Lesaka Technologies Inc (LSAK) 2013 Q2 法說會逐字稿

Good day, and welcome to the Net1 second-quarter 2013 results. All participants are now in listen-only mode, and there will be an opportunity for you to ask questions after 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.

Thank you, Dylan. Welcome to our second-quarter fiscal 2013 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 at www.Net1.com.

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 risk 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 affected by currency fluctuations between the dollar and the rand.

We will also provide some commentary on the DOJ and SEC investigations. But since the process is going, we will not be accepting any questions on the subject during the Q&A session.

With that, let me turn it over to Serge.

Thank you very much, Dhruv. Good morning to all of our shareholders. On today's call I will provide an update on our SASSA implementation, the DOJ and SEC investigation, and some of the trends and developments in our business.

For Q2 2013, we reported revenue of $111 million, a year-over-year increase of 29% in constant currency. Fundamental EPS in the quarter was $0.18, down 52% in constant currency as a result of the implementation costs incurred to roll out a new SASSA contract. Our core established businesses, which include CPS, KSNET, and EasyPay, together in Q2 2013 accounted for approximately 80% of our revenue, while our growth businesses were collectively 6% of our revenue.

As you know, our national SASSA contract commenced on April 1, 2012, and our phase 2 implementation commenced in early July of 2012. During quarter 2, 2013, we have paid approximately 9.5 million beneficiaries in excess of ZAR8.6 billion per month. We also have completed seven months of registrations on behalf of SASSA. And our technology core solutions and platforms have proved extremely reliable, effective, and secure to the full extent we had anticipated.

Our phase 2 experiences have demonstrated that not only does our technology identify and eliminate duplicate grant registrations, but it also leads to a number of illegal beneficiaries returning their existing cards, because of their fear of being caught out during the re-registration process. Based on our experience, it is clear that many recipients of child support grants do not bring the children in their care for registration. And a number of these instances is material.

Our beneficiaries utilize four major infrastructures at which they receive payments or/and make purchases for goods and services, namely our 10,000 pay points; our Net1 participating merchants; the national ATM system; and of course, the national MasterCard merchant network. All recipients who have been registered are automatically provided with one of our Grindrod bank accounts through which they can affect any type of banking transaction. We currently have 4500 enrollment stations in the field. And based on our latest data, we are currently registering up to 150,000 beneficiaries, inclusive of their dependents, per day; or, a run rate of approximately 3 million beneficiaries per month.

As of February 6, we have issued 6.1 million UEPS/EMV cards and enrolled a total of 13.2 million people, including dependents. As you know, our SASSA contract was challenged in court by AllPay, the previous contractor. The court will hear the appeal of the August 2012 High Court judgment on February 15. We believe we have a strong case, and look forward to presenting our arguments to the Supreme Court.

I would like to address the SEC and DOJ investigations that we announced in early December, and our lawsuit against Allpay. I want to reiterate several points. First, the fact that the investigations are taking place does not mean that the US regulators have said that we have done anything wrong. Second, through our attorneys, we are fully cooperating with the investigations. Third, we are continuing to perform under our SASSA contract, and we have no reason to believe that these investigations will impact our ability to continue to do so.

As a result of these investigations, however, we are experiencing an adverse impact from the damage caused to our reputation, including our ability to execute certain aspects of our strategic plan. We have had to divert substantial time and resources to respond to the investigations, which have come at the expense of focusing on certain strategic areas of the business. Additionally, given the significant share price decline since the announcement of the investigations, our BEE transaction has been put at risk of not being completed because of the current share price. It is unlikely that the share option will therefore be exercised.

We have also been required to expend substantial efforts to attempt to reassure our existing and new customers and partners that our business continues to operate normally. We have also had to respond to some South African regulators, who have expressed concerns regarding our potential acquisitions or product offerings such as, for example, insurance.

Our lawsuit against AllPay alleges that AllPay took a number of wrongful actions which were intended to cause the award of the SASSA contract to us to be overturned. The essence of AllPay's wrongdoing is alleged in the lawsuit is that, as an initial matter, AllPay provided false information to the South African media and orchestrated a series of South African media reports which falsely maintained that the SASSA tender process was tainted by corruption.

The lawsuit further alleges that after AllPay failed in its attempt to have the High Court overturn the tender award, AllPay made a report to the United States Department of Justice regarding these same, very same media reports, the ones that the High Court judge struck from the court record. We are therefore seeking compensatory damages from AllPay. Our counsel has advised us to have no further comment on these matters at this time. And so, as Dhruv mentioned earlier, we will not be taking any questions about these investigations or the lawsuit.

Moving on, our South African business -- which incorporates CPS, merchant acquiring, EasyPay, FIHRST, micro-financing, SmartLife, and our Grindrod Bank underwriting contract -- is focused on becoming the largest card-issuing organization in South Africa, targeting over 10 million cardholders; their family members; as well as all of the citizens who live in, or in proximity of the areas we visit and service on a monthly basis.

It must be understood that via 800 mobile banking vehicles, we visit in excess of 10,000 pay points throughout the country. We intend to leverage this infrastructure to not only service our pensioners as per our SASSA contractual obligations, but also to service all our citizens who also require our locals banking service with all of its functionality such as our biometrically based security, our money transfer system, as well as all its associated financial services.

EasyPay has already -- has largely anniversaried its customer loss and disposal of non-core transactions a year ago; and since then, signed two new large retail customers, one of whom began processing transactions during quarter two, driving year-over-year volume growth for the first time in seven quarters. Our EasyPay systems will ensure that we continue to acquire merchants and to complete agreements with more municipalities and other bill issuers. EasyPay will play a more and more important role in providing our millions of bank customers with value-added services from which we will derive new revenue streams.

NUETS has continued to develop, market, sell, implement, and support our UEPS and UEGS activities on the African continent, and specific regions of the Middle East. During the second quarter, NUETS remained active with a pipeline of new and existing opportunities, and is currently in advanced stages with a new country from among Republic of Guinea, Gabon, Malawi, the Congo, Botswana, South Sudan; as well as Jordan, Afghanistan, and Nigeria. Systems such as those implemented in Ghana, Iraq, Malawi, Botswana and Namibia have proved very successful in terms of reaching the poorest of the poor and the general population, and continue to gain traction.

We acquired the 50% stake in SmartSwitch Botswana, from our JV partners, and now control 100% of the business in that country. While Botswana's population is relatively small, we now have a number of opportunities to extend the breadth of the services we can offer.

We are also actively targeting additional breakthroughs in multiple geographies, in partnership with a well-known brands such as MasterCard, rather than competing with them as we did in the past. There are a number of opportunities that we have either responded to, or are currently evaluating with MasterCard and its member banks.

Our mobile solutions division, which is now run by Pbel, was focused on the integration of various smaller business units, as well as creating strategic plans for VCC, our Variable PIN, our kiosk voice biometric solution, and our virtual top-up products; as well as our promotional gaming and social networking contracts and opportunities.

We are currently refining the structure and business model we wish to scale going forward for MNOs, financial institutions, loyalty scheme operators and healthcare payment contractors, while implementing our existing projects.

We are also commencing a pilot with a large global handset manufacturer for VCC, for the first time with full NFC capabilities.

Finally, for KSNET, despite a macroeconomic slowdown in Korea, we posted a 10% local currency revenue growth. A positive development for the industry from the end of February, all of the VANs will curtail upfront payment and terminals to agents; which, in turn, should lower the capital intensity of the business, and of course, result in improved cash flows.

To conclude, I'm pleased that our SASSA implementation is going as well as we planned, and that our robust secure online and offline technology has demonstrated its ability to scale rapidly, driving roughly 150,000 new registrations per day. We believe that once the bulk enrollment is complete, we will be able to focus our efforts on capitalizing on the benefits that the 10 million customer base was expected to deliver.

We continue to see ever-greater interest in our UEPS, our UEGS, and our UEPS/EMV technology around the world; which, together with our new mobile division and their products, such as VCC, provides us an integrated and comprehensive payment solution for both the developing and developed worlds.

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

Thank you, Serge. I will discuss the key results and trends of our significant operating segments for the second quarter of 2013 compared to a year ago. I will also discuss, to the extent possible, the financial implications of the implementation progress made related to our new SASSA contract.

For Q2 of 2013, our average rand/dollar exchange rate was ZAR8.74 compared to ZAR8.18 a year ago, and negatively impacted our US dollar-based results by approximately 7%. The year-over-year comparability of our results for the quarter was impacted by our new SASSA contract in Q2 2013 and the change in South African tax law during Q2 of 2012.

On a consolidated basis, for the second quarter of 2013 we reported revenue of $111 million, an increase of 29% in constant currency. We reported fundamental earnings per share of $0.18 compared to $0.39 a year ago. Q2 2013 results include $18 million of direct implementation costs, and $3 million related to the expensing of the UEPS/EMV smartcards issued to cardholder grant recipients. We measured the group's profitability by analyzing operating income and margin by segment.

Within our segments, SA transactions-based activities posted revenue of $61 million during Q2 2013; 40% higher in local currency, driven primarily by higher government revenue from our new SASSA contract. Our segment operating margin, excluding amortization of intangibles, declined to 6% from 38% last year, primarily due to SASSA implementation costs including cards and higher, low-margin pre-paid airtime sales.

As previously discussed, we expect profitability in this segment to remain under pressure for at least one more quarter as we continue to invest in the infrastructure distribution and personnel required to enroll and disperse grants on a national basis, before returning to a more normalized and sustainable level in fiscal 2014.

Our international transaction-based activities posted revenue of $33 million during Q2 of 2013, an increase of 23% in constant currency.

Segment operating income was negatively impacted by continued competition in the Korean marketplace that was partially offset by increased revenue contributions from KSNET, the NUETS' initiative in Iraq, and SmartSwitch Botswana; and a favorable 8% currency movement between the Korean won and the US dollar. For Q2 2013, KSNET revenue grew 10% in Korean won, and was $31.8 million; while EBITDA margin of 24% was down compared to last year as a result of higher transaction volumes at lower pricing levels, but flat on a sequential basis. For first-quarter 2013, we expect continued revenue growth in this segment, driven by KSNET, as well as increasing contributions from XeoHealth from Q3 of 2013.

Our smartcard account segment posted revenue of $8 million, 21% higher in constant currency, as the number of cardholders grew to 6.2 million from 3.6 million last year as a result of issuing 4.4 million new UEPS/EMV cards to customers cumulatively under the new SASSA contract.

For our financial services segment, revenue in Q2 2013 declined 20% year over year, in constant currency, to 1.4 million. This decrease in our lending book is consistent with Q1 2013, and was primarily due to new rules introduced by SASSA regarding the maximum allowable deduction amount for loans and insurance policies from grants before transfer to bank accounts.

Segment operating margin improved to 72% in Q2 2013 from 53% last year. We are not currently able to accurately quantify the head office and shared intercompany administration operational and overhead expenses related to this segment; and, therefore, don't allocate such costs to this segment.

For Q2 2013 hardware and software revenue was $8 million, 12% higher on a constant currency basis, and improved due to an increase in royalty fees, offset by a lower contribution from our traditional hardware resellers. Segment operating margin declined to 11% from 13% last year, due to fewer sales from our traditional hardware and software resellers. That said, remember that profitability in this segment will also vary, depending on the timing and quantum of ad hoc sales.

Our Q2 2013 interest expense decreased by 14% in US dollars, driven primarily by our lower average debt outstanding during the period.

As mentioned above, and discussed by Serge, we incurred direct implementation expenses for our new SASSA contract of approximately $18 million, which includes costs for 5500 temporary staff members were incurred for the whole quarter; transportation and accommodations; premises and infrastructure higher costs for bulk enrollment, which was particularly higher than anticipated, given the larger volume of beneficiaries to be enrolled; and our emphasis on registering beneficiaries in the rural and deep rural areas first.

We also expensed $3 million related to the cost of the UEPS/EMV smartcards issued during the quarter, which, for clarity, is not included in the $18 million previously discussed. Our SASSA contract operating margin is anticipated to be at its lowest level during Q2 and Q3 of fiscal 2013, as this is the period where our enrollment volume will be at its highest level; resulting in us employing the highest number of temporary staff members, issuing the majority of the smartcards, and incurring all the related costs inherent to this massive logistical operation.

We also incurred a further $1 million in capital expenditures in Q2, 2013. Since the inception of the implementation we have incurred cumulative capital expenditures of $25 million. We now expect total implementation CapEx to be approximately $30 million; down from our $35 million estimate last quarter, and $45 million to $50 million initially, mainly due to expensing rather than capitalizing certain costs such as cards.

When we signed our service level agreement with SASSA in February 2012, we anticipated total cash outlays of approximately $68 million to $95 million from February 2012 through March 2013, including direct implementation costs of $5 million to $10 million per quarter; as well as capital expenditures of $45 million to $50 million in order to build our infrastructure, register 15.6 million beneficiaries, and roll out our biometrically secure UEPS/EMV technology nationally.

With one more quarter of bulk enrollment remaining, our total cash outlay to date has been $74 million for direct implementation expenses, smartcard costs and capital expenditures. We therefore will be in line with the midpoint of our initial total cash outlay range, assuming the volume of enrollment had not changed. Having to register the incremental 6 million people and therefore employ our temporary staff for longer, should result in our total cash outlay being between $100 million and $105 million by March 2013.

We also expect that by the end of the bulk enrollment period roughly 10% of to 15% of beneficiaries would not have come for re-registration, and therefore we would have to rely on SASSA's efforts to encourage those beneficiaries to re-register, which would require us to maintain at least some, if not all, of our enrollment infrastructure for a couple of months in Q4 2013; adding further implementation costs in that quarter, but well below the levels to be incurred in Q2 and Q3 of 2013.

Given our enrollment experienced to date, however, we are unsure of what proportion of unregistered people would ultimately come for re-registration, given the high number of duplicate recipients, or recipients that do not exist altogether. Once we are fully phased in, we still expect at the very least to maintain our operating income on a absolute basis that we generated from our previous SASSA contract. We currently expect to be fully phased in by the third quarter of fiscal 2013, but recognize that there should be some spillover into Q4.

As of December 31, 2012, we had $38 million of cash and equivalents on our balance sheet. The decrease in our cash balances from June 30, 2012, was primarily due to the scheduled Korean debt repayment; capital expenditures incurred to implement our SASSA contract; and acquisitions of $2.1 million, offset by the $18.8 million generated from operations.

We continue to fund the group's operations and capital investments, utilizing our cash reserves and cash generated from our business activities. Our long-term debt, which related to the acquisition of KSNET, was further reduced to $94 million following our scheduled debt repayment in Q2 2013.

Our effective tax rate for Q2 2013 was 54% and was higher than the South African statutory rate, primarily as a result of nondeductible expenses including interest expense related to our long-term Korean borrowings and stock-based compensation charges, and South African dividend withholding taxes. Our tax rate may fluctuate depending on our intention regarding undistributed South African earnings, and the timing of any payments; but we expect our effective rate for fiscal 2013 to generally remain between 36% and 40%.

Our fully-diluted weighted share count for Q2 2013 was 45.6 million shares.

To conclude our guidance, we expect our quarterly performance to remain lumpy during the SASSA contract implementation period, with Q2 and Q3 being the worst periods from a fundamental EPS perspective. We expect Q3 fundamental EPS to be flat sequentially, and then improve in Q4; but still incurring some implementation costs in Q4.

For fiscal 2013, we expect fundamental EPS to be at least $0.95, which includes the high implementation expense, as well as the cost of issuing our smartcards. Our guidance also assumes a constant currency base of ZAR7.72 to the $1.00, and our fiscal 2012 share count of 45 million shares.

With that, we will be happy to take your questions.

(Operator Instructions). Dave Koning, Baird.

My first question -- just so we're clear on the implementation costs, it sounds like next quarter will be the remaining big quarter of implementation costs. So it looks like we'll have about $50 million in total implementation costs by the end of March 31. And that is exclusive of the smartcard costs, right? How much -- I know the smartcard implementation costs were $3 million this quarter. How much are those going to be next quarter? And then after that, what's the more ongoing quarterly cost of just ongoing implementation of new beneficiaries and stuff? Is there a base level going forward?

We expect the smartcard cost, specifically, to be at its highest level in Q3 with the exceptionally high enrollment rates that we are seeing at the moment, and with us having a pretty good idea what the final number of smartcards that we would have to issue would be. And of course the caveat there is that there may be some people who don't get re-registered or don't exist.

But if we look at what remains to be done, the smartcard cost is between $10 million and $12 million, we expect, in total. And we expect that to be largely completed at the end of Q3. After that, a little bit will be done, I think, in Q4. And in terms of the ongoing implementation expenses, so we've spent $18 million in this last quarter. If we look at what we expect to do in Q3 -- and obviously, we are a month and a bit into Q3 already -- we will still employ all of our staff members through to the end of March to assist SASSA in achieving its goal of completing bulk enrollment.

And again, depending on what the exchange rates will do over the next couple of months -- it's been quite volatile over the last few weeks, specifically -- that may have an impact, obviously, in the final dollar number.

But from Q4 going forward, enrollment will be in the SASSA offices. During Q3, I think that our implementation expenses will not exceed the $18 million level that we've seen in Q2; and, in fact, we hope that we may be able to shave 10% to 20% off that number in Q3.

Okay.

If we look at what -- sorry, David -- to just at what we had guided forward, so going forward after Q4 -- so, in Q4 there will be some expenses depending on how much we need to do to mop up the beneficiaries that we haven't enrolled after the end of March. So that will be the big determining factor. But then if we look forward into fiscal 2014, at that point, we would have normalized completely; our temporary staff members would no longer be engaged in bulk enrollment. And the only real additional expense that we would see, from what the norm used to be in our operations, would be the replacement of cards or the ongoing enrollment of beneficiaries -- in other words, the new beneficiaries that join the system. But we don't expect that to be a material charge for the remainder of the contract period.

Okay. Good. And then, once everything is normalized like you said, in fiscal 2014, when you talk about profitability getting back to normal, does that mean basically if we go back to the fiscal 2012 and part of the fiscal 2011 period, every quarter you were generating about $15 million to $20 million of EBIT in the core transactions segment. Does that $15 million to $20 million of quarter of EBIT, is that what you're expecting going forward again?

Yes, so obviously, the segment also includes some of the other processing activity. But if we talk about the pension and welfare business as a standalone, we do expect to normalize, on an EBIT basis, where we were before. The margin, obviously, is completely different when we compare it to the revenue line, simply because the volume and the pricing has changed so substantially. So even though the margins would be much lower than what we saw under the previous contract, on an absolute quantitative basis in South African rand, we should be right back to what we had under the previous contract.

Great. And then just one final question. On the international business, the KSNET business mainly, you've had decent topline growth. But EBIT has been in the 3.5-ish range every quarter. So we are not seeing any profitability growth, despite the revenue growth. Is that something you'd expect profits to go up over time? And maybe why isn't profit growing with revenue growth?

Well, there's a couple of factors at play -- the major factor is that we've seen some pretty fierce competition in the Korean market between the large VAN companies. And the natural result of that is obviously being that we've had to engage in some pretty aggressive pricing policies to make sure that we retain our existing clients, and that we can grow the class customer base in terms of winning over new clients.

So that's why we still have revenue growth. But, unfortunately, at the competitive pricing levels that we have to engage in at the moment, the profitability growth of that business is -- for the foreseeable future, in my view -- going to lag behind the topline growth. I think that will probably only change once there's been a few reforms that we expect in the Korean marketplace.

One of the biggest changes that we anticipate that will take a while to filter through is really the discontinuation of the so-called upfront incentive payments that are traditionally paid to the large retailers in order for them to accept the business. That practice is being discontinued. And it will take a while for us to see the full effect of that. But that will have a positive impact on operating margins in that business.

And we've also moved away, really, from the large retail base -- again, the competition in that area, as you can imagine, is pretty intense -- to the smaller and medium merchants that aren't as price-sensitive as the larger guys. And once, I think, when we see a change in the mix of our customer makeup -- in other words, moving away or being less dependent on the larger retailers and having more small to medium retailers -- that will also increase the operating margin of the business.

Okay. Great. Well, thank you.

Kevin Tracey, Oberon Assets.

First, had a couple of questions related to EasyPay. It was difficult to understand how the EasyPay business is performing based on your disclosures. All we see is transactions grew slightly. But I was hoping you could comment on how the profitability of EasyPay had grown, or not grown, over time.

And then, secondly, if you could explain to us again maybe what the benefit of EasyPay might be for issuing 9 million new cards.

It is Serge. I will answer the second part of the question, and Herman can talk about the profitability of it.

EasyPay, for us, gives us the ability to lock in some of the larger retailer footprints throughout the country. And because we become, for lack of a better word, their service provider and technology provider in terms of the functionality that they can provide on a terminal network, we are able to then start offering different products on these terminals; which products are targeted, or will be targeted, to close to 10 million clients that we are currently adding to our banking portfolio.

So for us, as you can well imagine, the 10 million clients we have are all very much part of the lower-income bracket group in South Africa and, therefore, relatively poor people. What's important, though, is that the products that these poor people require are currently not really offered at any real outlet, brick-and-mortar outlet throughout South Africa; simply because, on a one-off basis, they are simply not profitable.

So for us, our retail footprint gives us an immediate and automatic footprint, through which we will be able to distribute these products. And by cutting in, of course, the merchant, still being able to generate some very, very good profit margins while making these products available to the poorest of the poor at a very, very competitive price.

And that is where we've always seen as far as that is concerned, the future of EasyPay, or at least the importance of EasyPay in our plan, is to have as many retail outlets as possible through which we can service these clients.

On the other side of EasyPay, which very often we don't mention, is that we also, have course, the bill payment engine, as well as things like for example, the availability of being able to sell products such as prepaid products like -- for example, electricity, water, or airtime. Now that is something, of course, that, at the end of the day if you don't want to lose anything in interchange; or let's say having to buy from a third party, we would like to be able to then own the entire chain from a A to Z. And this is really the other side of EasyPay. So on the one side, it's footprint; on the other side, it is product range, which together now of course with the product offered through the bank, gives us a complete product solution for the 10 million people that we believe that we are and we will continue to service.

Herman, if you want to maybe say a few words on the profitability of the line.

All right. I think it's important to remember that depending on where we end up in the product mix at EasyPay, we have a significant shift in the operating margin of the business. When there is growth in the value-added product side of the business -- so specifically, the sale of prepaid electricity as well as bill payments, those are all fairly high-margin transactions for us in terms of how much we earn, and what the real cost against those transactions are as the volume base grows.

But added to that is when there is significant growth in, specifically, the prepaid airtime sales business, that has a pretty dramatic effect on the operating margin of EasyPay, simply because prepaid airtime sales is done at a very low margin. But the volume is typically quite high, especially if we manage to become a service provider for prepaid airtime to one of the larger retail chains, to give you an example, where revenue would increase substantially from the sale of those products because we effectively own the stock of airtime, and we sell that through the retail chain. But we do so at a margin that is often less than 2%, or even 1% in some cases. So depending on where the mix is and depending on the size of the retailer that we sign up for specific product types, the margin in EasyPay may fluctuate quite substantially.

Okay. But could you comment -- and I know you have shifted away from low-margin activities over the past couple of years -- but can you comment on the absolute level of EasyPay's profitability over the past year or two? Has that continued to grow?

So about a year ago, there was a specific line of business that we had discontinued which was really more in the hosting side. And I think what we've seen over the last two quarters -- and again, specifically, December, for EasyPay is a strange quarter because of the relatively high level of the summer vacation and Christmas, the holiday season period in South Africa. But still, from our perspective, if we look forward and we have to map out the profitability of EasyPay, I would say that what we've seen as an average during the last six months is more or less what we think is sustainable. Without the continued addition, obviously, of any new major retailers or product lines, we would be able to sustain at the very least what we've seen in the last six months on average.

That, certainly from our perspective, is the normal trading pattern at EasyPay. There's been no real abnormal activities for the last six months. And I think it's a pretty good benchmark to use as the run rate going forward, without the addition of any significant clients or products.

Okay. Can you give us an idea of what, over the past six months, the operating profit of EasyPay was, then?

We don't disclose that separately. But I'm sure Dhruv can assist you with some of the operating metrics in that specific business segment.

Okay. Okay. And then moving on to KSNET, a follow-up on the previous question -- now, you guys purchased KSNET for $230 million a few years ago. And I think based on disclosures you made, it was for roughly 9 times EBITDA. Now I would assume even though margins have been under pressure, that EBITDA has grown since then.

And I guess I'm wondering, given that you are running at a $14 million adjusted operating profit today -- and I know that includes some costs related to other international business -- but can you give us an idea of how we can feel comfortable about KSNET? Is still at least worth the $230 million that you paid for it?

Sure. So if you look at the 9 times EBITDA multiple that we paid for the business, and we use the EBITDA at the time, that we obviously made our decision -- based our decision and our valuation on -- the EBITDA remains intact; and in fact, has grown. In terms of how we look at KSNET specifically, we find that EBITDA is the most appropriate measurement. And if we look at the EBITDA margins, specifically, there's been slight variation in that margin number fluctuating between the 24% and 28% levels over the last couple of years. And that is a band that we're quite comfortable with.

But if we extrapolate that into real numbers and quantitative numbers, what we thought we bought in KSNET in terms of real EBITDA contribution, remains intact and has grown over the last two years. And looking forward, we expect that growth to continue. It is at the moment, as we said, at a pedestrian rate, although the topline growth is in double-digits. I think that we still expect the EBITDA and the operating margin lines to at least continue with high-single-digit growth looking forward.

So we're pretty comfortable that the metrics that we used to determine the valuation a couple of years ago remain intact and remain valid.

Okay. So just lastly, very quickly on your guidance, I guess you said at least $0.95 a share. But then you assume a cost of currency basis ZAR7.72 to the $1.00. Obviously, the exchange rate hasn't been that (technical difficulty) day, so I would imagine -- I just wanted to confirm that that ZAR7.72 is assumed for the whole year.

And then secondly, if you add back the one-time implementation costs and adjust for tax today and assume no growth, my math gets us to in the neighborhood of $2 a share for say, June fiscal 2014. Can you give me an idea if my math is somehow wrong there?

Kevin, it is Dhruv. Yes, all our guidance is in constant currency, based on the prior year's exchange rate. And if we'd given it in real time, so we'd be moving it every quarter just based on exchange rates. So, yes, for the full year we are assuming ZAR7.72.

As far as the math goes for fiscal 2014, obviously there is no specific comment from our side. But there have been some moving parts on the tax side. The implementation costs, I don't think you can add back the entire amount because there is a component that continues. An example of that is, after 5500 temporary staff, we have now -- we are probably going to keep at least one-quarter, which is 1200 to 1500 people. So that cost will continue. And so you can't just add back the entire amount.

Right, okay. But, ballpark, you would think it would be -- I did haircut that for tax. But there's nothing -- is my math on that number quite wrong, do you guys think?

No, nothing wrong with the logic, otherwise.

All right. Thank you.

Tom McCrohan, Janney.

On the BEE option set to expire in April that a strike price well above the current market price, it seems like you folks are considering extending those options. And I'm wondering, whose decision is that? When will we know, by between now and the April expiration date, what actions you would take? And is it a possibility that not only would you extend the options, but lower the strike price?

From a strategic point of view, there are this year a couple of factors that, as you know, have affected the price negatively; which unfortunately, really, those factors have come at the wrong time.

Now, as you know, one of the main factors is that we are going to the appeals court on the 15th of this month, next week Friday. And we are -- by hook or by crook, we will get, we believe, a final answer from the courts vis-a-vis this particular contract. We obviously hope and believe that we are likely to come out the winners.

Now, this, in my view, should, by definition, give the price a new rating. And obviously, depending on the outcome of that new rating, we will then be in a position -- if, of course, the judges give us a kick before the end of April, which we hope would be the case -- then your rating would then be one of the main factors as to how we will treat the current option. In other words, would we simply extend it? Would it simply fall away?

Either way, one thing is for certain, according to South African rules and regulations -- we, as a Company, will have to be BEE compliant and BEE empowered. There is no doubt about that. And this is just something which is becoming almost a daily newspaper event.

So there is no doubt that, one way or the other, we will have to either extend or enter into a completely new BEE transaction at the end of April; as I said, depending on where our share price is going to be at that point in time.

The only thing I can tell you is that, in South Africa, you have a BEE certificate which rates between basically a 1 and an 8 -- 1 being the best, and 8 being the least. We, at the moment, are not sitting as an international company rather than a local company. We are sitting more into the sixes and the sevens depending on our Company here in South Africa, rather than where we should be to ensure that it does not negatively impact our business. Namely, we should be sitting on a 3 or a 4 at least -- better to be a 2 or a 1 -- but certainly, a 3 or a 4 which certainly levels the playing field.

We will have to conclude some form of a BEE deal, simply because otherwise we are going to continue to beat, basically -- or to find a wall in front of us, not only from a point of view of government business but also any other type of business. Because in South Africa, any other firm, be it a government or not, also gets scoring all these points based on who they employ to do work on their behalf.

So if we have got a very low B rating, the companies that employ that -- like, for example, the number of banks that use our technology, they are penalized because of our BEE rating. So we do not have a choice. And in fact, in order to marry and understand and go with South African regulations, which we endorse completely, we will have to conclude a deal -- either this one or a new one -- very, very early in the next -- well, in the next three to six months.

So in regards to the gentleman's question before mine, about trying to get to a run rate earnings once this implementation is over, any math should include your share count going up by 9 million shares, is that correct?

I think it is, unfortunately, it's too early -- there are some new rules that have been publicized at the moment and talked about, in terms of what would be the correct shareholding that a BEE partner should have, of an international company. And those rules haven't been fixed in concrete at this point in time. So would it be 20%? Would it be 15%? Would it be 10%? We are not 100% sure what it will be. What we will have to make sure is that whatever we do --

Percent.

-- in terms of percentage. So where we are not 100% sure is that it's going to be something -- in other words, we cannot afford to become half-pregnant with this. Either we are going to do a BEE deal that is going to give us the rating that we require -- which is at least, like I say, a 3 or a 4 -- otherwise, candidly, we would actually be wasting the money spent on the BEE rating.

So worst case scenario, you are probably right, it will be 20%. Best case scenario, it's likely to be 10%. And so I would think the answer is probably in between.

I know in your prepared remarks you were hesitant to talk about the DOJ. I'm just looking for not specifics, just the timetable. Is there any way you can give us any sense for when that investigation will be resolved?

The only thing that we can say on this is that we have been cooperating to the best of our ability. And candidly, I think in our view, we've done a very good job to supply the DOJ with anything they've been wanting. And we have been doing it as quickly as possible, as quickly as we can.

However, it is not in our hands at all, in terms of the speed of resolution. And I'll honest with you, this is very much a first for us. So we really have absolutely no expertise on our side to even have a guess of what this process entails. So we are very much in the hands of our attorneys. And our attorneys, of course, are telling us, well, it depends. So we are waiting for the next set of results, or the next race of questions or discoveries, or whatever it is that they are called. And hopefully, we obviously try to press. We try to have it resolved as quickly as possible.

But that's about as much as I can throw in terms of giving you any sort of -- for what it's worth, that's the only thing I can possibly tell you, because I really don't have a clue.

Understood. Okay, thanks for taking my questions.

A pleasure.

Marc Heilweil, Spectrum Advisory Services.

Yes, could you elaborate a little bit more on the comment of the manner in which these investigations have tendered your strategic plans? And when you refer to the damage to your reputation, are you referring to entry into other markets?

Yes, sure. One must understand that South Africa is obviously not the United States. And certainly we are not used, in this country, to this type of investigation. So they do tend to come as a very big shock to all concerned. And there is absolutely no doubt that a lot of regulators, for example -- people that regulate our insurance company for example -- are at the moment we were looking at making certain acquisitions, which again need regulatory approval.

And obviously, these regulators are certainly looking at these transactions very much differently now. Because like the previous caller, they would also like to know what is the timing of the resolution of these events, and what will be the resolution of these events.

So this, for lack of a better word, is certainly slowing down a huge amount of our initiatives, simply because the people or potential customers are not sure about timing; they are not sure of the outcome; and they're not sure of how the outcome may or may not affect the Company. So on the one hand, that is why I said the reputation -- you know, unfortunately, when these things come out, people immediately assume the worst. Although they don't understand that this is an investigation, not a conclusion. So from their point of view, they say what if?

So it's only natural that people are going to be cautious; people are going to delay decisions; people might even decide, because they can't delay a decision, to go with a competitor because they've got to make a decision right now. So on the one hand, we've got this thing over our heads, for lack of a better word, that makes it very difficult for us to operate in what I would call a stable environment.

On the other side, of course, you can well imagine that we are taking this extremely seriously. And by taking it extremely seriously, we have got a number of attorneys engaged. We have got -- our Board meetings are coming more frequently, which means it's taking a huge amount of management time. And we have always run Net1 with a very flat structure, which means that we found that all of our top management, in some form or other are involved at certain times in the investigation; once again, stopping them from actually doing their day-to-day job, or at least slowing them down for the day-to-day job.

So that's what we are talking about to say it from a strategic point of view. Things that we could have done now might be delayed by a couple of months. And that is the problem. And customers are unsure. And of course, you don't know what you don't know. So you don't know how many customers might miss the boat completely, and decide not to work with us because they haven't engaged with us, and they don't really know what's going on. But they would rather say, let's rather err on the side of prudence and rather do nothing, rather than to be engaged with the Company.

So all of this is unfortunate. But it is something that we will work through, and that we are currently trying to work through. But of course, at the cost of time and the cost of money.

We had time for one last question.

Gentlemen, we actually have no further questions. Therefore, on behalf of Net1, that concludes this conference. Thank you for joining us. You may now disconnect your lines.