Lesaka Technologies Inc (LSAK) 2016 Q1 法說會逐字稿

Ladies and gentlemen, good day and welcome to the Net 1 UEPS Technologies Q1 2016 earnings call.

(Operator Instructions)

Please note that this call is being recorded.

At this time, I'd like to turn the conference over to Dhruv Chopra, Head of Investor Relations. Please go ahead.

Thank you, Ari. Welcome to our first quarter fiscal 2016 earnings call. With me on the call today are Dr. Serge Belamant, our Chairman and CEO, and Herman Kotze, our CFO.

Both our press release and Form 10-Q are available on our website, www.net1.com.

As a reminder, during this call we will be making 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 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 US dollar and the South African rand.

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

Thank you very much, Dhruv. Good morning to all of our shareholders, and good afternoon to others.

Our first quarter of 2016 marks a milestone in our Company's ability to innovate, but more importantly to deliver. I've mentioned a number of times that our strategy is based on both attack and defense. Some of you may know or heard of Tigran Petrosian, an Armenian chess world champion during the 1960s who was known for this defensive play before he would launch an unstoppable mating combination.

We have for many years attempted to ensure that we construct fallback plans before we spearhead any new business development. We have been successful in implementing this strategy, and our business has been able to morph when we required to counter direct threats and to continue growing at an healthy rate.

This quarter is a testament to this strategic plan. We achieved $154.5 million in revenue and $0.56 in fundamental earnings per share, which in rand terms translate into a 19% and 16% increase when compared to our first quarter of 2015.

We have been successful in scaling up our EasyPay Everywhere business, expanding our financial services businesses, and further developing our ZAZOO business in both South Africa and also in the world. We continue to scale all of our strategic businesses, as we expect these to deliver higher revenue streams with improving margins.

Herman will provide the details of our financial performance, while I want to focus on some key strategic areas such as EasyPay Everywhere, ZAZOO, and our card-centric activities. I will also provide an update on the latest SASSA developments.

Perhaps, let me start by updating you on the SASSA contract. We have already informed you that last month SASSA decided not to award the RFP and that therefore our contract would remain in place until 31st of March, 2017, as per the 2012 tender award and service level agreement with the Company, in accordance with the Constitutional Court's ruling.

SASSA filed this decision with the Constitutional Court of South Africa and at the same time advised the court that they will submit a plan regarding the insourcing of the payment system after the conclusion of the contract. SASSA submitted the insourcing plan to the Constitutional Court yesterday, and we have posted the SASSA Constitutional Court filing on our website for your convenience.

Although we cannot comment on the timing, feasibility, or complexity involved in any of the milestones stipulated in the proposed plan -- as many of the steps to be performed are conditional on negotiation and approval by a number of institutions and organs of state such as the South African Reserve Bank, the Payment Association of South Africa, the CSIR, the scientific and industrial research, national treasury, and many others -- we would however like to offer our interpretation of the plan based on our understanding of the business, in general.

SASSA has since 2012 reiterated that they intended to insource the payment function of grants at the end of the 2012 tender contract period. To this end, SASSA included in our contract a clause that allowed them to test their payment system six months, or so, prior to the end of our contract period.

Our contract also mandates us to provide a phase-out plan, which, if in line with the timing specified in the recently canceled RFP, would range between nine and 18 months after the end of the contract period. We thus believe that the SASSA proposed plan is in line with SASSA's original intention.

SASSA indicates, however, that some delays may be experienced in the finalization of some of the steps required in their proposed plan, as they have fallen behind in some aspects due to the preparation, issuing, and evaluation of the latest RFP as was ordered by the Constitutional Court.

SASSA is also clear that their intention is to continue with the outsourcing of the cash payment portion of the business, which step in our opinion, may require a fresh tender to be issued in due course.

They also state that retaining biometric proof of life is critical to the future solution.

In addition, SASSA indicates that they need to consult with various stakeholders regarding the opening of special bank accounts, which we assume would be the same heavily-restricted accounts mentioned in the now-cancelled tender.

SASSA also mentions the fact that they would like to issue new cards to the 10 million beneficiaries over a six month period, but very scarce detail is provided on how they would achieve this mammoth task.

The SASSA decision not to award the RFP and to thus utilize our system until March 31, 2017, should allow the Company to realize its anticipated five-year profit margin of between 17% and 20% over the duration of the contract. Our South African Social Security Agency contract, as operated by our subsidiary Cash Paymaster Services, continues to represent approximately 20% of our total income.

We will keep you abreast of developments regarding SASSA's plans and what change, if any, such plans could have on the Company after March 31, 2017. We will however continue to provide unwavering support to SASSA in any way possible to achieve their objectives without jeopardizing or disrupting the payment to grant beneficiaries.

Let me now focus attention to our EasyPay Everywhere initiative. Our strategy, which partly resulted from our decision not to participate directly in the new SASSA RFP, was to convert as many unbanked or underbanked customers as possible, including grant beneficiaries, to our new EasyPay Everywhere account offering.

The rationale for this approach was simple enough. The new RFP in many ways impaired the functionality that could be offered to grant beneficiaries by the winning bidder, their partners, or the consortium members, and SASSA's filing yesterday still references special bank accounts for future payment, which we assume means restricted bank accounts.

It appeared that SASSA's intention is for a beneficiary to receive their grant in these restricted accounts and then to be able to either withdraw the grant in cash or to transfer such grant into another bank account of their choice such as, for example, an account at EasyPay Everywhere.

All beneficiaries currently enjoy full unrestricted functionality under the solution we currently provide and are therefore already familiar with feature of the EasyPay Everywhere product. Such functionality -- for example, debit orders -- is in our view, fundamental in providing the means to achieve financial inclusion in a most comprehensive manner.

This researched belief and strategic objective has not waivered, and as a result we have opened 450,000 new accounts as of today since we commenced this program just a quarter ago. I want to highlight that we have now deployed our sales team in all nine provinces of South Africa and are now achieving registration rates in excess of 17,000 new accounts per working day on our busiest days, which occur at the beginning of each month.

What does this mean for our business? Firstly, we will continue to receive the monthly fees as per the SASSA contract for a minimum of 18 months, plus any phase-out period.

Secondly, securing alternative independent accounts, rather than SASSA accounts, will result in beneficiaries' being able to use their EasyPay Everywhere account irrespective of our contract with SASSA. The bank accounts that we provide are therefore permanent and not affected by the duration of the SASSA contract.

We believe that our bank accounts offer the best value and functionality available in the market and that our accountholders have no reason to go through the tedious process of changing the EasyPay Everywhere account ever again.

Thirdly, our new EasyPay Everywhere customers enjoy reduced charges when using the EasyPay Everywhere-branded ATM network. We had 750 ATMs deployed by the end of October, which process approximately 774,000 transactions with a value of ZAR672 million. After the first week of November, we now have 800 operational ATMs that have already processed 600,000 transactions, with a value just in excess of ZAR600 million.

As we deploy more ATMs and sign up more EasyPay Everywhere account holders, we should increase the transaction volumes in our ATMs, resulting in a four-fold increase in overall fees we generate, even though our fees are less than those charged by any of the other banks.

Our loan book has currently established is currently stabilized at around ZAR490 million due to our conservative approach to micro finance, specifically to affordability criteria. As we continue to deploy new products -- such as, for example, in our focused loans or emergency cash advances -- we maintain a tight reign over our risk, but estimate that our book should grow at double-digit rates in rand terms this financial year.

In addition, we have now deployed our sales force in some provinces to market and sell our new insurance products. We estimate sold over 17,000 policies, which represent an annual premium income of around ZAR10.5 million. Although these numbers are not significant at this point in time, we believe that once we have deployed and trained our sales staff in all provinces, the contribution from insurance should accelerate and become more meaningful, just as we have experienced with all of our other financial-inclusion business products.

Another benefit from having a life insurance license is that we are also offering our EasyPay Everywhere customers basic free insurance life insurance cover, which further differentiates us from our competitors and detractors.

I will now spend a few minutes on our mobile-centric business, ZAZOO. ZAZOO, as you know, was born effectively in 2013 by combining various mobile-related businesses within the Net 1 Group, integrating them as one unit, driving a unified corporate and market strategy, and building a cohesive mobile-centric fintech company with multiple products, customers, and geographies.

Today, ZAZOO's business includes over 5 million customers in its various Manje services; Pasavute in Malawi, which for the first time exceeded 1 million active customers in Q1 of 2016; over 1,700 employers with more than 660,000 employees for payroll services through ZAZOO enterprise payment solution, named FIHRST. ZAZOO remains the largest virtual top-off service provider to MTN across nine African countries, including Nigeria and South Africa, and the largest supplier of SIM cards to Smart, the largest mobile operator in the Philippines.

What is more exciting for us when we look at ZAZOO is that all of these accomplishments I've just listed exclude what is the future of the company; namely, our patented technologies for mobile virtual card and variable PIN. A majority of the developments we have announced and talked about in the past 12 months relate to MVC or VPIN only and have either recently been launched or are in the process of launching. These initiatives pan the developing and developed worlds and solve the issues we have identified; namely, interoperability, accessibility, and security.

VCpay, our B2C brand in South Africa, has enjoyed good traction over the last six months, seeing transaction volume grow by over 200%. Partnerships with the likes of Uber, MasterCard, and Microsoft, which started as pilots in South Africa, are in the process of expanding into other territories.

We are working vigorously to get the new projects with the likes of BitX, Funifi, and Oxigen live as quickly as possible.

Meanwhile, in calendar 2016, we are also going to introduce EasyPay Corporate, which is a state-of-the-art corporate solution based on MVC that enables businesses to control spend by employee, merchant, currency, and the like and streamline their entire corporate spend and expense reimbursement status quo through a simple-to-use virtual card platform.

We have already signed agreements with four early-adopter corporates, which together should add around ZAR100 million upon launch to our transaction volumes. Initially, we will target the 1,700 employers we have a relationship with FIHRST, allowing us to build this new offering in South Africa and Europe through the multinationals we serve.

During Q1 2016, we also began staffing up a UK office for ZAZOO in order to help us implement and deliver our current and future pipeline of projects. From a financial and metric perspective, ZAZOO's revenue grew 57% year over year in constant currency while it processed approximately 93 million transactions in Quarter One 2016, which is 68% higher than 2015. ZAZOO is now the Group's third largest revenue contributor.

We are also in the process of identifying the best solutions that will allow us to issue plastic or virtual cards ourselves without paying away a real large portion of the acquiring and issuing fees to third parties. We are focusing our initial efforts on the European economic zone and will keep you updated on our progress.

In India, we were hoping to announce the launch of our project with Oxigen by the end of September, but we are running six to seven weeks behind schedule, driven largely by external and local processes. Nevertheless, the good news is that we are now in the final stage of user acceptance testing and are targeting to be live in the next two weeks, or so.

Oxigen is one of the oldest and largest prepaid service providers in India, with 200,000 retail distribution touchpoints and following a national branding campaign, now has in excess of 10 million digital wallet customers who will all very soon have access to MVC with VISA.

Our opportunity pipeline in India is far more encouraging today, and we will need to ensure we allocate sufficient resources in order to capitalize on these exciting opportunities.

Meanwhile, our mobile value-added services in South Africa and elsewhere continue to grow from strength to strength. Umoya Manje posted 67% transaction growth over Q1 2015, while Power Manje transactions grew 108%. Similarly, Pasavute in Malawi sustained its momentum, with year-over-year transaction growth of 111% in Q1 2016.

One final thought on our value-added services. The reason for our success with these projects is because we provide the solution that is convenient and easily accessible through the mobile phone and affordable, as it is by far the cheapest of any formal or informal alternative.

Depending on the territory and infrastructure, we can work equally successfully with any funding or repayment mechanism. So, in South Africa, naturally the consumers of these services have an account with Grindrod bank, but take Malawi as another example. We have no relationship with any bank or account, and therefore we rely on the network operator's traditional agent network for repayment.

Given the value we provide and the robustness of our technology and strength of our risk management solutions, even through the agents in Malawi, our default rate is below 1%.

To reiterate, on our mobile-centric business, we are intent on building ZAZOO into one of the leading mobile fintech companies globally. We already have built sufficient scale in this business, both in terms of revenue and, more importantly, profitability. And with its current and rapidly growing pipeline, we continue to hold ZAZOO to an extremely high standard of delivery.

Lastly, on our World Food Program, our association with MasterCard is starting to bear fruit. We have now signed a contract with MasterCard for the express purpose of tendering for the World Food Program distribution business in 81 countries, and we have now submitted our joint tender and await WFP's decision. Number of beneficiaries targeted in these countries exceeds 90 million.

As I had stated previously, our WFP initiatives will not generate massive profits for our Company, as these programs are socially motivated and are meant to assist the poorest of the poor in many developing economies. However, for every country in which we deploy our technological platform, we will generate the opportunity to build a business similar to the one we have created in South Africa. It is from these businesses that we will be able to grow our revenue as well as our profitability.

We are close to implementing the first WFP country in the SADC area, as a result of our previous tender award by the WFP for the southern region.

I will continue to report on this activity as well as other card-centric activities in the region and elsewhere where we are experiencing ever-increasing momentum.

To conclude, the Company is poised for sustained growth over the years to come in many of its businesses. We'll continue to strive to expand the longevity of our business contracts and to improve the quality of our earnings for the benefit of all of our shareholders.

Thank you very much for your time, and 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 first quarter of 2016, compared to a year ago.

For Q1 of 2016, our average rand-dollar exchange rate was ZAR12.96, compared to ZAR10.76 a year ago, which negatively impacted our US dollar-based results by approximately 21%. And the South Korean won was 13% weaker compared to last year's won rate.

We continue to face significant currency headwinds in our operating geographies. The US dollar, our reporting currency, remained strong against emerging market currencies, and the South African rand is currently trading at around ZAR13.94 to the dollar, while the won has strengthened slightly over the last few months and is currently trading at KRW1,144 to the dollar.

The stronger dollar has again had an adverse impact on our results. Fortunately, we have experienced good growth in our functional currencies, and therefore due to the fluctuations caused by the volatile exchange rates in our operating currencies, we provide constant currency comparatives in order to analyze the core operating trends in our businesses.

We have again started the year with a very strong foundation in constant currencies, with revenue and fundamental earnings per share growth of 19% and 16%, respectively. On a consolidated basis for the first quarter of 2016, we reported revenue of $154.5 million and fundamental earnings per share of $0.56. Our fully diluted weighted share count for Q1 2016 was 47.1 million shares.

Let me now turn to a discussion of our segments and their financial performance during Q1 2016. In our South African transaction processing segments, we reported revenue of $55.6 million in Q1 2016, down 8% compared with Q1 2015 in US dollars and up 11% on a constant currency basis.

In South African rand, the increase in segment revenue was primarily due to more low-margin transaction fees generated from cardholders using the South African National Payment System and an increase in the number of social welfare grants distributed, offset by fewer inter-segment transaction processing activities.

Segment operating income margin for Q1 2016 and 2015 were 24% and 23%, respectively, and have increased primarily due to an increase in the number of beneficiaries paid in Q1 2016 and a modest increase in the margin of transaction fees generated from cardholders using the South African National Payment System.

EasyPay continues to track well. Our volumes increased mid-teens year over year, benefiting from increased transactions from our EPE account holders and the addition of new retail bill collectors as well as bill issuers, including prepaid electricity and traffic payments for local authorities.

We continue to expect our South African processing segment margins to be in the low 20% range for the remainder of fiscal 2016. The margin will be affected by continued rollout of our ATMs during 2016 and inflationary pressures on our cost base in South Africa.

Inter-segment transaction processing activities are eliminated on consolidation but have a meaningful contribution to the segment this quarter.

International transaction processing generated revenue of $41 million in Q1 2016, up 15% compared with Q1 2015 on a constant currency basis, primarily due to higher transaction volume at KSNET during Q1 of 2016.

Operating income during the first fiscal quarter of 2016 was higher, due to increase in revenue contribution from KSNET and a positive contribution by XeoHealth in the US, but was partially offset by higher ZAZOO start-up costs in the UK and India as we scale up those operations.

Operating income margins for Q1 2016 and 2015 were 16% and 17%, respectively.

For Q1 2016, KSNET revenue grew 8% in Korean won, to $40 million, while EBITDA margin increased to 29%, compared to 28% last year.

KSNET has sustained local currency growth of high-single to low-double digits for several quarters now, despite the slow economy. Industry forecasters expect transaction growth to slow modestly in South Korea as a result of macroeconomic factors and reforms in the VAN and related industries, going forward, including the introduction of a new pricing scheme for card transactions.

KSNET is well placed to adapt to any industry changes, given its competitive position and value proposition.

Our financial inclusion and applied technologies segment revenue was $67 million in Q1 2016, up 3% compared with Q1 2015 in US dollars and 24% up on a constant currency basis. In South African rand, financial inclusion and applied technologies revenue and operating income increased primarily due to the introduction of our EasyPay Everywhere and SmartLife offerings; higher prepaid air time and other value-added services sales; more ad hoc terminal and card sales; and, in South African rand, an increase in inter-segment revenues.

The South African National Credit Act made certain industry-wide amendments which became effective on March 13, 2015. These amendments were introduced primarily to address overindebtedness of South African consumers and requires lenders to perform a stricter affordability assessment.

Our UEPS-based lending book at the end of Q1 2016 was approximately ZAR490 million, compared to ZAR607 million in Q1 2015 and ZAR496 million in Q4 2015. The decrease in the lending book is primarily due to compliance with the industry-wide amendments to the South African National Credit Act.

Compliance with the amended legislation continued to have a modest impact on our UEPS-based lending business in early first quarter 2016, but has started to normalize now and should return to growth into the second quarter. We do fully agree that prudent and responsible lending is paramount to the success and growth of this industry and ultimately will result in a stronger and more sustainable book for us.

The rollout of our SmartLife insurance policies will gather momentum during the remainder of fiscal 2016, as we scale our operations and employ the appropriately qualified staff members as required by the regulator. As our insurance business grows, we will build the appropriate reserves on our balance sheet, while the impact of policy collections will become more pronounced in segment revenue.

Segment operating income margin was 25% and 27%, respectively, and has decreased primarily due to the sale of more low-margin prepaid airtime and higher costs related to the launch of EPE and SmartLife products.

The operating margin of this segment will continue to be affected by the relative contributions of the various businesses in this operating segment and the introduction of our EasyPay Everywhere and SmartLife products. We expect significant expenditure on marketing and establishment costs for these exciting products during Q2 of 2016.

Corporate/eliminations includes amortization of intangibles, stock-based compensation, US legal expenses, and general corporate and overhead costs. In US dollars, our corporate expenses have decreased primarily due to the impact of the stronger dollar on goods and services procured in other currencies, primarily the South African rand, and lower amortization costs, partially offset by modest increases in dollar-denominated goods and services purchased from third parties and Directors fees.

Our Q1 2016 net interest income increased to $3.3 million, driven primarily by lower average debt outstanding and higher average cash balances during the period.

Capital expenditures for Q1 2016 and 2015 were $10.7 million and $9.4 million, respectively, and have increased primarily due to the acquisition of more payment processing terminals in South Korea and, of course, ATMs in South Africa.

At September 30, 2015, we had cash and cash equivalents of $126 million, up from $118 million at June 30, 2015. The increase in our cash balances from June 30, 2015, was primarily due to the expansion of all our core businesses, offset by provisional tax payments, capital expenditures, and the strengthening of the US dollar against our primary functional currencies.

The strong US dollar has impacted our cash reserves maintained in foreign currencies, primarily South African rands. And therefore, in order to mitigate the wild and often unpredictable fluctuations in the rand against the dollar, we converted approximately ZAR500 million to US dollars after the quarter-end. As a result of this conversion, we expect our net interest income to decline during the remainder of fiscal 2016, as the yields on US dollar deposits is significantly lower than the returns earned on rand deposits.

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 offerings; investments in our new and high-growth businesses such as EasyPay Everywhere, SmartLife, ATMs, and international expansion; the servicing of our debt; share repurchases; and strategic acquisitions.

Our effective tax rate for Q1 2016 was 32%, a little higher than the South African statutory rate of 28% as a result of non-deductible expenses, including legal and consulting fees.

Our tax rate will fluctuate depending on our intention regarding undistributed South African earnings and the timing of any payments such as the ZAR500 million distribution we made from South Africa to the USA during Q2. We continue to expect our effective rate for 2016 to be in the 30% to 35% range.

Our share count in Q1 2016 was 47.3 million shares.

We are very optimistic about the future contributions from our new product range and the organic growth of our business in general, despite the curve balls presented by factors such as currency fluctuations and global macroeconomic conditions.

For fiscal 2016, we therefore continue to expect fundamental earnings per share of at least $2.57, assuming a constant currency base of ZAR11.43 to the dollar and a share count of 46.7 million shares.

With that, we will gladly take your questions.

(Operator Instructions) David Koning, Baird.

Nice job. My first question, I think you said there are 90 countries now that are participating in the World Food Program and that you want to basically get your same level of services or your same types of services into those countries as you enter. If you look out three to five years and just had to guess, how many countries do you think you could put systems in pretty similar to what you have in South Africa and that could become decent revenue contributors? Of those 90 countries, how many countries might that happen in?

David, that's a difficult one. Typically, the first thing we have to ensure is that when we enter the particular country -- and that's always a difficult thing. The WFP gives us the chance to actually come into a particular country, sort out -- using them, using MasterCard -- any of the sort of issues that are local to any country; namely, central bank, finding a banking partner, making sure the system is certified to be used in those particular environments. And that's what, really, the WFP is going to give us at the end of the day.

We will make some form of profit of course through making WFP payments, but we're not focusing on how profitable it's going to be.

Once that has happened, the beauty here is that the rest of the exercise -- because, now, the infrastructure has been paid for -- the rest of the exercise is to now really find the right teams of people in order to do the marketing and to be able to sign up the similar sort of business partners that we have here in South Africa. So, it could be merchant stores. It could be banks. It could be MNOs. All that sort of thing.

So, the (inaudible) is that if --. And, look, it's unlikely we go in to do this in 82 countries or 90 countries in the next three years. We're hoping that with a little bit of luck, once this thing starts ramping up, I'm hoping that we should be able to implement two to three countries per annum.

How long in each from the time that we actually commence operations -- I'm not talking WFP; I'm now talking about the [diversification] of WFP -- I think that normally would take anything between 12 and 18 months.

So, if you look at two or three countries over a period of three to five years from now, we should be with WFP in at least 10 countries. That's what we're really aiming at doing. And then, you've got to give yourself a lag of about 12 months to 18 months for each of these countries to start creating operating volume making some money. And after that, as you know, all that happens after that falls down straight to the bottom line.

At the moment, that's about all I can tell you, David. I know it sounds little bit unclear perhaps, but that is to me a wonderful opportunity simply because we are able with WFP to put the foot in the door.

Okay. Great. My second question, just with SASSA, with the contract coming up March 31 of 2017. Would you still have a high level of confidence that you can more than offset any lost revenue there and that you can keep the license contract? And I guess, basically the whole thing here is, two years from now when we look at profits, do you have continued confidence that they will be up from where we are today and that the loss of that won't make profits be down in a couple of years?

David, we've tried in many ways to explain the strategy, and sometimes it's difficult to do it over the phone and just with a document.

But the bottom line is we now know that until March 31, 2017, nothing is going to change. We also know that after March 2017, there is no doubt that there will be -- there possibly would be a phase-in and phase-out that, according to the previous, or the last, RFP, could range between another nine and 18 months. So, even if --. Call it another 12 months, to make it easy, which means that it's 18 plus 12 is 30 months from now.

That's assuming that SASSA, that has spent quite an enormous amount of time on this last attempt at trying to get a tender out and trying to award this tender -- they've said so themselves -- they're now running behind their own plan. So, there is a chance that, in fact, they might not even be ready by March of 2017. It might take another six months before they can even enter a phase-out.

So, we could be looking at anything between 30 months and 36 months before, in theory, we are no longer the operator of SASSA accounts.

Now, when I say that, we've always stated that just because we don't want to directly be the operator does not mean that indirectly. For example, SASSA is also saying they want to go basically to tender again in order to provide the cash payment. Now, cash payment applies to around 3 million people at the moment. And today, we are probably the only people with an infrastructure to go out in rural areas to pay these 3 million people. So, that's probably not going to go away, even according to what SASSA has just stated.

On top of it, of course, is the technology play, which is what we've been focusing on and saying to SASSA: Guys, if you want to do that yourselves, you're going to need a technology. Why not use a technology that you know and a technology that works?

Which means, that's like not likely to go away.

So, if you really look at what might go away in 20, 30, 40 months, well, up to then it might be nothing. And after that, it might not be a lot that actually goes away.

And of course, during that period we've implemented and we are continuing to focus on implementing our EasyPay Everywhere. As you can see, it's ramping up at a huge rate. We now have as of today 450,000 customers. We believe that that number is still increasing in terms of velocity, or acceleration, for lack of a better word.

So, at the end of the day we still think that within the next year, or so, we should have added another 2 million or 2.5 million people comfortably. In other words, we should hit the 3 million mark. And as I have mentioned before, if we hit the 2 million mark or 2.5 million mark, that would offset any possibility of losing the entire SASSA contract, not 30% of it or 20% of it or none of it.

So, that's going well. So, we feel very comfortable right now that we do not see that there will be any real dip in our earnings. If anything --. And that's assuming of course that there will be absolutely nothing, outside of the SASSA revenue, which today, as you know, only represents about -- I think it's around 20% of our revenue line and probably less than 20% in terms of our profitability.

So, the rest of the business -- being it mobile or being it loans or being it insurance -- lots of other people are today in that market like we are, and are targeting the same people as we're targeting. So, the chances that that will go away, in my view, is less than 5%.

But of course, because we have now this extra incentive of being able to provide a banking account which has got all the functionality that we know people require, but at the lowest cost in South Africa, that will give us, in fact, [a full-weather guarantee] why in fact we're not likely to lose any of our ancillary businesses that we're currently running using, for lack of a better word, or introducing grant recipients as customers.

So, at the moment -- I'll be honest with you -- we believe our strategy is correct. We believe our strategy is sound. We have the proof that it's working according to plan. And right now, we're now focusing on internationalization of the business, rather than to keep on worrying about what may or may not happen in the business that we've had for the last almost 20 years. So, I think we feel quite comfortable with that, David.

Okay. Great.

John Rolfe, Argand Capital.

Just a clarification. The press release indicated that there were 350,000 EasyPay Anywhere customers signed up, I believe. But it sounds, Serge, like you've said a couple of times in your comments that that are 450,000. Which is the right number?

I think the reason is is because the number 350,000 was at the end of the quarter, where now I'm talking numbers as of -- I get the information as of today.

Okay. Got it.

Just to be clear, over the last five days the subscription rate has been approximately 17,000 of new accounts per day, and that accounts for the extra 100,000.

Okay. Great. And I think initially you had commented that you thought the EasyPay Anywhere customers you were signing up might come in at just a modestly higher tier on the -- I don't know what the right word is -- on the socioeconomic spectrum than your typical grant recipient. Is that still what you're seeing in terms of to the extent that you have that data?

Yes, we're starting to see a little bit what we were hoping, namely that now that we've deployed [and you probably saw] it through our ATM transactions. To give you a typical example, when we started with no ATMs whatsoever, the bottom line is that the people that were making the money were the banks that actually owned ATMs. They were the guys that were getting the interchange fee, which is set by the South African Reserve Bank, which is around [ZAR10 per ZAR1,000] that is withdrawn.

As we implement more ATMs ourselves, we are now starting to get these ZAR10. And as of course we put out more of our EasyPay Everywhere customers, those customers tend to come rather to our ATMs because they're biometrically enabled, number one, and number two, because our transaction fees are cheaper.

So, we're starting to be converting the amount of money we used to make out of another base transaction, which is no more than about 15% of the value -- call it ZAR1.5 per ZAR10 -- and we're converting that to about four times that amount, which is ZAR6 to ZAR10.

So, the more customers we continue to have in EasyPay Everywhere and the more places they can start drawing cash or performing transactions which belong to us, we quadruple basically the amount of money that we're currently making, and that's where the real economics of this thing comes in. On top of course is the fact that we are then in a good position to offer them our Manje services as well as our loans as well as our insurance as well as a number of other products.

So, we're getting very excited. That's why I've always come out with a number [to say these are 10 million before] and if we can get 2.5 million people, we basically would be the same as if we had all 10 million. Of course, we're not aiming at 2.5 million people; we're aiming at 4 million or 4.5 million people.

So, that's where we believe we can continue to grow and grow quite exponentially and if all of the numbers I've talked about actually come to realization. And it appears that what we've seen to date, that in fact the numbers are actually pretty much correct.

Okay. Great. And the last thing I have is just a comment. You indicated that there's a number of very attractive alternatives for cash deployment, and it sounds as if -- certainly from an organic growth perspective, new products, that sort of thing -- there's some potentially very high return projects in there. I would encourage you just to continue to be balanced on the cash deployment and continue to allocate at least a portion of that to share repurchases given where the stock is trading. It's obviously a high-return use of cash, and I think in addition it has the ancillary benefit of sort of lifting some of the concerns against the Company that have been lodged in the past.

So, again, I'm not looking for anything extreme. I would just encourage you to be balanced and to continue to put some of the cash toward share repurchases, going forward.

It's noted, and I can assure you this is an issue that gets debated every quarter at our Board meetings on numerous occasions.

And I think sooner or later -- we've always had a split Board in terms of what we should do. Should it be a dividend? Should it be a share buyback? Should we rather keep a little bit of a war chest --? In order to make sure that if we want to make a few acquisitions in order to enter certain territories, shouldn't we rather keep the money while we can?

But I think, we are, as you know, very cash generative. And I think that is something because of that, that there's a cash cow, start accumulating, we will have to start looking at seeing how we can utilize this cash a little bit better than what we've done in the past.

Look, you guys are in the enviable position, like you said, of generating a lot of cash and having a very strong balance sheet. So, that gives you a lot of flexibility and an ability to do more than one thing at once in terms of cash deployment. So, I look forward to seeing the decisions you make. And keep up the good work.

Thank you very, very much. And we will. Certainly, your comments have been noted.

Okay.

Russell Anmuth, Gotham Holding.

How much of the expense, the CapEx, is behind you in terms of the EasyPay and ATM-related and SmartLife investments? As it seems that there probably wasn't corresponding revenue in the quarter to that, and it seems like there's significant leverage ahead and maybe profitability was a bit understated in the quarter.

Russell, from a CapEx perspective I think we have now incurred most of what we had to do to build out the infrastructure, specifically on the EasyPay Everywhere side. We think there may still be a little bit to go on the SmartLife side as we expand our office presence across the country.

From an ATM perspective, as we've indicated, we've got about 800 ATMs out there. And I think the initial high-growth rollout is behind us, and obviously we will now strategically locate the remainder of our ATMs.

So, you're still going to see some CapEx spend on the ATM side, and we think that we could probably end up over the next year to two years at roughly 2,000 ATMs. But in terms of total quantum, the CapEx that we will spend on that per quarter is not going to be very significant.

As far as the operational expenditure is concerned, specifically on the EasyPay Everywhere and SmartLife rollouts, those were obviously quite high during the last quarter and will probably continue to be the same in Q2. We obviously have quite a bit of expense in terms of recruiting staff members, getting them out into the field; so, the related expenses in terms of vehicles and fuel and maintenance and accommodation. We're also running some marketing campaigns at the same time to create the awareness that we feel is necessary.

But after Q2 and going into the last half of the year, I would expect those expenses to reduce and for the margins that we will see, specifically from EasyPay Everywhere and from the SmartLife side, to improve.

And then, of course, there's also the CapEx and OpEx expenses that we anticipate to incur as we build out ZAZOO internationally. At the moment, we have our operations in India and in the UK. Those two specific points we think we need to bulk up a little bit more as we get more projects underway and we need more staff members to assist us, specifically from a development point of view.

So, that obviously will also require a little bit of CapEx and some investment in operational expenditure over the next three quarters, or so, specifically as it relates to ZAZOO. But in the greater context of things, again, it's not going to have a material impact on the overall margin of the Group.

Okay. So, it seems like at least on the South African investments that we should see better and even better in the current quarter, in the December quarter?

Yes, I hope so.

Okay. The follow-up. So, two things. One, can you offer any outlook on the Hawks? And in talking about the MVC and ZAZOO, do you see more interesting opportunities like Uber in the pipeline? Or, within Uber, let's say, expansion into different countries?

There's two things -- and I know it must be frustrating for you guys and it's probably even more frustrating for us, because we were told that we would have the final report from the Hawks already, to be quite honest, almost five months ago.

And we now have found out that, in fact, there were two concurrent cases, which one of them we had filed. And that report is apparently finalized, and we have been told again -- because we asked -- that the second report would also come out within the next week. And as far as I know, neither one of the reports are going to say that we were guilty of anything. It's difficult to be guilty of something you haven't done.

So, we are hoping that that is going to be once and for all behind us, but I don't want to be called a liar because I tell you that I've been told. Unfortunately, until now I've got it in my hand, we're not going to commit to anything. But we hope that -- we've been promised again that it will be very, very soon.

So, that's the Hawks.

On MVC, you'll be pleased to know -- at least I'm very excited to know -- that people already like Uber have already made a commitment that because of the success of our systems in South Africa, that as soon as we are able to issue [VC/MVCs] in Europe, that they would extend the service to the European market as well and to any other market in the world where we are able, of course, to convert local products into a virtual card, into a virtual credit card. So, that's one example of a business that, in fact, people are willing and wanting to expand MVC.

There is no doubt that there are a number of other alternatives. The ZAZOO people are certainly not idle. And we are already negotiating a number of other deals which, to me, would be these biggish deals rather than, let's say, the one-off or small (inaudible).

In other words, we like big deals. We like the Microsoft's. We like the type of companies that have got worldwide reach, simply because if we can prove that what we do works in one place, the chances are that six months later, 12 months later, they like it and they expand somewhere else.

So, we think at the moment we're getting a fantastic ramp-up.

But as we mentioned, to issue cards in Europe, you need to have an issuer license. And to have an issuer license, you need to have a relationship with a bank, in which case they take the money, or you get your own banking license.

So, I'm not going to put any words in anybody's mouth, but we are putting a lot of effort to make sure that by the time that we finally launch this product we are not going to be leaving most of the money on the table for somebody else to take.

So, what does that mean? Does that mean that if you're not going to leave the money --? You're going to capture your fair share plus, does that mean --? How does that work with establishing a banking relationship?

Well, I'm not going to -- I can't give you anything. But I think you probably have worked out the answer yourself.

Okay. But you're talking about a banking relationship potentially with one of the large European multi-country banks?

I'm not interested in any relationship with any bank, because they're going to want to milk most of the money. We're not that good at sharing our revenue or profits with anyone.

Okay. So, if you don't go with a bank, what kind of financial intermediary do you bring into this picture?

You're going to force me to give you an answer. Let me give you an example: we could be a bank.

Got it.

So, if we were a bank, we could issue. And if we could issue, I don't need anyone else.

That means you have to apply for licenses country by country?

No, because under the EU, as you know, all you need is a (inaudible) license, in which case you can access 31 different countries.

Got it. Okay. Exciting.

Let me not say any more than that.

I don't want to steal any of your thunder.

Ladies and gentlemen, in the interest of time, please, could you limit yourself to one question?

Jordan Hymowitz, Philadelphia Financial.

First of all, can I get a specific dollar amount of expenses on the World Food Program and the life insurance programs spent last quarter that obviously did not generate any revenues last quarter?

The answer is very simple. Everything we [offer] right now is Cloud-based, apart from a number of people who are basically engaged either with MasterCard or with WFP and a certain amount of legal fees in order to make sure the contracts are in place. Having said that, we're talking about a few hundred thousand dollars was about it.

Okay. Second question is, when you get brought in (inaudible) and even the South Africa (inaudible) begins to internalize some of these things, I don't think it's in the government's interest to allow 10 million people to have a disruption in benefits, although politics makes strange things.

So, given that once you internalize that, you're likely to get paid some technology fee, and I would argue that the technology fee is a much higher multiple business even it's a lower revenue business. So, I guess my question is, if the government elects to pursue the technology, will you break out that technology revenue as a separate line item which (inaudible) much higher multiple?

Once again, I think you make two comments which are very valid. One, politics. One thing we know and we've known for many, many, many years -- perhaps that has led to the cancellation of the latest RFP -- is that government will not take any chances in terms of jeopardizing the payment grants to 10 million people that represent anything between 10 million and 17 million voters. So, that point of view is more than valid.

So, the second point is, you are 100% right. Let's say that a lot of our business that we do in CPS today, which is where (inaudible) entity, is not the most pleasant, attractive, or fancy business. There is absolutely no doubt that that's the one that costs the most and, thus, the margins are very low.

If we wanted to renegotiate in such a way whereby that could be internalized by SASSA, we would remove, to be quite honest, a fairly large chunk of costs and, candidly, we would not lose a huge amount of profit.

On the other hand, of course, if we had to (inaudible) for that technology, we could then assume that those technology margins would be certainly in the 50% to 60%, rather than to be in the CPS margins, whereby at the moment we're probably not even at 20%. We're probably down at the moment on 14% or 15%, because we're aiming at 17% to 20% towards the end of the contract period as an average.

So, I think it answers both of your questions, and I think you're right in your assessment and certainly something that we would do because we would no longer be, strictly speaking, (inaudible) rational from the point of view of issuing cash to beneficiaries through a pay point, that we would simply restrict ourselves to providing the glue; namely, the technology core solution that makes that happen.

Thank you.

Ladies and gentlemen, we have come to the end of today's conference. On behalf of Net 1 UEPS Technologies, that concludes today's call. Thank you for joining us. You may now disconnect your lines.