasterCard-branded mag-stripe card, the second is our Version 10 UEPS smart card, the third is the bank-to-bank transfers using the national payment system of South Africa, and more importantly, the our world's EMV compliant M/Chip 4 UEPS smart card.

We have also completed five months of registrations on behalf of SASSA and our technology core solution and processing platforms have proved incredibly robust, effective, and reliable to the extent that we had anticipated they would be. I will come back to this critical achievement in more detail in a few minutes.

Four quarter four 2012 we reported revenue of $108 million, a year-over-year increase of 30% in constant currency. Fundamental EPS in the quarter was $0.27, down 21% in constant currency largely due to the implementation cost incurred to roll out our new SASSA contract. Pension and welfare revenue grew over 40% in the fourth quarter of 2012 while KSNET grew 15% in local currency and MediKredit, NUETS, and FIHRST continued to show improving momentum.

Our core established businesses, which include CPS, KSNET, and EasyPay, together in the fourth quarter accounted for approximately 82% of our revenue while our growth businesses were collectively 8% of that revenue. All of our business units, specifically those that can have meaningful impact on our financial results, namely CPS, KSNET, VCC, MediKredit, and NUETS, have a robust pipeline of new and existing opportunities which should begin to yield significant contributions to our bottom line over the short to medium term.

Our technology is well placed to advance our business in many markets such as welfare systems, mobile payments, medical claim adjudication, financial inclusion, as well as our UEPS EMV card issuing systems.

In our pension and welfare business I am extremely pleased with the progress made towards the implementation of our new SASSA contract under which we began distributing social grants to approximately 9.2 million beneficiaries across all nine provinces in South Africa. As it is known, our contract was challenging (inaudible) AllPay, a previous contractor, and we were notified yesterday that the High Court of Pretoria intends to issue its judgment next week Tuesday. We look forward to getting closure on this matter and will update investors as soon as we have been made aware of the court's decision.

Our SASSA implementation schedule has two key phases. The first one was completed by April 1, 2012, and required us to issue roughly 2.5 million MasterCard debit cards to beneficiaries in the provinces in which we did not previously operate. The goal was for us to ensure that no reliance whatsoever would be required on any of the previous contractors in order to minimize SASSA's cost and prevent any potential roadblocks or delays. To assist us with this substantial short-term enrollment program we hired approximately 2,500 temporary employees.

We began phase two of implementation in early July and we expect this phase to be completed by March 2013. This phase requires the biometric enrollment, including fingerprint and voiceprint, and the issuance of our new EMV-compliant M/Chip 4 UEPS MasterCard, branded MasterCard smart cards. This phase also entails the activation of our [ON12] map, which stands for the one-to-many biometric search engine to identify and eliminate duplicate registrations. Field experiences have demonstrated that not only does this technology identify and eliminates duplicate grant registration, but it has also led to a number of illegal beneficiaries returning their existing cards because of their fear of being called out during the re-registration process.

We are currently distributing grants to the approximately 3.5 million beneficiaries through electronic transfers into existing bank accounts, 3 million beneficiaries through our UEPS Version 10 smartcard, 2.5 million through our MasterCard-branded mag-stripe card, and the balance through our new EMV-compliant MasterCard-branded M/Chip 4 UEPS card. Our beneficiaries utilize three major infrastructures at which they receive payments and make purchases for goods and services.

4.5 billion beneficiaries access their funds through our 11,000 [bank] and Net1 participating merchants, 2.5 million are being paid at ATMs, and the balance are being paid through national merchant stores. All beneficiaries who have been registered are automatically provided with one of our Grindrod Bank accounts through which they can [effect] any type of banking transaction.

We currently have 3,500 enrollment stations in the field and, based on our latest data, we are currently registering approximately 55,000 beneficiaries, inclusive of their dependents to a day, or a run rate of approximately 1 million beneficiaries per month. Since we commenced phase two we have already issued 750,000 cards to 1.4 million beneficiaries and their dependents.

In addition, SASSA so far has been adding around 40,000 new beneficiaries per month to the beneficiary base. As time goes by all beneficiaries will be issued with our new EMV-compliant MasterCard-branded M/Chip 4 card UEPS card and all beneficiaries will be operating one of our Grindrod Bank account.

This initiative is, of course, massive in its complexity and will have far-reaching implications from social, political, and financial points of view. Net1 now reaches millions of South Africans in all cities and villages and provides them with their choice of transacting channel with the security and the functionality our technology delivers.

Biometrically-secured mobile banking and biometrically-secured ATM and point-of-sale transacting at non-biometrically-enabled devices is also provided via our voice verification technology, a world first as well. During September we will pilot the launch of our financial services offering and other value-added services through our new distribution channel in association with our (inaudible) partnered (inaudible) and SASSA tender submission.

During this pilot phase, which should run for three to six months, we will be able to ascertain the take-up of our services and seek fixed feedback from government and customers alike before tailoring our initiatives to target all of our 10 million customers. We will then be able to quantify this market opportunity and communicate our findings to our shareholders.

Our mission is and has always been to provide an alternative payment system to the majority of citizens within a territory, specifically those that are normally excluded from the economy and those that have had little or no access to competitive financial and/or retail products. Our products comprise our very latest technological breakthroughs in terms of biometric verification using voice and fingerprint, our new version 16 EMV-compliant UEPS suite of transactional products, as well as our [neural network 12-map] identification system.

Our solutions now provide interoperability across our and all traditional payment systems, thus ensuring the ubiquity of transacting for all without the need for any hardware or software changes to be made by any of the existing or new participants. To this effect, following our extensive work with MasterCard on EMV certification and our subsequent strategic decision to issue MasterCard-branded UEPS EMV cards to SASSA's customers, we have entered into a partnership with MasterCard not only of for card issuing in South Africa but also in other emerging countries to address the financial needs of their large unbanked populations. In case you missed it, MasterCard's announcement of our partnership a few weeks ago received widespread media attention, especially, of course, in South Africa.

Our new UEPS EMV technology removed one of the most significant barriers to entry we have faced historically when attempting to penetrate new markets, namely being perceived as a closed-loop proprietary system. With MasterCard's extensive distribution and our functionality rich UEPS EMV technology, we have already begun discussions with almost a dozen new countries. We firmly believe this combination will have improved our conversion rate as it relates to offering the services to new countries.

Let me now briefly address some of our other key businesses and developments. For KSNET revenue grew 15% in local currency in quarter four and over the past 12 months KSNET has improved its market share in the country. Official promotions for sales agents to penetrate the small- and medium-sized merchant market yielded a 10% increase in the number of merchants served during the year bringing the total base to 220,000 merchants.

We have also recently concluded a comprehensive strategic review of the business and have identified a number of opportunities, both in Korea as well as in the surrounding regions, that could have a meaningful impact on the Company's top and bottom line over the next two to three years. As we progress towards achieving some of our strategic objectives we will provide updates to the market. We are unable to share some of these strategies at this stage given the competitive sensitivity around certain of our proposed actions.

We continued to refocus EasyPay during quarter four of 2012. However, it is worth noting that as we get further into our SASSA implementation we expect the lines demarking EasyPay as a separate business to blur. An example of this would be interchange fees that are earned on MasterCard transactions that are recorded under our CPS Grindrod business and not our EasyPay business. Additional EasyPay value-added services will also be offered to our SASSA customer base and, therefore, will be recognized in the CPS rather than EasyPay.

Our Board has also decided that our mobile virtual card initiative that has signed a few deals with companies such as Panamex and Metro PCS, as well as a joint venture in India, is now ready for globalization. Our patented technology, which can be integrated into any mobile wallet, will provide the missing link that exists in most of the mobile wallet offerings we have reviewed to date. Together with a contact list [of] NFC technology our solution addressed the need for both card present as well as the card not present transactions in the same manner with the highest level of security, functionality, and even of integration.

Over the past few months we have spent an extensive amount of time with internal management, outside advisers, and other mobile market participants to evaluate the long-term prospect of our VCC product. Having been through this exercise we have never felt more strongly about the applicability, security, and simplicity of our VCC, and we now have a complete commitment from management and our Board to scale this business more aggressively. We have already changed our business management structure, as well as our go-to-market strategy, in order to achieve these goals as quickly as possible.

NUETS continues to make progress on these business development initiatives for both UEPS and UEGS solutions in various African and Middle Eastern countries. However, with our new UEPS EMV solution now being actively deployed in South Africa and backed by MasterCard, NUETS sales activities in Africa should increase substantially.

In Ghana, while we don't earn transaction fees we have been very pleased to see a tenfold increase in the number of UEPS transactions effected between January 1 and June 30, 2012. We continue to see an increase in transaction revenue in Iraq as demonstrated by July revenue which was over $400,000. We should continue to experience ongoing increases in these fees and more and more government employees are registered for smart card initially for the payment of their grant benefits and thereafter for their salaries and wages.

Other revenue streams are being planned, as for example those that could result from the adoption of our system by the Ministry of Information in Iraq, which wishes for all traffic fines to be paid via our UEPS technology. XeoHealth and MediKredit are both actively pursuing new opportunities in their respective markets across both public and private sector. XeoHealth help is currently in data testing phase for its RAC services and is expected to go live within the next two months.

To conclude, I believe that our strategic initiatives in our core businesses will drive improving financial contributions over the short to medium term and our technology and expertise with unbanked customers in developing countries could continue to be our primary competitive differentiator. I am bullish on the future prospects of Net1 and believe we have all the tools are in place to create long-term value for our shareholders.

With that let me turn over to Herman. Herman, over to you.

Thank you, Serge. I will discuss the key results in terms of our significant operating segments for the fourth quarter of 2012 compared to the fourth quarter of 2011. I will also discuss to the extent possible the financial implications related to the implementation of our new SASSA contract. My discussion will be based on our results in South African rand, as this provides the best indicator of the Group's actual operating performance.

For Q4 of 2012 our average rand/dollar exchange rate was ZAR8.03 compared to ZAR6.81 a year ago and negatively impacted our US dollar-based results by approximately 18%. The year-over-year comparability of our results for the quarter was impacted by our new SASSA contract, which was in effect for the full quarter as well as the acquisition of Eason.

On a consolidated basis, for the fourth quarter of 2012 we reported revenue of $108 million and increase of [50]% in constant currency. Fundamental earnings per share was $0.27 compared to $0.39 a year ago and includes $9.1 million of direct implementation costs associated with our new SASSA contract. We measure the Group's profitability by looking at operating income and margin by segment.

Within our segments, SA-based transaction activities posted revenue of $58 million during Q4 2012, 37% higher in local currency, driven primarily by higher revenue from our new SASSA contract and the inclusion of Eason. Our segment operating margin, excluding amortization of intangibles, declined to 12% from 50% last year, primarily due to the implementation expenses as well as the inclusion of Eason's prepaid airtime business, which by its nature is a high volume, low margin business, and higher intangible amortization.

To reiterate, we expect profitability in this segment to remain under pressure for another three quarters as we continue to invest in the infrastructure, distribution, and personnel required to enroll on dispersed grants on a national basis before returning to a more normalized and sustained level.

Our international transaction-based activities posted revenue of $31 million during Q4 2012, an increase of 31% in constant currency.

Segment operating income includes additional startup expenditure related to the launch of our mobile virtual card and XeoHealth initiatives in the United States and Mexico. For Q4 2012 KSNET revenue grew 15% in Korean won and was $50 million while EBITDA margin of 26% was down compared to last year. For fiscal 2013 we expect continued revenue growth in this segment driven by KSNET as well as increasing contributions from XeoHealth from Q2 2013.

Our smart card account segment posted revenue of $8 million, 12% higher in constant currency as the number of cardholders grew to 5.6 million from 3.5 million last quarter as a result of issuing 2.5 million new cards to customers under the new SASSA contract. Monthly revenue per card fell to ZAR4 per card from ZAR5.50 previously.

We have reduced our pricing for smart card accounts after taking into consideration the lower price and higher volumes of the new SASSA contract. The new pricing, effective April 1, 2012, reduced the average revenue from ZAR5.50 to ZAR4 and the operating income margin from 45.45% to 28.5%.

For our financial services segment, revenue in Q4 2012 declined 8% year every year in constant currency to $2 million. We did not focus on growing the loan book during Q4, but as we proceeded with our SASSA implementation and the issuing of the UEPS EMV smart card through fiscal 2013 we expect financial services to increase as well.

Segment operating margin continues to be adversely impacted by the startup of SmartLife our insurance business and was 54% in Q4 2012 compared to 72% last year, but consistent over the last two quarters. For Q4 2012 hardware and software revenue was $8 million, 17% higher on a constant currency basis and increased due to improved software sales.

Segment operating margin improved to 25% from negative 23% last year due to a higher mix of software sales and cost containment at Net1 UTA. To reiterate, profitability in this segment will vary depending on the timing and quantum of ad hoc sales. Our Q4 2012 interest expense decreased by 16% in US dollars driven primarily by lower average outstanding during the period.

I will now provide some additional detail of the anticipated financial implications of our new SASSA contract. Our new contract became effective on April 1 and of which we are required to enroll approximately 20 million grant beneficiaries and issue approximately 9.2 million payment cards to these grant recipients initially. We are being paid ZAR14.42, excluding value-added tax, per beneficiary paid, which translates to approximately ZAR150 million revenue per month.

During Q4 we incurred SASSA-related expenses of approximately $9.1 million for the implementation of the tender and capital expenditures of roughly $13 million. The bulk of our capital investments related to infrastructure. This is complete or committed and the remainder of our SASSA CapEx of $45 million to $50 million related to the procurement of cards and terminals.

We expect to be two-thirds complete with our capital expenditures by Q2 of 2013. To reiterate, once we are fully phased in we expect at the very least to maintain our operating income on an absolute basis that we generated from our previous contract. We currently expect to be fully phased in by the third quarter of fiscal 2013.

In Q4 we spent $16 million on capital expenditures on which roughly $13 million related to infrastructure such as payment vehicles, equipment, and branch network for our new contract. Operating expenses should increase proportionately with revenue due to higher headcount as we employ additional people responsible for initial enrollment and issuance of cards, as well as ongoing payments related directly to the distribution of grants.

Direct implementation costs are expected to remain elevated during phase two of the rollout given higher personnel costs, biometric enrollment, and other direct operational costs. Excluding the impact of interest paid under our Korean debt, the decrease in cash provided by operating activities resulted from significant implementation costs related to our SASSA contract and due to the timing of the opening of the [July 2012] to our payment cycle, as we did not have any significant amounts due to none pre-funded merchants participating in our merchant acquiring system as of June 30, 2012.

As of June 30, 2012, we had $39 million of cash and equivalents on our balance sheet. During Q4 2012 cash flow utilized in operations was $23 million and capital expenditures was $16 million. The decrease in our cash position from March 31, 2012, was due to significant implementation costs and capital expenditures related to our SASSA contract, a scheduled debt repayment of $7 million, biannual South African provisional tax payments, and due to the timing of the opening of the July 2012 payment cycle.

Our effective tax rate for Q4 2012 was 38% after adjusting for the BEE equity instrument charge and nonrecurring capital gains taxes of $1.5 million. Our tax rate may fluctuate depending on our intention regarding undistributed South African earnings and the timing of any but we expect our effective rate for fiscal 2013 to generally remain between 36% and 40%.

Our fully diluted weighted share count for Q4 2012 was 46 million shares. On April 19, 2012, we issued the one-year option for 9 million shares under our BEE deal. Assuming that the option is exercised in full, we would receive proceeds of $18 million and issue 9 million shares. Once exercised, our issued share count would be approximately 55 million shares, assuming we used none of these proceeds to buy back our stock.

As previously disclosed under US GAAP in Q4, we were required to book a non-cash stock-based award charge of approximately $14 million. Our priorities for the uses of cash remain capital expenditures, strategic acquisitions, buybacks, and debt repayments.

To conclude on the guidance, we expect our quarterly results in fiscal 2013 to improve sequentially through the rest of the year so that quarterly results may still be lumpy given the timing and quantum of investments and startup costs to be incurred to ensure the implementation of our SASSA contract. For fiscal 2013 we expect fundamental EPS to be at least $1.49 on a constant currency basis. That is using our fiscal 2012 rate of ZAR7.72 to the dollar and fiscal 2012 share count of [35] million shares.

As always, fundamental earnings exclude amortization of intangibles, stock-based charges, and other one-time non-cash items.

With that we will gladly take your questions.

(Operator Instructions) Tim Wojs, Baird.

Hi, guys. Nice job. I guess I have a couple of questions here. Just on the fiscal 2012 guidance, can you give us a sense for the amount of one-time operating costs that are included in there so we can kind of get a sense for what normalized EPS might look like once the contract gets fully ramped up?

Sure. We expect, although again it may be a bit lumpy over the next fiscal year, that our quarterly additional operating expenditure for the implementation of the contract will be in the region of $5 million to $10 million per quarter for the first three quarters of fiscal 2013.

Okay, that is helpful. Then just on the hardware side, you had some good profitability there and I am just wondering -- I know it can be lumpy but with some of the cost containment you guys have done is that a business that can sustainably be profitable on an annualized basis?

If you look at the various components of that specific segment, our focus is always to ensure that the businesses, specifically the ones that we deem to be mature, are indeed profitable. Given the lengthy sales cycle in some of them, obviously it is not that simple on a quarter-to-quarter basis to ensure that that is the case, but at least on an annualized basis we would expect our hardware and software, traditional hardware and software sales businesses to be profitable and to maintain profitability on a fiscal basis going forward.

Okay, that makes sense. Then just on the international margins, I think that if you look at them ex-amortization I think they have kind of been a little pressured over the past year. And I know you guys have done some sales efforts there to increase merchant counts, but is this a sustainable level where we are at on the margin front? Do you expect a little bit more pressure in fiscal 2013?

I think the pressure will always be there. The Korean market specifically, if we are talking about KSNET, is a highly competitive market and there is no doubt that there is sustained pressure on margins. There are also new entrants into the market that have a better deal than the larger, more established players.

So I think from a Korean perspective the margin pressure certainly will be there for the foreseeable future. We have numerous plans to mitigate that margin squeeze. One of them, of course, is for us to make sure that the product mix that we sell in Korea changes so that a higher emphasis is placed on those products that deliver a higher margin to us. Also, to identify new business opportunities that shouldn't result in significant margin pressure as they are introduced or ramped up.

So I think from our perspective looking forward over the next fiscal year at the current EBITDA margin levels of around 26% we are quite comfortable that that will be sustainable. Of course, you also have to remember that on one of the other of this specific segment is the XeoHealth initiative in the USA. Those costs have been higher due to the testing and the implementation of our various projects in the USA.

We have had the Panamex implementation in Mexico for our [MVC] implementation. So if we look at the past quarter there have been quite a few projects that have been in ramp up or implementation phase, so I think overall the margin is probably at its lowest point that we expect to see for the year going forward as these things scale up and become fully operational.

That is really helpful. Then just if I look at the South Africa business, if I add back the 9.1 million in one-time costs you guys incurred this quarter I get to a margin north of 20%. Should we see something in kind of the mid-20%s in terms of a normalized margin in South Africa transaction base going forward as everything kind of normalizes out?

I think that is a fair assumption. Everything does normalize and it will take another nine months or so for us to get there.

Looking at the way we have stepped up the operations. We are obviously getting a much better understanding of exactly what our cost components are going to be going forward, especially in the new areas. We certainly hope to maintain a normalized margin going forward of something that is at least 20% for the foreseeable future. So that is the kind of target that we have set ourselves and that is the sort of margin that we would need to attain with the higher volumes to ensure that we actually make the same quantum of operating profit that we did under our previous contract.

Right, that makes sense. Then I think just one clarification from Serge's remarks, did you guys say that SASSA is adding 40,000 beneficiaries to the base every month?

Yes, that is quite correct.

Okay, so there is still a lot of natural growth underlying in that business kind of going forward?

Absolutely. If you remember I think during the tender negotiations or let's call it what was issued as far as the tender requirement, SASSA was planning to have in the region of over 11 million, 11.5 million beneficiaries within three years. So there is no doubt that if we had 9.2 million now we have still got to get another 2 million in the next two to three years. At least 2 million more would be coming on to the database anyway.

All right, thanks, guys. Appreciate it.

Kevin Tracey, Oberon Asset Management.

Thanks for taking my question. I guess I was just wondering now that your smart cards are interoperable with the EMV technology could you talk about the potential to earn additional fees from, I guess, purchases made on your smart cards going forward and what kind of magnitude that may have relative to your already [existing] revenue?

Your point is a very good one because the card is now interoperable our contractual obligations with SASSA is that whenever a beneficiary transacts through an infrastructure which is not our infrastructure we are entitled to levy a fee as any other bank or any other bank in South Africa would actually levy. So we do expect that there would be revenue that would arrive after the beneficiaries transacting at points of service which are not our own point of services, in other words not part of our 11,000 pay points and not part of what we call our own retail merchants.

The other 60,000 merchants' stores where beneficiaries can transact at or the other 34,000 ATMs where they can also get cash from definitely would generate some form of income for us as well, and we are starting to see some of that income being generated. So there is no doubt that you are quite right that that has to be quantified.

But there will also be, of course, some MasterCard interchange fees as well that we will be generating, which on debit cards is around 5% on average, which gets given to the issuer which happens to be us. Because under our agreement with Grindrod Bank is really the MasterCard license fee, for lack of a better word. The entire 0.55 interchange actually comes to Net1.

So you are quite right that there is a substantial amount of fees that are going to be generated after our beneficiaries transacting at also some points of sale or points of service which are not ours.

Kevin, this is Dhruv. Just to elaborate on Serge's point, once we have got some more history -- we have only been doing this for five months -- I think we will be able to give a little more guidance in terms of once we know where people go and what kind of spending patterns they have to give you some additional color on that.

All right, all right. Thanks. Then my next question was with regard to EasyPay. Now I know you are looking to focus on value-added services that are higher margin and I think you said you shut down hosting processing servers for financial institutions and I think that led to a significant drop in the number of transactions for EasyPay. But I was hoping you could talk about what the trends in profitability for EasyPay have been and if you expect profits to continue to grow.

Once again that is a very good question. I think we did mention that EasyPay in a way I think we are going to break the business down in to a number of elements and reconstruct it in a different way. Now what I mean by that is that you are probably aware that we do have a very good contractual agreement with Grindrod Bank which happens to be a bank, but at the end of the day we really, to some extent, are the bank.

By being the bank it means that we not only have an issuing license through MasterCard, but we are also developing right now our own acquiring license. Having our own acquiring license means that a lot of the EasyPay merchants today, whose transaction we route directly to other acquiring banks, the intention of course is for us to become the acquiring bank ourselves and to only route vendor transaction to the issuing banks. Therefore, making, for lack of a better word, the full issuer and acquiring interchange on our own card and to make an acquiring interchange fee on the card that belong to other banking organizations as well.

So somehow the focus on EasyPay is no longer going to be, for lack of a better word, to make ZAR0.10 or ZAR0.15 to route the transaction, which in my view is a business I think that is always going to be under pressure, but rather to convert that into making, as an example, 2.1% on a credit card around probably the 0.75% to 0.9% on a debit card as an acquirer. And then to, of course, retain the full interchange as an issuer. So that is one aspect that EasyPay -- in the way that EasyPay is going to change.

Where EasyPay will not change and will continue to grow, of course, is in terms of registering more and more of our South African municipalities in order to continue to provide services, such as prepaid electricity specifically, and of course bill payments across the entire national footprint. Now that is very, very important to us because that is a service that we want to provide to the 10 million customers that we now have.

So EasyPay is really going to be, for lack of a better word, transformed into somebody that is going to be signing up far more bill issuers, for lack of a better word. On the one hand, a lot of them will be government bill issuers, candidly because that is where our 10 million customers actually go to in any case or need to have. But of course, it will also sign up bid issuers on behalf of other cardholders that may belong to other financial institutions.

So, again, you will have to be a little patient as we demonstrate what the EasyPay picture is actually going to look like as part of our larger South African strategy.

I just want to add to that I think one of the key elements that will change in EasyPay specifically will again be the impact that the change of our product mix in that business will bring about. So you have already seen in the fourth quarter we acquired the business from Eason, which is primarily a prepaid airtime sales business.

This is the kind of business that, unfortunately, from an average margin point of view has the impact of significantly reducing the overall operating margin of the business. So it adds quite a high number to the revenue line, but given the margins inherent in the prepaid airtime sales and utility sales businesses, the net effect of that on the operating margin is nominal.

So what we will see over the next couple of quarters as we continue to grow out the offering, specifically on prepaid utilities and prepaid airtime, which is an exponentially growing business in South Africa, we will see that the margins in EasyPay will continue to decline as those products are being introduced. But overall, obviously, the impact on the quantum of the operating profit of EasyPay should improve as we roll out those services.

Okay. Thanks for that. Very helpful. Then my last question was I was hoping to get an idea if you could explain your long-term strategy. You have talked about how you have partnered with many industry leaders to provide services to customers who normally rely on the informal sector.

Can you talk about what kind of services you envision providing to holders of your smart cards and ultimately where the business will go over the long term?

Once again that is something that we are shaping at the moment, but the obvious things that are the [amended] free offer in South Africa or has to be offered in South Africa includes what we call your barrier insurance. And you are probably aware that we have our own insurance license. It includes what they call micro finance or micro loans, which are very short-term loans, probably in the region of, let's say, one to six months is the maximum, which is a huge opportunity in South Africa and very, very necessary.

We look at money transfers, which is something that occurs all the time, which, of course, with 10 million customers and the infrastructure we have we are probably the best positioned to provide. We obviously look at prepaid airtime and electricity, which are two of the obvious ones that we can provide our customers. We obviously look at bill payments.

Apart from those six major trends then, of course, we go into maybe some of the smaller stuff which is not going to be utilized by 30% or 40% of the 10 million people, but which might be even on a higher profit margin but will only be used by a few hundred thousands of people. And these products we are only going to start looking at in the next 18 months.

We are going to focus on the six that I have mentioned at the moment, because these are the ones that can really turn the dial and make more than a significant impact to our bottom line in South Africa in a very short to medium term.

Okay. Well, thanks so much for answering my questions. Congratulations.

Thank you very much.

(Operator Instructions) We have no further questions so on behalf of Net1 that concludes this conference. Thank you for joining us and you may now disconnect your lines.