Lesaka Technologies Inc (LSAK) 2015 Q2 法說會逐字稿

Ladies and gentlemen, good day and welcome to the Net1 U.E.P.S. second quarter 2015 earnings. All participants are now in a 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, sir.

Thank you, Dylan. Welcome to our second quarter fiscal 2015 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 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 in 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.

And with that, let me turn the call over to Serge.

Thank you, Dhruv. Good morning to all of our shareholders.

Let me kick off by saying that our second quarter results were, in my view, very, very impressive. We achieved $154.1 million in revenue and $0.57 in fundamental earnings per share, which translates into a 12% and 43% growth in dollars respectively, and 24% and 56% growth in rand terms when we compare that to the second quarter of 2014.

Our businesses continue to perform at par or above our expectations, and we are pleased to report that our new and potentially massive growth businesses are beginning to scale and on the verge of adding significantly to our bottom line.

Today Herman will provide the details of our financial performance while I'll concentrate on some business areas which I feel are strategic to the group.

Our business unit management teams have delivered on our strategy, which was to consolidate our existing businesses, continue to grow these at a decent rate, and improve the operating margins. We have been very successful in this endeavor, as our results demonstrate.

Our CPS business continues to perform well, as we were able to reduce costs further and commence the use of our national mobile and fixed infrastructures to address customers who are not grant beneficiaries, but who are either unbanked or banked by other South African banks.

We are achieving this by making our mobile banking units available to any customers in semi and deep rural areas of South Africa where ATMs and other banking infrastructures are lacking or simply nonexistent.

Our mobile banking units offer cash withdrawal, money transfers, airtime and electricity top-ups, micro financing, and insurance products to all South Africans, resulting in opportunities for us to generate transaction fees, product sales, initiation fees, and collection fees at prices which are more competitive than those currently offered by our competitors.

These products and services are not currently available in the areas where we intend to operate. And we believe that our go to customer strategy, rather than having them come to us, will be and has proven to be a differentiating factor that will result in the acquisition of millions of new customers over the next several quarters.

The same semirural and rural based-service will also be offered to SASSA beneficiaries who now prefer to operate a comprehensive banking account rather than one that is or could be limited by SASSA's basic requirements.

Our existing 10 million clients have been operating our SASSA-based accounts for more than two years now, and have become accustomed to our quality of service, product range, ease of access, and security, but are now demanding in terms of their banking experience. And they are becoming more demanding every day. We are ready to deliver these new requirements, including savings accounts, loyalty programs, online banking, and many other financially inclusive services.

We have also recently commenced with the deployment of our EasyPay branded ATMS, which are both EMV and U.E.P.S. compliant, and provide biometric verification as well as proof of life functionality. We have already deployed just over 300 ATMs in a few months, and target in excess of 1,000 ATMs before year-end.

We are able to place these ATMs with our merchant partners as well as within our own branches, creating a new delivery channel where it does not currently exist. This project is already scaling admirably and already contributes to overall EBITDA.

Our new EasyPay Everywhere product will be officially launched within the next two months. This product incorporates a banking account which is the cheapest available in South Africa, and comprises a MasterCard branded EMV U.E.P.S. compliant debit card, access to all of the South African National Payment System infrastructure, a mobile channel and Internet portal, and of course the Net1 range of products and services such as cash withdrawals, payments for goods and services in both the card present and-- card not present space, money transfers, micro finance, insurance, advanced ATM, advanced electricity prepaid products, loyalty programs, and informative services; in other words, a fully comprehensive package.

This product, we believe, will allow us to provide banking to millions of South Africans who are employed but cannot afford the current banking costs or who have access to only a few limited services.

Let me now provide a short update on the new SASSA tender process. We have asked the Constitutional Court to review and set aside the current tender process initiated by SASSA. We await the court's further directions or decision in this regard.

We have the view that the court will do all that is in its power to avoid any possible disruption to the payment system that would affect negatively on the way of life of the poorest of the poor. The court is also well aware of the shortcomings identified in the previous tender process and in the evaluating and adjudication processes.

And I believe that the court will ensure that any fundamental shortcomings are addressed in order to prevent new lawsuits similar to the previous ones, as these have had a negative impact on the country as a whole and have jeopardized the good intentions of government.

An hour ago we received further direction from the Constitutional Court instructing SASSA to indicate to the court whether they intended making any further amendments to the RFP by Tuesday, 10th February, and if so, to effect those amendments by Friday, 13th February, 2015. The court also advised that it may issue further directions.

During our first quarter earnings call, I mentioned that we had tendered our EMV/U.E.P.S. biometric solution in one specific country as well as in a group of countries. It was too early then to disclose either the countries or the business entity with which we had tendered.

I am now pleased to announce that the South African Regional Office of the United Nations World Food Programme, WFP, has awarded us a tender for the entire SADC region, which comprises around 12 countries, namely South Africa, Lesotho, Swaziland, Mozambique, Madagascar, Malawi, Namibia, Zambia, Zimbabwe, Republic of the Congo, Democratic Republic of the Congo, and Tanzania.

The contract is for the distribution of cash and food grants to hundreds of thousands of WFP beneficiaries in these territories. Similar to our SASSA deployment, our technology allows the financial assistance provided by the WFP to reach the intended beneficiaries regardless of where they live and without the need for intermediaries. This results in massive cost savings, and eliminates areas of fraud and other possible nefarious activities.

Our technology makes use of any infrastructure present in each territory and allows for the biometric verification of all beneficiaries regardless of the infrastructure being utilized, even when such infrastructure is actually not biometric enabled. In these scenarios, we utilize our patented variable PIN technology that uses fingerprint or voice verification methods using any mobile phone.

We are proud that our technology and solutions are increasingly recognized, and that we are able to participate in social initiatives by organizations such as the WFP to assist millions of poor people that depend on these allowances for their survival and that of their families.

I must add that I'm not of the great belief that this socially responsible tender will necessarily translate into a meaningful financial contributor for our company in the short term. But, I firmly believe that the exposure and credibility of winning and operating a project of this nature and scale will create further opportunities for us to implement similar or the same solutions for the more affluent citizens, resulting in greater income to cost ratios and thus increased profitability.

We are currently finalizing a deployment contract with the WFP office which is based in South Africa, and we will announce this program along with additional details as soon as all the procedural work is completed.

I'd like to take this time to commend our special team that continues to work closely with MasterCard, our partner, to identify and seize these opportunities and expand our footprint, credibility, as well as our bottom line.

Let me take now this opportunity to present a quick update on our mobile-based businesses in South Africa and elsewhere. A quick summary, our Airtime Manje, the Umoya Manje product, continues to grow and has sold nearly 58 million vouchers in this quarter, a 71% increase on last year's second quarter.

Our monthly ARPU has increased almost 20% to near ZAR60, and we achieved our record trading day of 2.6 million transactions during the quarter under review.

Our Power Manje product now processes 2.4 million vends. Our monthly ARPU is now over R55 and our users have grown to 790,000.

Our information services effected in excess of 4 million transactions during quarter two, and now has 2.1 million users. Our advanced airtime product, called Pasavute in Malawi, has now processed 21.5 million transactions last quarter, which is a 48% sequential growth, and now has 767,000 users and an ARPU of around MWK470.

Our VTU 2.0 platform deployment in Nigeria is set for completion in February 2015. We have confirmed deployment in Cameroon, Rwanda, and Colombia. VTU is used by mobile operators such as MTN to provide mobile top-up services.

We are pleased, however, that our partners have embraced our new utility offering, including the sale of, for example, electricity, and will look to include these in this ever-growing channel in the near term.

We also continue to develop GSM-based SIMs, directed for customers such as SMART in the Philippines and through agents that are licensed with our technology. We have delivered 5.5 million SIMs in the quarter and will deliver a further 8.75 million SIMs during the third quarter. We have recently signed an agreement with Bluefish for us to provide them with software for their SIM cards to be used by SMART.

On another note, we have now officially launched Zazoo to oversee the global expansion of our mobile payments and value-added service businesses, including the activities currently conducted through its Net1 mobile solutions business unit based in Johannesburg.

Zazoo's management, led by its new Managing Director, Philip Belamant, will focus on worldwide growth opportunities, especially in the UK, Europe, the USA, and India and other developed and emerging markets. Zazoo will coordinate all research and development, operations, and marketing activities associated with Net1's mobile businesses.

Mobile presents one of the greatest untapped opportunities in the payments industry, and we believe our mobile technologies and intellectual property are poised to capture these opportunities. With a dedicated brand, a focused management team, and a strong sales pipeline, we are highly optimistic about driving the next leg of growth for Net1.

We intend to take Net1's patented technology solutions to new markets and new clients, with London serving as a convenient hub from which we will coordinate all our global efforts, unlock the value of our products and solutions, and build a technology company for the future.

We chose the name Zazoo and our new corporate logo because it's catchy and memorable, and evokes a sense of energy that reflects the spirit and passion of our business culture.

Zazoo has scored its first win with an exciting collaboration with Microsoft and Cell C, one of South Africa's largest mobile network operators, for the launch of Microsoft's first branded mobile phone, the Lumia 535 mobile phone. Four thousand phones will each be packaged with a ZAR250 VCpay voucher exclusively for new Cell C owners to use in completing a purchase of their choice when using the VCpay service.

We are hopeful that Microsoft will extend the use of Zazoo VCpay service to all of their phones in South Africa and hopefully in other territories as well. Zazoo's mission is to sign up deals with companies that operate across the world, and a few new deals will be announced in the very near future.

A quick update on India; as you know, we launched our MVC technology with Axis Bank in India at the end of last year. To target the unbanked youth, we started with a pilot in university campuses in a tier three city and saw an encouraging adoption rate of around 20%.

Based on customer feedback and to simplify the registration and KYC requirement in India, we are currently in the process of retooling the application and expect that exercise to be complete in the next few weeks. Once completed, the registration and activation of the MVC app will become significantly more user friendly and, more importantly, could then be made available to the bank's more than 15 million customers on a nationwide basis.

Our second MVC project in India is with one of the country's leading prepaid digital wallet providers. Our partner is actively in the midst of the integration, and we believe are on track for commercial launch in late March or April this year.

While we are intensely focused on our first two MVC rollouts in India, we are also extremely pleased with the traction we are getting from other major Indian corporates, not only for mobile payments but also for our broader mobile and biometric offerings.

Given our long term optimism for our projects in India, last quarter we also acquired our local joint venture partner's stake and now own 100% of our local subsidiary.

Finally, management continues to investigate methods to globalize our business on the one hand while also creating an environment where our valuation better reflects both the performance and the realizable potential of the company. Net1 has traditionally always had the steak but perhaps lacked the sizzle, and the time has come for us to change that.

I am of course very pleased that this was the case rather than the other way around, as what we have built not only is a significant blue sky opportunity but also provides us with a solid base which protects us against any possible downside. I am expecting the next six months to be positive, exciting, and rewarding for all of our stakeholders.

Thank you very much for your time, and let me hand over to Herman. Herman, over to you.

Thank you, Serge. I will discuss the key results and trends within our operating segments for the second quarter of 2015 compared to a year ago.

For Q2 of 2015, our average rand/dollar exchange rate was ZAR11.22 compared to ZAR10.16 a year ago, which negatively impacted our US dollar-based results by approximately 10%.

The US dollar, our reporting currency, has continued to strengthen against all major currencies, while the rand continues to be plagued by South African specific risks. The rand is currently trading at around ZAR11.30 to the dollar. And as predicted, the stronger dollar has progressively adversely impacted our fiscal 2015 results thus far.

Notwithstanding the reporting currency issues discussed above, we have continued to sustain our top and bottom line growth during Q2 2015. On a consolidated basis, for the second quarter of 2015 we reported revenue at $154.1 million, an increase of 24% in constant currency.

We reported fundamental earnings per share of $0.57, which grew by 56% in rand compared to a year ago. Our fully diluted weighted share count for Q2 2015 was 46.6 million shares, and includes the positive impact of our repurchased 1.8 million shares from our BEE partners in August 2014.

Let me now turn to a discussion of our segments and their financial performance during Q2 2015. South African processing recorded revenue of $58.4 million during Q2 2015, 10% higher in local currency, driven primarily by increased low margin transaction fees generated from our customers using the South African National Payment System, and more intercompany transaction processing activities.

In addition, revenue from the distribution of social welfare grants grew modestly during the year, and was in line with the increase of 4% to 5% in unique welfare cardholder recipients, net of removal of invalid and fraudulent beneficiaries, but partially offset by the loss of MediKredit revenue as a result of the sale of that business in Q4 2014.

The sale of this business also contributed towards the improvement in the South African processing segment operating margin to 22% in Q2 2015 compared to 12% a year ago.

EasyPay volumes were again up middle to single digits, despite the fact that, as we continue to expand our value-added services offering through alternate channels such as mobile, the volumes and revenues for those services are recognized by the respective units, even though they rely extensively on the EasyPay platform and distribution.

The inflationary increases over time in our costs could modestly depress our South African processing segment profitability, and segment margin may vary depending on the mix of products, particularly volume of transactions through the National Payment System.

We will, however, continue to seek opportunities to increase efficiencies such as our ATM rollout, and continue to carefully manage our cost structure in order to provide stability in segment margin.

Some of our new initiatives such as the ATM project will result in increased capital expenditure and higher depreciation charges, but should increase the EBITDA margin of the segment.

Intersegment transaction processing activities are eliminated on consolidation, but had a meaningful contribution to the segment during this quarter.

International transaction processing generated revenue of $40.5 million during Q2 2015, an increase of 18% in South African rand, mainly as a result of South Korean-based KSNET's continued revenue growth during Q2 2015.

KSNET is the major component of this segment, and also drove the increasing segment operating income. However, operating income and margin for Q2 2015 was negatively impacted by ad hoc incentives provided to staff due to the strong operating performance by KSNET during calendar 2014. Accordingly, the operating income margin was flat at 14% compared to last year.

KSNET's strong performance during Q2 2015 is reflected by revenue growth of 11% in Korean won to $39.5 million, while EBITDA margin of 25% was flat compared to last year.

KSNET has sustained local currency growth of high single to low double digits for several quarters. Industry forecasters expect transaction growth to slow modestly in Korea as a result of macroeconomic factors and reforms in the VAN and related industries going forward.

We continue, though, to expect and set incentive targets for KSNET to outpace industry growth, given its competitive position and value proposition.

Financial inclusion and applied technologies represents our initiatives that provide various services and products to customers that result in their inclusion in the former sector as well as the provision of our technology, both hardware and software, across our broad product portfolio.

This segment encompasses smartcard accounts, Net1 mobile solutions including the mobile driven prepaid solutions, financial services including lending and insurance, and our hardware and software businesses.

Our financial inclusion and applied technology segments delivered revenue of $67.5 million, 48% higher on a constant currency basis. The primary drivers of top line growth were again Net1 mobile solutions and financial services. Segment revenue was also impacted by a meaningful increase in intersegment revenue, which is eliminated on consolidation.

Net1 mobile solutions facilitated 64 million transactions through its mobile delivery channels during Q2 2015, an increase of 73% compared to Q2 last year, and a sequential increase of 8%.

Our U.E.P.S. based lending book at the end of Q2 2015 was approximately ZAR700 million compared to ZAR606 million in Q1 2015 and ZAR450 million in Q2 2014.

Operating income margin for the financial inclusion and applied technologies segment decreased to 27% from 30%, primarily as a result of more low margin prepaid airtime and the sale of competitively priced financial inclusion products to address the needs of the broader market.

The operating margin of this segment will continue to be affected by the relative contributions of the various high and low margin products and services comprising the segment.

Corporate and eliminations includes amortization of intangibles, stock-based compensation, US legal expenses, and general corporate and overhead costs.

Our Q2 2015 net interest income increased to $2.5 million, driven primarily by lower average debt outstanding and higher average cash balances during the period.

Capital expenditures for Q2 2015 and 2014 were $9.1 million and $6.8 million respectively, and relate primarily to the acquisition of payment processing terminals to both expand and replace our retail processing footprint in Korea.

At December 31, 2014, we had cash and cash equivalents of $71 million, down from $81 million at September 30, 2014. The decrease in our cash balances from September 30, 2014 was primarily due to large provisional tax payments in December and the scheduled Korean debt repayment in October, partially offset by the improved cash generation of all our core businesses during the quarter.

Following the repayment, our Korean debt at December 31, 2014 was approximately $60 million at prevailing exchange rates. And the next scheduled principal repayment is in April 2016.

We continue 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 offering, investments in our new and high growth businesses such as ATMs, the servicing of our debt, share repurchases, and strategic acquisitions.

Our effective tax rate for Q2 2015 was 30.6%, and was higher than the South African statutory rate of 28% as a result of nondeductible expenses including legal and consulting fees, interest expense related to our long term Korean borrowings, and stock-based compensation charges.

Our tax rate can and will fluctuate depending on our intention regarding undistributed South African earnings and the timing of any payments, and may result in an effective rate as high at 38%.

As a result of our repurchase of BEE shares in August 2014, our share count is now approximately 46.5 million shares.

For fiscal 2015, we now expect fundamental earnings per share to be at least $2.28, up from $2.14 last quarter. Our guidance assumes a constant currency base indexed to the fiscal 2014 rate of ZAR10.40 to the dollar and a share count of 46.5 million shares.

With that, we will gladly take your questions.

Thank you very much, sir. (Operator instructions.) Dave Koning, Baird.

Yes, good morning, guys. Great job again.

Thank you.

And I guess my first question just -- it sounds like the food bank deal, I mean, this is the first time I remember you really talking about it. And it sounds like something that could be meaningful near term. And maybe you could just talk a little bit about kind of what kind of range or type of impact it could have and whether it's in your fiscal 2015 guidance at all, some contribution is included.

Yes, sure. I think I did mention not the actual -- the company last quarter, but I did mention that we were working on a couple of tenders in association with MasterCard.

And we're obviously very, very pleased that they have decided now, at least that the World Food Association decided that we were the right people to implement technology on a cloud basis across all of these SADC areas.

And what was interesting for me is that -- to try to learn a little bit more about how they operated. And I don't know if you know this, but they actually operate out of Rome. And their model used to be that every country, and I think it still is like this to a great extent, used to decide as to how they were going to distribute their so-called food grants in their own country.

You can imagine that that raises all sorts of problems, number one because the technologies were all different, but more importantly because I think a lot of the money was simply not going -- or was not being received by the people to which it -- to whom it was intended.

So, they've now been able with us to implement a system that can work in any country regardless of what the infrastructure is. It can be the most advanced infrastructure or it can be the most backward infrastructure. And our systems are capable of doing both.

Of course, we've got the biometric security. And of course, they don't have to then worry about going to tenders in every single country in order to see what will be the technology that will be utilized.

So, from that point of view, it's very exciting. When we look at -- because everything is from the cloud, we basically have one big fat computer that is going to be running out in South Africa, and that -- with a backup outside, of course, of South Africa. And that computer is going to simply make sure that we can actually deliver a service to anybody anywhere, candidly anywhere in a SADC country.

What this actually means is that, depending on the amount of money that they will receive from different organizations that are committing to obviously funding them, and there are plenty of those, the amount of money allocated to each country is very different depending on population and depending on the need.

But, it can vary from a few million dollars to $20 million or $30 million to be distributed either on a monthly basis, on a quarterly basis, or annually. And the number of people, again, can vary from hundreds of thousands in a country to only 30,000 or 40,000 in one country, and could go up as high as 0.5 million to 1 million in another country.

So, that's the plan that we're currently working on with them, to say where are we going to start? Which countries do you want to do first? How many people are we going to address? And how much money are we going to pay them? And these are the things that we intend to publish as soon as possible.

The excitement for me, apart from the fact that it's great to know that we have been appointed for the entire SADC region because of what we've done, and they know it works and it is a bit of -- there is a social involvement in this. But, once we are in these 10, 12 countries, the same technology can simply grow outside of this hub and start being implemented by everybody else that actually lives in that country.

And these are not going to be the poorest of the poor, but they're going to be hopefully people that have a bank account, that earn a certain amount of money. And therefore, we are hoping that that will allow us to germinate or to grow our businesses in each one of these countries and therefore start generating fundamentally much better revenues and much better profitability out of, let's call it, people that have rather than the people that have not.

Okay, got you. That's helpful. So, this is -- I guess from a financial perspective, it sounds like this could be a tens of millions of dollars of revenue type thing, not just like a couple million. And is any of that in the fiscal 2015 guidance, or not yet?

No. So, none of that is the 2015 guidance because we simply don't have exact visibility of when the various countries will take up the program. This is something that we will have more clearance or more clarity on as we progress and as we negotiate with the World Food Programme. So, we have not taken that into account at all in our current guidance.

Tom McCrohan, Stern Agee.

Yes, a quick follow up question on the World Food Programme. Were any of the card networks, Visa or MasterCard, involved or partnered with you in this process?

Yes and no. MasterCard, my understanding -- and of course I think you can see it on their own website. My understanding is that they have got an agreement with the World Food Programme to provide them either with a payment solution or with consultancy vis-a-vis a payment solution.

So, either way, we work very closely with MasterCard. We certainly tell them what we do. They tell us what it is that they are doing in that space. And obviously the technology we are implementing is going to be an EMV MasterCard M/Chip based product. That either will be the real MasterCard M/Chip 4 product or it will be powered by MasterCard.

So, we intend to certainly keep MasterCard as our partner simply because at this point in time we work very well with them. And they are attempting to open doors even if those doors are more in what I would call as the social environment rather than what I would call purely the business environment. But, we all think that one is going to lead to the other.

Would the distribution of monies for the World Food Programme ultimately be given to someone on a piece of plastic, a card, or is it going to their mobile device?

It's going to be both. Some people are going to be getting a piece of plastic where they can go to, if there are any, existing ATMs or point of sale devices. There will be an implementation of POS devices by the World Food Programme in specific areas in order to make sure that the money may be spent in specific retail shops. So, we are providing that to them as well.

But, of course our mobile technology, if it is of course available in those territories, specifically if the right mobile phones are available, we will be able to do tap and go. We'll be able to do the VCC. We'll be to use any of our other developed mobile applications in those territories as well.

Jordan Hymowitz, Philadelphia Financial.

Thank you, guys, very much for taking my call. Before I ask my question, I just have a request, if you could possibly post a transcript of this call on your website. It's been very, very difficult to understand with the accent for a number of people that I've been talking to.

My question concerns you have the World Food Programme announced with MasterCard. You also said on the last call there was another country of about 40 million you were working with. Do you have any update on that?

Yes. What has actually happened is that the country we were talking about is now part of the 12 SADC countries. So, we had in fact signed a deal already with one of the 12 countries, in fact, with the food program. And now I think this has resulted -- instead of us implementing that country on its own, it's now resulted in the World Food Programme actually awarding us with a tender for all 12. So, it was part and parcel of that one.

Funnily enough, it's strange that you're mentioning it, because now we also are now working with another country which is not part of the WFP, which also has around the 35 million to 40 million people. But, this is something completely new and is a completely different tender.

And what country was that, just out of curiosity?

At this point, they basically mentioned to us that we should rather stick to the 12 countries. And I don't think -- I think there are some internal politics there, and I think they didn't want us to mention the specific one.

Russell Anmuth, Gotham Holdings.

Hey, guys, congratulations.

Thank you.

Very good quarter. This time it's very particularly hard to keep to the limited number of questions, given everything you put forth, but I'll give it a shot here. Just to circle back on something on the old sort of legacy situation, when do you expect the Hawks to come out on South Africa?

I like your forwardness. As you know -- and that is something I think that's important. We haven't heard much from the US side at all from what is referred to as the government, which I'm assuming is the SEC/DOJ. And the reason is that maybe they are probably waiting for the Hawks to actually finalize their investigation.

The latest thing that we've heard -- and again, I don't want to get our hopes to be too high. But, we've heard that they have finalized their investigation and it is now in the hands of the prosecutor. And it is up to the prosecutor now to actually decide what he wants to do.

In my understanding, he has a couple of choices. One, he can prosecute. Two, he can decide not to prosecute and to say that we have been cleared on all counts, or three, he could ask of course the Hawks to investigate something else.

I hope that it's not going to be a further investigation into something else, because I fail to understand what it possibly could be. And obviously, we hope very much it's not going to be the first one, namely that he's going to prosecute.

So, with a bit of luck, in the next few weeks we may have at least some finality in South Africa, and hope that that finality might assist in translating finality into the US as well.

Okay. Okay, thank you for that clear pathway. May I ask a second question?

If it's a follow up question.

Go for it, as long as it's a follow up question. That was Part A and this is Part B, right?

Well, Part B on a different topic. So, you talk about Microsoft in Africa, which is very exciting. Now, in the past, you've also alluded to doing -- to working with the largest handset company in the world. Are you still talking with them, right, to apply your technology solutions, some of the new undisclosed capabilities that you're referring to?

We haven't given up. We were working, if you remember, with both. We were working with the big one and we were working with Nokia, if I remember correctly, at the time, which is now really Microsoft anyway.

So, we are chasing both. Obviously, we're not waiting for the one to do the other. We're very excited, and I'll be sort of -- I'm even very, very excited about the Microsoft initiative simply because that allows us to have our VCpay application. This is the application preloaded onto all of those phones.

And we know that with Microsoft and advertising and Cell C beyond it, those phones are going to start being used. And by definition, we know that then this is going to start really putting our VCC on the map.

So, that's going to happen in South Africa first and foremost, first with Cell C. But, in my view, I think it's going to go outside of the Cell C world as soon as Vodacom and MTN, etc., etc., are also going to be selling the same phones.

But, I'm more excited about some of the noises that I am hearing that perhaps there is already some application that Microsoft might be seeing in all of this outside of South Africa.

South Africa is still very small. It's great for us to do something here. But, we now want to become a global company when it comes to VCC, not a South African company only.

So, that's what I'm hoping, that it's going to go down that route. And I hope that that small win, for lack of a better word, is also going to push the other players that we are talking to to perhaps say, hey, maybe somebody else is now committed to this. We better do the same thing.

And you will see in the next few weeks we're going to announce one or two other international -- or at least companies that are international that, in my view, are also keen and are going to commit in the next few weeks to also implement this technology.

And that's going to happen. We couldn't do it now. We're hoping it's going to be released in the next week to 10 days.

(Operator instructions.) Jean Pierre Verster, 36ONE Asset Management.

Hi, guys. Obviously in September last year the Minister of Social Security released a media statement regarding the issues that the Black Sash has found regarding the tender. And then, on the basis of that, said that they will, for the new tender, set a cap of ZAR14.50 per month per recipient, which is obviously now this court case and the reissue of the tender regarding this contract.

Now, without getting into the actual court case, which I assume you do not want to comment too much about, if you look past the court case to 2017 when this contract expires, what would be the impact of a new contract from 2017 in the way that SASSA want to issue it on your business?

It's actually a fairly complex answer to this, but I'll try, if I may. Everybody talks -- the ZAR16.50 goes to ZAR14.50. It's quite easy to understand that there is ZAR2.00 missing. And on 10 million people, it's ZAR20 million a month. So, that's not complicated, to work it out.

What is unknown at this point in time is a number of things. The first one is that of course there is growth in beneficiaries. And we know that we are going to be going towards another election, which means the South African government is likely to, in my view anyway, register more people and to put more people on welfare than less.

SASSA has already projected, I think, 1 million people that are going to come on board. It could be substantially more than that specifically with children. So, that's an unknown factor that could easily perhaps make the difference between the ZAR14.50 and the ZAR16.50 anyway. So, that's point number one.

But, that's not really -- that's more, for lack of a better word, a sort of defensive approach. To me, what I'm more excited about is the fact that the new contract or the new SASSA SLA, because of the allegations made by organizations such as the Black Sash -- who I think mean well, but really in my view don't quite understand perhaps many of the aspects of financial services, and the fact that when you give people the ability to choose, well, at the end of the day they might choose correctly or incorrectly.

And it takes a lot of education before people that have been given their freedom can actually use their freedom in the best possible way. That doesn't mean, of course, that you should now withdraw the freedom and treat them as if they actually were incompetent. So, that is something of interest.

What I see happening or what I think will happen if the tender, of course, is awarded -- because SASSA made it very clear that all of them will go to tender because of the Constitutional Court decision to basically tell them to do so. It does not mean that they will actually award the tender at all.

But, let's assume they do. The tender is very specific in the way that it wants to create what they call a very restricted account. And that restricted account is going to basically give absolutely, in my view, nothing to beneficiaries. It's going to allow them to receive money from the government and basically to draw that money out in a cash form.

They will not be able to conduct any other basic business. What we will see then and what we are already seeing is that beneficiaries that have become quite comfortable with the sort of functionality we've been granting them are going to migrate to a fully fledged banking account rather than to utilize the SASSA restricted account.

So that, in a way, gives a new opportunity to re-bank or on-bank existing beneficiaries, but of course without the restrictions on product and without the restrictions on pricing that SASSA is imposing in the new tender.

So, it's an interesting paradigm we're getting into. But, in a way, I'm very excited about it because I think it's going to open up the entire market to basically be -- or to work outside of the SASSA constraint, allowing SASSA to do what they mean to do, which is the distribute grants and to make sure that people receive them, but afterwards not to take any responsibility, accountability, or liability of what it is that they will be entitled to do with the grant that they have received.

And if that means that they decide then to open a bank account in order to become part of the South African economy in a greater way and to have access to financial inclusion, I think that can only be good for us and our products and the services that we supply.

Thank you. If I could follow up, obviously I'm trying to get to how important the SASSA contract is not just for your transaction processing revenue and profit, but also then for your financial products which you sell to those same beneficiaries within -- post 2017 you technically would not be able to access via the restricted bank accounts.

So, if I want to get a feeling about how important that account is, you did a public interview here in South Africa late last year with Alec Hogg and the transcript is on the Biznews.com website. And Alec asked you what proportion of your income is generated outside of South Africa, and you answered it's about 20%. It used to be 20%. Now it's closer to 65% to 70%.

I just want to confirm that amount, because it was difficult for me to tie that up with your financial statements. What proportion of your income is non South African?

Oh, at the moment I think that's -- let me get Herman to answer this question exactly for you so at least he can be more specific.

Jordan Hymowitz, Philadelphia Financial.

Thank you. Most of my follow up questions have been answered at this point.

Okay. Hold on a second. Let us just answer the last question, because that got cut off.

So, yes. I mean, I think the reference was the -- what portion of the revenue and income was non South Africa. I think the reference is not non South Africa, but it's non SASSA.

So, just to clarify what you had asked, Serge's references to the revenues split basically -- what he referred to was non SASSA revenue.

And obviously, within South Africa there are various other businesses that produce -- or that contribute significantly to the top line. And those would include our EasyPay business, as an example, and all of our Umoya Manje product ranges. So, the split that he referred to definitely was non SASSA compared to the rest of the revenues.

And so, that's I think -- in your question, I think there was also an inference to say, well, what is the dependency on the SASSA account, which obviously is a very good question.

And what's interesting is that today our financial services we offer, including for example Umoya Manje airtime and the (inaudible) we sell --.

And financial.

And financial services are completely independent of that particular card. So, that is run through an independent set of people, an independent company. And funnily enough, all of the deductions that occur because of, for example, debit orders, these are actually run through the standard banking system and are not directly connected to the SASSA account itself.

So, most of that stuff is going to remain regardless of who wins the prize of having the SASSA account at the rate of ZAR14.50, including that or not. And if you take that into consideration with my previous statement, namely that a number of beneficiaries will then choose to open up what I would call a fully fledged account, we see no reason at all why those beneficiaries will not open those accounts with us, considering that our accounts right now are by far the cheapest in the market and, candidly, have got the most functionality for the buck that you pay for them.

All right, Dylan, you can go ahead to the next question.

Dave Koning, Baird.

Yes. Hey, guys, just a couple quick financial ones. I think you mentioned something about margin increasing a bit, EBITDA margins increasing a bit in the core South African transaction business. And I can't remember what the reason exactly was, but maybe you could just talk about that for a minute.

So, the margins in our core South African business, they've -- in terms of operating margin, there is a bit of fluctuation depending obviously on the product mix. And it varies from quarter-to-quarter because there are also some cyclical trends in some of those underlying businesses.

What I referenced in my prepared remarks is really looking at the EBITDA margin specifically of the South African transaction processing is something that we hope to stabilize over the next several quarters.

One of the prospective projects that may have quite an impact on both -- well, mainly on the operating margin will be the rollout of our mobile ATMs across the country. We plan to rollout quite a significant amount of these fairly expensive machines, but obviously we've done what we believe is sufficient research and homework in terms of the volumes that we hope to generate through these specific ATMs.

Clearly, the depreciation charges on those machines will have an impact on the operating margin. But, as far as the EBITDA margin is concerned, we certainly hope to improve on the margin as it currently stands.

Okay, great. And then, the tax rate the first two quarters were kind of below kind of normal rates. I think you're averaging 31% year-to-date. Is that sustainable, that kind of 31%, 32% going forward?

I wish I could say yes. But, unfortunately a big determining factor on the final tax rate for the year is obviously going to be the extent to which we declare or may declare dividends up from the South African company into the US company to pay for expenses or for international expansion.

And those in turn would obviously trigger some utilizations of foreign tax credits, etc. That calculation gets gone at the year-end stage, and the result of that could have an adverse impact on the tax rate.

So, for our own perspective right now, we don't think that it will tick up too significantly, but it could go up at much as to the 38% range. But, that will only happen in Q4 right at the end when the final tax comps are finalized.

Russell Anmuth, Gotham Holdings.

In South Africa, when do you expect to be able to offer life insurance services again, given how important that can be to cash flow?

Yes. As you know, our life insurance company, what we were issued was a Section 12, which means we haven't been able to sell any insurance for the last, what, two years?

Yes.

And we've kept it going. And I think we've done everything that the Financial Services Board has asked of us to do in order to, for lack of a better word, meet all of their current and future requirements.

To be quite honest, I think the DOJ investigation did not do us any favor in this particular aspect, because they have been, I think, far more thorough at looking at us and our business plan and what we are doing and how we do it rather than perhaps at other people.

We, again, are of the view that we've done everything in our power now over the last, I think, couple of weeks. And we have been told by its Managing Director as well as the gentleman that was appointed by the FSB to oversee what we were doing as part -- who is also on its Board and its management. When I am talking the Board, I am talking the Board of the insurance company.

And we are hoping to get clearance from them very, very, very shortly now. If that happens, then to be quite honest we have been ready for a while to actually launch a real attack on the South African market with the product that we've designed.

And when we do put our minds to launching a massive attack, we're normally pretty good at it, which means we'd like to get 50,000, 100,000, 150,000 new customers very, very quickly from the date of launch, which means with a bit of luck by the end of this financial year, end of June, we could already have 50,000 or 80,000 people in our books, if everything goes according to plan.

Big number.

Yes. Well, you've got to go for big numbers, because we're growing -- in order to grow at the sort of rate that we're growing, we can't do it anymore with small numbers.

So, the beauty of scale finally. So, just a follow up to that. So, with all the damage that AllPay has caused the company, right, in all kinds of different arenas, from business in South Africa to the US stock market capitalization and on and on, where do you stand at this point with AllPay, with Barclays, with addressing the situation?

Sorry, I didn't catch the last piece of the sentence.

What is your thought process on addressing the damages that AllPay has caused the company across the board, from the US stock market capitalization to business in South Africa?

I understand the question now, and obviously there are a couple of things. We had mentioned the fact that we had commenced legal action, number one because we believe that they were fundamental in leaking information to the press first and then to the DOJ anyway without any substantial evidence of anything, which should have been difficult considering there isn't anything to find.

And certainly we have -- our attorneys have decided that it was better to wait for the Hawks' investigation to conclude, because when -- rather than to use the word if, when they actually decide that in fact we didn't do anything wrong and that none of our companies were ever involved in any of these particular events of corruption or alleged corruption, then to be quite honest we're going to be, I think, on the front foot.

And we'll be able to go back and start adding everything together and decide how much money have we lost and have our shareholders lost because of this, and of course which jurisdiction should we commence any lawsuit in, because depending on the legal system -- South Africa is not very good as far as collecting damages. Obviously we prefer the US because it sounds that in the US you can basically ask for anything from anybody at any time.

So, there must be an opportunity and we are reviewing that at the moment. Knowing that we are hoping to get clearance very, very soon, we will then decide in which jurisdiction we go after Absa, which is really AllPay, which is really Barclays, simply to make sure that this does not happen again specifically for the wrong reasons.

Thank you very much, sir. Ladies and gentlemen, on behalf of Net1 U.E.P.S., that concludes this conference. Thank you for joining us. You may now disconnect your lines.