Lesaka Technologies Inc (LSAK) 2016 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the Net1 UEPS Technologies, Inc. fourth-quarter and year-end 2016 earnings call.

(Operator Instructions)

Please also note that this call is being recorded. I would now like to attend the conference over to Mr. Dhruv Chopra. Please go ahead.

Thank you, Chris. Welcome to our fourth-quarter fiscal 2016 earnings call.

With me today our Serge Belamant, our Chairman and CEO, and Herman Kotze, our CFO. Our press release and Form 10-K is available on our website at www.Net1.com.

As a reminder, during this call we will be making certain forward-looking statements and I ask you to look at the cautionary language contained in our press release and Form 10-K regarding the risks and uncertainties associated with forward-looking statements. In addition, during this call we will be using certain non-GAAP financial measures and we have provided a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures.

We will discuss our results in South African rand, which is a non-GAAP measure. We analyze our results of operations in our 10-K and 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 US dollar and the South African rand.

So we got me turn the call over to Serge.

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

During the fourth quarter of 2016, we continued to make meaningful strides in safeguarding the long-term strategic but sustainable growth of Net1 through the provision of technology-based solutions to facilitate financial inclusion. We have built a business model that is defensible, differentiated and socially responsible, capable of delivering top- and bottom-line constant currency growth despite ongoing political and regulatory interference in South Africa and macroeconomic events globally.

Being disruptive is not easy as challenging the establishment, norms and cartels can result in upheaval and reputational damage, usually obstructing progress at the cost of those we need it the most. This is the environment in which Net1 has always strived.

While the weaker rand has strengthened meaningfully off its lows it still has a significant impact on our year-over-year dollar-based results so far, creating a 25% headwind this quarter alone. The rand continues to be volatile, and hence the Company's effort to globalize activities over the course of fiscal 2017 will become even more critical.

Quarter-four 2016 revenue of $151 million grew 15% in constant currency and was driven by solid growth in our South African and international transaction processing businesses. While the number of South African financial inclusion products, such as loans and insurance, showed strong growth, some of the early and sizable offerings like prepaid airtime are starting to reach more normalized levels. And we expect each new value-added product or service will continue to drive waves of growth as they penetrate the customer base and as the customer base itself grows.

Our fundamental EPS in Q4 was $0.51, 10% higher on a constant currency basis including the impact of a higher share count due to our IFC transaction and taxes related to the distribution of South African cash reserves. We continued to invest in our financial inclusion infrastructure during the fourth quarter but lower sequentially from Q3.

In fiscal 2016, we repurchased 2.4 million shares for approximately $27 million and under the $50 million 10b5-1 plan adopted on June 29, 2016 have purchased a further 1.2 million shares for approximately $12 million. Out repurchases have only been constrained due to the limited trading volumes over the past two months.

I want to spend a few minutes first on outlining our strategic plans, efforts and opportunities and will then touch on the performance of some of our current operations followed by my thoughts on our government contract and related topics. I have no doubt that Net1 could continue to generate reasonable top- and bottom-line growth by focusing on our key initiatives in South Africa. But those efforts would unlikely ever be divorced from a regulatory, reputational and other challenges we face in this market, not to mention the overall size of the market itself.

As we have seen, we continue to grow earnings and our multiple continues to contract, creating no value for our shareholders or the Company or its employees. With Net1's focus now squarely on the expansion of our activities across developing economies worldwide and as a developed market, namely Europe. We now have many of the right partners such as IFC, the WFP and MasterCard, we have the cash and cash flow and most importantly the products that are relevant in each of these territories.

What we need and are in the process of creating is the infrastructure and management depth required to address each of these opportunities in a focused and aggressive manner and the corresponding benchmarks and targets to hold ourselves accountable. Until now our international strategy was always dependent on third parties in countries which can lengthen sales cycles and reduce economics. We will now sell direct to markets as we have done successfully in South Africa.

To provide additional context around our strategy, our focus will be on six core products across geographies, namely our US- UEPS/EMV product, our Virtual Card product, our financial services products, our working capital finance product, our corporate payment solutions as well as our prepaid electricity metering solutions. Any other offerings we currently have will be complementary to these six as applicable, which we believe are all scalable on the worldwide basis.

To support this strategy we have to deepen our management bench, build direct sales and support staff and when necessary establish a presence in-country. This strategy will further be supplemented by targeted acquisitions and investments.

Why do we believe this is the right strategy for the Company and what gives us the conviction to follow this path? First, we want to build Net 1 into a global player with a much larger addressable market, in turn driving higher and sustainable revenue and earnings, which we believe will attract far more reasonable valuation than our South African businesses.

Second, the strategy is completely in sync with the rationale based on which the IFC invested in our Company. And we expect them to play a significant role in assisting us through this expansion with their expertise, relationships and portfolio investments.

Third, we have already made meaningful progress with a number of products in several territories. To give you some examples, for UEPS we are now live in Zimbabwe with our WFP and we will have additional countries to follow, and in various stages of advanced discussions in countries like Uganda and Mozambique.

For Virtual Card we have almost completed setting up the infrastructure required to introduce our offering in Europe including various licenses, issuing and processing capabilities and region-specific product development while expanding further in India with Oxigen and now with today's announcement MobiKwik as well. For working capital finance we have already taken steps to introduce the product into a handful of European countries outside of Germany over the next six months. For corporate payments we have obtained issuing licenses in UK, Mauritius and hopefully soon in Malta as well as certifications for third-party processing.

For financial services, we are now currently offering this product in, for example, Botswana and other territories such as Nigeria. And for electricity meters we have 65 million installed meters in a number of countries and going forward we intend to migrate these to a per transaction model from a one-off sales model.

Let me highlight some of the acquisition and investments in support our strategy. Starting with our announcement this morning Net 1 is making a strategic investment in MobiKwik, one of the leading digital payment companies in India. What is more important, however, is the ability to partner with them and introduce a number of our products and services on this sizable platform in India.

As we noted that our investment in MobiKwik is based on being able to convert the entire customer base to a banking platform and to then offer these customers not only portals through which they can purchase goods or services but also the financial products they seek. SASSA in South Africa has given us the base of customers to do just this. MobiKwik will assist us to do the same on a much larger scale.

This, as we all know, solves the customer acquisition dilemma. Masterpayment business model revolves around acquiring online merchants and to provide these with transacting needs. More importantly, these merchants seek finance to grow their businesses which Masterpayment is able to provide at competitive pricing due to the close relationship with Bank Frick.

These merchant stores are also earmarked to accept but also to promote the issuance of our VCC solution to safeguard online transaction and thus eliminate chargebacks and allow the businesses to grow without increasing their collection risk. Masterpayment does not, however, carry the financial risk. Masterpayment can scale across Europe and has already commenced its activities in countries such as Italy, Spain, Germany, France and the United Kingdom.

T24 is being transformed into being a processor on a worldwide basis, allowing us to issue cards and acquire merchants, perform many transfers and access international settlement in clearing. T24 will also become the gateway for us to enter Chinese markets and become the technology partner to some of our financial partners such as Finbond to provide local banking and transacting services to their clients.

Coming back to the performance of some of our key businesses, we are pleased, but not really surprised, with the adoption of our ATM rollout and the associated usage of the same. We currently have 904 ATMs deployed doing approximately 1.2 million transactions a month with a value of ZAR1.1 billion being processed on a monthly basis.

EasyPay Everywhere continues to gain traction and we now have in excess of 1.45 million customers compared to 1.1 million three months ago. We began using our mobile infrastructure to expand our reach beyond the physical branches we have established over the past 12 months. These clients perform more than 1.8 million transactions with a value of ZAR1.3 billion per month.

On average each of our clients makes use of our ATM, point-of-sale and [USSD] portal as well as both for macro finance and insurance products. Our customers seek our solutions and products because of the cost structure and the value they deliver on the one hand and the simplicity, security and ubiquity of the access.

Moving on to our financial services offering, our lending business returns to year-over-year growth following the regulatory changes making affordability assessment more stringent in March 2015. While we still decline more loans that we approve the book, which has returned to growth in quarter-four 2016 and was approximately ZAR547 million compared to ZAR496 million last year. We expect the demand for our loans, which are the cheapest and most transparent, will continue to remain strong in fiscal 2017.

Our efforts in insurance with Smart Life gain further momentum in quarter four of 2016 and the number of policy issued doubled to over 160,000 in the past three months alone while insurance is already starting to be a meaningful contributor to our financial services revenue. Specifically, ongoing momentum through fiscal 2017 will make it a more meaningful contributor to our broader financial inclusion segment.

Briefly on our value-added services in South Africa, growth in financial inclusion segment was somewhat constrained by one of our first products, namely prepaid airtime starting to reach maturity level within the existing customer base. While the product should grow over time, particularly as the number of users increase, one can't sell more airtime than the individual needs. Having said that, a number of products introduced subsequently are in earlier stages of their product lifecycles and will continue to drive healthy growth in our financial inclusion business.

Lastly, I would like to give an update on our SASSA contract and various regulatory developments. We have commenced to work with some of SASSA's teams to assist them with building a plan that would result in SASSA performing the payments function themselves as a result of the constitutional court's ruling. To achieve this will require collaboration between us and SASSA to solve the many and complex issues associated with a payment solution including technology, security, biometry, infrastructure, product definition and, of course, the challenges posed by regulation and other RSA acts.

It is too soon to discuss the many possible alternatives or their time frames. We remain committed to assist SASSA and beneficiaries in any way we possibly can going forward to ensure that there is little disruption to the payment system as a result of the changing of the guard.

To conclude, we are now ready and able to drive our business with more impetus which will result in value growth for all of our investors. More importantly, each win we make outside of South Africa will reduce our country risk and allow our P/E to return to a level that is commensurate with our financial performance, our IT excellence and our unique solutions.

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 fourth quarter of 2016 compared to a year ago.

For Q4 of 2016 our average rand/dollar exchange rate was ZAR15.02 compared to ZAR12.04 a year ago which negatively impacted our US dollar-based results by approximately 25% and the South Korean won was 6% weaker compared to last year's won rate. We continued to face significant currency headwinds in our operating geographies. While the rand has strengthened in July and early August, hitting ZAR13 to the dollar at one point, this week it is weakened again to over ZAR14 to the dollar.

Currency aside, we have continued to experience the growth in our functional currencies during Q4 and this momentum is expected to continue into fiscal 2017. Over the course of fiscal 2016 to protect our cash reserves we distributed over ZAR1.2 billion of our South African cash reserves and continued to do so during Q1 of 2017. As previously stated this resulted in withholding and other tax-related adjustments as well as lower tax affected interest income due to the differential between South African rand and US dollar deposit rates which impacted Q4 2016 EPS by $0.04.

Revenue for Q4 2016 grew 15% in constant currency while fundamental earnings per share increased by 10%. On a consolidated basis for Q4 of 2016 we reported revenue of $151.3 million and fundamental earnings per share of $0.51. Our fully diluted weighted share count for Q4 2016 was 51.2 million shares, largely as a result of the issuance of 10 million shares to the IFC in May 2016.

Now onto our segments. In our South African transaction processing segment we reported revenue of $53.6 million in Q4 2016, down 10% compared with Q4 2015 in US dollars but an increase of 12% on a constant currency basis. In South African rand the increase in segment revenue and operating income was primarily due to higher EP transaction revenue as a result of increased usage of our ATMs, more low-margin transaction fees generated from cardholders using the South African National Payment System, increased inter-segment transaction processing activities and a modest increase in the number of social welfare grant distributors.

Our operating income margin for Q4 2016 and 2015 were 24% in 19% respectively and was higher primarily due to higher EasyPay Everywhere revenues as a result of increased ATM transactions and increase in inter-segment transaction processing activities, an increase in the number of beneficiaries paid in Q4 2016 and a modest increase in the margin of transaction fees generated from cardholders using the South African National Payment System. We continue to expect our South African processing segment margins to be in the low to mid-20% range during fiscal 2017. The margin will be affected by continued rollout of our ATMs during 2017 and inflationary pressures on our cost base in South Africa.

Inter-segment transaction processing activities are eliminated on consolidation but had a meaningful contribution to the segment during this quarter. International transaction processing generated revenue of $47.2 million in Q4 2016, up 38% compared with Q4 2015 on a constant currency basis. Revenue increased in constant currency primarily due to higher transaction volumes at KSNET during Q4 2016 and a contribution of approximately $4 million from T24 and Masterpayment.

Operating income during Q4 2016 increased due to growth at KSNET and XeoHealth and contributions from our acquired businesses offset by an increase in depreciation expenses at KSNET and ongoing ZAZOO startup cost in the UK and India. Operating income margins for Q4 2016 and 2015 was approximately 17%. T24 and Masterpayment have performed well and both achieved their anticipated profitability.

We have decided to accelerate the rollout of Masterpayment's working capital finance product across Europe during fiscal 2017 which will likely result in operating losses for this business during the next year as we scale up our organization, platform and infrastructure. We believe that our investment will result in a profitable contribution from this business in fiscal 2018 with exponential growth expected in 2019 and beyond.

T24 was recently awarded an electronic money license in the United Kingdom which has been passported across the EU and will further enhance the card issuing, acquiring and processing opportunities available to T24. For Q4 2016 KSNET revenue grew 6% in Korean won to $41.6 million while EBITDA margin grew to 32% from 27.9% last year.

KSNET has sustained local currency growth of high single to low double digits for several quarters now despite a slowing economy. We expect some headwinds in the fiscal 2017 year for this business as a result of recently enacted legislation that impacts on all card issuers and Korean value-added networks.

We have plans to mitigate the impact of these changes. However, for fiscal 2017 expect a lower between 5% to 10% revenue and operating income contribution from this business.

Our financial inclusion and applied technologies segment revenue was $62.1 million in Q4 2016, up 6% compared with Q4 2015 on a constant currency basis. In South African rand financial inclusion and applied technologies revenue and operating income increased primarily due to higher lending service fees and ad hoc terminal sales and improved contribution from Smart Life and offset by lower prepaid airtime sales.

Having anniversaried the more stringent affordability assessment legislation in March, our lending business once again has returned to healthy year-over-year growth. Operating income for Q4 2016 was also adversely impacted by the expansion of our branch network as well as an increase in interest segment charges.

Our UEPS-based lending book at the end of Q4 2016 was approximately ZAR547million compared to ZAR496 million a year ago. We believe that our lending book has matured and can be grown through the further expansion of our financial services branch and ATM networks.

The rollout of our Smart Life insurance policies continues to gather momentum and the business is already profitable. Smart Life contribution will become more meaningful as we continue to scale our operations and employ the appropriately qualified staff members as required by the regulator.

For insurance business grows we are building the appropriate reserves on our balance sheet while the impact of policy collections will become more pronounced in segment revenue. Operating income margins for the financial inclusion and applied technology segment was 22% and 27% respectively during Q4 2016 and 2015 and has decreased primarily due to the significant expansion of our branch network and employee count and an increase in inter-segment charges partially offset by higher lending, insurance and ad hoc terminal revenues.

The operating margin of this segment will continue to be affected by the relative contributions of the various businesses in the segment and the adoption rate of our various financial services products. We expect our cost base to stabilize during fiscal 2017. Corporate and 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 fair value adjustment gain of $2.2 million related to the change in accounting methodology for Finbond, lower executive bonuses and the impact of the stronger US dollar on goods and services procured in other currencies, primarily the South African rand, partially offset by modest increases in US dollar denominated goods and services procured from third parties, directors fees and M&A transaction costs. Excluding the impact of the fair value adjustment mentioned above, we expect our corporate expense to increase moderately in fiscal 2017 as a result of increased intangible asset amortization and the expected inflationary and currency pressures on our corporate expense base.

Our Q4 2016 net interest income increased to $3.5 million driven primarily by higher average daily South African rand cash balances and South African interest rates and lower average debt balance in Korea, partially offset by the lower interest rate earned on the US dollar cash reserves that we converted from South African rand through distributions from our South African subsidiary. While we expect our interest earned to reduce during fiscal 2017 due to higher balances held in US dollars we expect our interest expense to reduce substantially in fiscal 2017 as a result of the prepayment of approximately 50% of our June 2016 Korean debt outstanding or KRW50 billion in July 2016.

Capital expenditures for Q4 2016 and 2015 were $7.1 million and $11.6 million respectively and have decreased primarily due to the acquisition of fewer payment processing terminals in South Korea and ATMs in South Africa. We do not expect our quarterly 2017 capital expenditures to be significantly higher.

At June 30, 2016 we had cash and cash equivalents of $223.6 million, up from $118 million at June 30, 2015. The increase in our cash balances from June 30, 2015 was primarily due to the cash received from the IFC share issuance and the expansion of all our core businesses, partially offset by the strengthening of the US dollar against our primary functional currency, repurchase of our shares of common stock, debt repayments, provisional tax payments, acquisitions and capital expenditures. During Q4 2016 we acquired approximately 350,000 shares of our common stock for approximately $3.2 million which brings our total repurchases for fiscal 2016 to approximately 2.4 million shares bought for approximately $27 million.

Our repurchases during Q1 2017 totaled approximately 1.2 million shares so far under our 10b5-1 program. This program expires at the end of August 2016.

We continued to fund the group's operations and capital investments using our cash reserves and cash generated from our business activities. We will continue to utilize our substantial and growing cash reserves to invest in sizable and sustainable growth opportunities in South Africa and internationally, strategic acquisitions and ventures in terms of our agreements with IFC, debt repayments and share repurchases.

Now the effective tax rate for fiscal 2016 was 33.3% and for Q4 30.2% and was higher than the South African statutory rate as a result of nondeductible expenses including consulting and legal fees and a tax impact including withholding taxes of approximately $2 million for Q4 and $6.2 million for the fiscal year attributable to a further distribution from our South African subsidiary which we intended to further help reduce the impact of the weakening South African rand on our reported cash balances. We expect our effective rate for 2017 to be in the 33% to 35% range.

Our weighted share count for Q4 2016 was 51.2 million shares. Our share count as of June 30, 2016 was 55.3 million shares and reflects the issuance of 9.98 million shares to the IFC in May 2016. The fundamental drivers of our business activities remain strong and robust and we continue to make tangible progress with diversifying our customer, currency and product base.

During fiscal 2017 we expect to implement our strategic plan by investing between $15 million and $20 million and building out our direct international salesforce, management teams and infrastructure, establishing a presence in new countries and further developing our product across Europe and many emerging countries in Africa, Asia and Latin America. These investments will be a drag on our reported results but the resulting top-line benefit should start to accrue in the second half of fiscal 2017 and more meaningfully in fiscal 2018 and beyond.

In South Africa we expect our CPS business to remain flat while our financial inclusion businesses should continue to grow in excess of 15%. As a result of these factors and taking into consideration the approximately 10 million shares issued to the IFC in May 2016 for fiscal 2017 we anticipate our fundamental earnings per share to be at least $1.65. Our guidance assumes that our existing contract with SASSA remains in effect for the full year on the existing terms and conditions, an updated constant currency base of ZAR14.38 to the dollar, a share count of 54.1 million shares and a tax rate of between 33% and 35%.

With that we will gladly take your questions.

(Operator Instructions) Dave Koning, Baird.

Yes, hey guys, thanks for taking my call. I guess first of all on KSNET, the new regulation, what part -- I guess a couple of things, what part of the regulations causes your EBIT to be negatively affected? And then when did it start exactly so that we can just understand when it will lap on a year-over-year basis?

Dave, it's still a bit fluid at this point in time. But effectively the interchange rates in South Korea have been lowered as we've seen in many other places around the world and the primary target of this obviously are the card issuers in Korea. But as a result of those fees being lowered, of course, the entire value chain is affected including, obviously, the VAN companies and the VAN companies in turn have to negotiate how the reduction is going to be shared with agents that are used to distribute the point-of-sale devices to the retailers.

So there are multiple renegotiations happening at the moment between the various VAN companies and all the card issuers on the one hand and the VAN companies and the agents on the other hand. And so the full impact of this will become evident when all of those negotiations have been completed. We expect that to probably be during the second quarter, so October, November of fiscal 2017 for us, which means that I think the full impact will be evident in Q3 and Q4 for us and then obviously will anniversary the year after that.

Okay, got you. And I guess the other thing is often when interchange goes down some of the other processors and acquirers in the US at least or in the UK seem to get benefit that if interchange goes down the smaller merchants often really don't know whether it goes down or not and they actually can sometimes take a little of that, that interchange reduction for themselves. But you must be in a different position where it actually hurts you instead of being able to take a benefit.

Yes, I think all of the VAN companies in Korea will be equally affected by this. One of the other legislative changes is that all transactions below KRW50,000, which is approximately $45 or so, are now no-CVM transactions, or maybe no CVM transactions. And that has an impact, obviously, also on the smaller merchants where the majority of the smaller value transactions take place.

The netting effect of this is that the fee that is paid by the smaller merchants for a no-CVM transaction is a lot lower than it was before for signature-based transactions because before you had to collect the slips and you had to store them. So the no-CVM up to KRW50,000 change in rules has obviously impacted the smaller merchants which is really a focus area for KSNET as well.

Jordan Hymowitz, Philadelphia Financial.

Hey guys. You have a tremendous amount of cash even with these acquisitions, and if you believe your stock is undervalued as you say, will we see an acceleration of both Company buybacks and will management finally step in and buy stock as well?

Jordan, I think the Company's share buyback strategies will obviously be determined by a number of factors. We have a 10b5-1 plan in place which expires at the end of August in a couple of days time, obviously, when we move into our open period again. And going forward we will obviously have to evaluate the opportunities as well as specific large investments or corporate activities that we've contemplated.

So obviously for us where it makes sense and when the cycle is optimal we will look at continuing our buybacks. I think over the last year we've demonstrated in a very meaningful way that we believe our stock is undervalued and we've spent quite a bit of money so far on doing the repurchases. We obviously also have certain volume restrictions that we have to keep in mind, but for us right now the core focus is on expanding the Company's business activities and really focusing on the key structural changes that need to take place going forward.

And how about personally? Will you finally be putting your money where the talk is and buy some stock yourself?

Well, that's obviously a function of our knowledge that we have. It's quite difficult for management to be in the market in a Company like ours where most of the time we are unfortunately busy with certain transactions or we have certain inside information that we clearly prohibits us from acquiring those shares. We are meaningful contributors I think already through our stock incentive plans.

Those are designed to keep management incentivized not only for the short term but in the long term and the medium term. I think the targets that are set are quite strict or they are fairly difficult to achieve. So from that perspective I think the management team is fully committed and have a high vested interest in the Company's success going forward.

(Operator Instructions) Bob Napoli, William Blair.

Thank you. Just a question on the MobiKwik investment and their use of your technology. When does that take place and do you have any -- can you give any metrics on MobiKwik and what their revenue is and what you think it means for your revenue?

Thank you. What is your ownership percentage? The 40 million, what percentage ownership would you have?

You know, the 40% or the 40 million, sorry, investment will obviously take place over a period of roughly two years. We have not disclosed the ultimate ownership percentage. That will obviously also determine on other corporate events from MobiKwik's perspective over the next two years.

But from our perspective we anticipate being in a meaningful minority position following the full investment. The agreement basically provides for us to finalize the commercial, the exact commercial terms and the rollout plans around our Virtual Card product over the next 90 days.

So we've given ourselves a fairly short time to bed down all the legal and commercial terms and for full integration to then take place as soon as possible. So obviously we hope to already have it in place by the end of the current calendar year.

Just in terms of metrics, MobiKwik at the moment has roughly 32 million users. They have 100,000 merchants signed up. We expect that number to grow to over 150 million users over the next three years. Clearly the introduction of the VC pay technology will open up the number of merchants where the wallets may be used from 100,000 merchants basically to all merchants in India that accept the standard card scheme card.

Okay, thank you. You did talk about new key management. What management are you looking to hire and where? And when you talk about expanding the salesforce maybe some more color on the number of headcount additions.

The new restructure of the Company is based around the six products which are to be defined. And at this point in time we are looking for three heads of three of the verticals. We've already got three people that are going to be running three out of the six.

And each of these heads are going to have directly responsible to them a number of people in the sales team as well as if necessary in a particular country and operational team. So we are looking at acquiring another between 15 and 20 different people that are going to span a number of geographies, one, of course, being Africa but not obviously South Africa which is more Central and West Africa.

We are also looking at a number of people in Europe itself as well as a number of new people in India and around the T24 which is around the Hong Kong area. We are going to focus on those geographies first because we believe that we've already got a substantial amount of business. We are only looking at this point in time at really senior people; in other words, people that are going to be responsible for their own P&L and responsible for the deployment to sell the marketing and the product development that is required in this particular territory.

We will, of course, at this point in time we're not doing this in a sort of blind fashion. Since we've made the decision with our Board around nine months ago to start looking at the possibility of doing this we've already been approached by numerous countries in these particular territories that are very keen on us being directly involved with them in supplying our technological solutions. As you are probably aware, our last business plan was more focused on utilizing organizations such as MasterCard and the World Food Program to actually open a few doors and to allow us to penetrate territories.

We've now decided that we will be better served by doing this ourselves and having a direct hands-on approach. And we've already got as I say around half a dozen countries that have come to us with certainly the willingness to engage and to start deploying certain technologies, not all of them, but certainly the majority of our technologies in their own territories. In order to that right and to be able to be successful we had to re-drive or restructure the Company in such a way that we will have both senior people as well as support people to be able to know that we will be able to support the work that needs to be done.

Obviously we will continue with MasterCard and WFP. But we do not believe that as their direction or their sort of priorities is certainly not us but them. I think perhaps to some extent it was probably a bit of a mistake to hope that they will actually drive the sales without us actually being directly involved.

We decided to do this differently which means that we are going to spend $15 million or $20 million getting the right people. We've already started. We've got headhunters working on all of this.

We certainly believe that we are going to be very, very successful, very, very quickly. And already the market response to the little bit of work that we've already done is actually astronomical. So we feel very, very excited that, in fact, for lack of anything (inaudible) in this respect we should actually have done that probably a year ago.

Will Settle, Woodmont.

Yes, I just wanted to explore the MobiKwik a little more. Obviously it's a large market, but can you give us any context for expected financial impact as you penetrate? How meaningful could this be? Obviously you're investing $40 million over the next couple of years but expect some return from that.

Yes, obviously we are not the sort of Company that typically invest our money when we don't expect to see a decent return. You probably are aware that in most of these markets and most of those types of technology customer acquisition happens to be the most costly part of actually penetrating a particular market. And most specifically the term wallet, of course, is used in very different ways, but the so-called wallet has been based on purely how much am I going to pay a customer to join my system.

Now number one, the MobiKwik focus is very different compared to most other people. In other words, they do not sponsor, for lack of a better word, customer acquisitions or at least they attempt to rather get retailers to come forward to join the system and for them to actually want to get market penetration through the MobiKwik customers. That's number one.

Otherwise, candidly, we would not have gone with MobiKwik if their model was the same as everyone else. Number two, which is very important for us, is that we know that in order to ramp up our financial product we need to have a customer base. We did that very successful with SASSA in South Africa and SASSA we know was really a double-edged sword.

It allowed us to get a customer base of 10 million people, on the one hand, which was fantastic and base and build to build on that particular base all of our financial products that we could then sell to the same customer base. MobiKwik for us is no different. Today it's 30 million, 60 million, 90 million, 100 million clients which we believe they can reach.

They are talking up to 200 million. We are not setting our mind to 200 million. We will be quite happy with 80 million or 90 million or 100 million.

And if that's the case we believe we can convert that base into UEPS/EMV banking customers which, of course, will allow us to actually start selling them all of the different products and services that we currently sell our customers in South Africa. In addition to that because we are going to be providing VCC, which allows MobiKwik customers to basically shop online with any merchant rather than to a restricted base, we believe that that in itself is going to generate another revenue stream for Net 1 as, in fact, MobiKwik is paying us a transaction fee for every single transaction that is going to make use of our VCC technology. So that will, again, generate another income stream for us outside of our shareholding in MobiKwik itself.

So put together I think at the end of the day we are getting, or we are investing $40 million to have access, unfettered access to 100 million customers over time and to be able together with MobiKwik to be able to provide them with financial services and products which normally you would have to try to in some form or other you would have to try to sign up these particular customers before you could access them. This is the basically the best of both worlds.

Okay, you mentioned couple of times IFC and working with them. Obviously you got a few months into that transaction. Can you give us some examples of how that's changing the way you are approaching the market or helping to facilitate things?

Funnily enough the strange thing is that the model that we are now employing, the business plan that we put together and certainly the structure we have been playing with it for quite a while, specifically the direct approach rather than the indirect approach of sales, and candidly the meetings we had and we had extensive meeting in Washington with IFC and a number of the senior personnel who, by the way, were extremely useful to us and very helpful including a couple of meetings with the World Bank we were able to actually convince all of us that, in fact, the direct approach although expensive because you have to invest another $15 million or $20 million in order to achieve it, but we felt that that is going to by many, many, many times give us the return that we would like to have. But more importantly it's going to allow us with their contacts, the investments in already many different financial organizations, institutions, banks and other companies in developing economies it's going to allow us to focus our activities outside of South Africa because South Africa is still financially a very small country. Sooner or later it will be saturated in terms of what else can you sell and I think more importantly as well it will remove both currency and country risk which we believe is a primary reason why our P/E ratio has been so poor and continues to actually degrade. By doing that with the IFC and penetrating and having a fairly sizable, couple of sizable wins outside of South Africa and building models similar to the South African model outside of these territories, outside of the South African territory we hope that we are going to then be perceived by our shareholders in a very, very different light and therefore they will be in a position to actually rebuild our P/E to where it should be based not only on our financial performance, which has been strong for many, many years, but our breakthroughs in technology which are well accepted worldwide has been the best of the best and at the end of the day our business models, which as you know provide financial inclusion to billions of people which very, very few if any one in the world has been able to achieve successfully until now.

Dave Koning.

Yes, thanks guys. I guess this is the first time in probably 10 or more years that you've specifically called out an amount, the $15 million to $20 million an amount that you would spend in excess on sales ramping and that makes sense if it's going to drive growth.

But I guess I'm interested in just the timing. Because now that you've got the World Food Program as a sales channel, the World Bank, the IFC investment as a channel you've gotten unprecedented help now from other channels and at the same time you're investing so much more than normal in sales, I'm just I guess I'm wondering the timing of why now?

Why haven't you done this in the past? And is it that you just can't absorb this much spending through the normal P&L that you want to call it out? Or I guess it's just hard for me why this was the point in 10 years to call this out instead of in the past.

Well, David, it's obviously a very good question. But I think the fundamental reason why we believe it's worthwhile mentioning and we should mention it is because it is very much a different direction compared to the way that we used to do things in the past. We've always been perhaps too careful, perhaps we have been far too concerned about going out there and maybe taking a bigger risk, for lack of a better word, and investing in our own future and in our own people and building a much depth, much more depth in our management structure and perhaps retrospectively that might be a mistake.

Talking to organizations like, for example, the IFC it has become very clear that when we compare our sales to many other companies, some successful and some not, there is absolutely no doubt that we have been far too thin at the top. And in order to penetrate that the new territories we cannot do it with an extremely flat structure and with a centralized management style. There is a lot of benefit as you can well imagine in terms of control but at the end of the day it also strangles the actual growth of the Company over time.

So we believe it's important to talk about $15 million to $20 million for a number of reasons. One, because our Board is of the view that we have underspent in the management development of the Company and the building of let's call it a larger worldwide infrastructure that allows us to actually penetrate other markets. And in a way, the $15 million to $20 million is, in fact, to KPI that we have to be able to meet and explain to our Board why it is that we have not spent $15 million.

That's something which is very, very, very important as well. We must understand that a lot of the channels that we have and the sort of in order to service these particular channels there's not a question with our technology to say, well, we need a salesperson. Salesperson is a person that's going to allow us to finalize the contract.

We need to have the backup teams, the implementation teams that are going to be able to come behind that particular person in order to ensure that we continue to deliver the level of service that we are known to be able to deliver. The last thing we want to do is to start hitting two or three or four countries in one fell swoop and to land up by dropping one or two of them. I think that would be the end of the Company.

So the thing in between was to say let's invest first and you're right we are building this thing. The beauty about it, the WFP, the IFC, some of the prospects that we've already got on our books means to us that we are not going to be waiting for three years before that investment is going to give us a return. But we believe within the next nine months to 18 months we are going to see a substantial return on that particular $15 million investment, hopefully all of which will come from outside of the South African borders.

Rich Tullo, Albert Fried.

Hi, thank you very much for taking my question. Really two questions. Is the MobiKwik investment a debt investment, a straight equity or is it going to be consolidated on the income statement?

The MobiKwik investment we are investing in equity in MobiKwik. So over a period of two years we will build up our position.

This means that initially we will show it as an investment on our balance sheet but we will not consolidate or equity account for it. And as soon as we cross the relevant parameters that demonstrate significant minority shareholding we will probably equity account for this business in about two years time.

Fair enough. When you discussed Italy and UK could you please provide a little more color on that for those of us who may not be versant in the story?

So Masterpayment I assume you are referring to our Masterpayment business, so Masterpayment is an acquisition that we did in two tranches over the last year based in Germany. And Masterpayment to just give you a brief description is really a PSP or a payment services provider in Europe to a number of large online merchants. And as a result of their extensive experience in the PSP market identified that there was a specific need amongst merchants for working capital financing.

One of the key shareholders in Masterpayment was a bank based in Liechtenstein called Bank Frick. And together with Bank Frick, Masterpayment developed quite a unique model that allows them to rapidly deploy working capital financing for the merchants that they service in what we think is a very innovative way and also in a way that really reduces the risk on them as the enabler of this specific product. And, obviously, the recoverability of the working capital finance that is provided is secured by the settlements that take place through the usual PSP acquisition platform.

So this is a business Masterpayment that has been running for a couple of years. They've been very successful, specifically in Germany. And after the acquisition of the business we had a strategic session with a management team who really convinced us that there was an opportunity, specifically in Western Europe where it's obviously a factor of investing the correct amount of capital into the business for them to deploy. And one of the key things that they have to do is to deploy a salesforce in the countries where we believe we have low-hanging fruit for lack of a better word.

Those countries for now include Italy, Spain, France and the UK. So that's where we will focus our attention for the Masterpayment rollout or the big bang approach. And that's where we will also hire some fairly senior business development and sales teams over the next 12 months.

And more importantly, which is key to our plan, is that we believe that once again customer acquisition being the most expensive part of any business nowadays that through these merchants we can promote the utilization of our Virtual Card simply because as you know online merchants always suffer from chargebacks and fraud. And we can eliminate that.

In other words, by also reintroduce to allow these merchants to actually on-sale our VCC products to their own customers we'll be able to reduce if not eliminate chargebacks in totality and allow these merchants to secure their own business and grow their own business far quicker. So we believe, again, it's a sort of using a platform in order to sell on to it another product and, therefore, eliminate the customer acquisition at least once if not twice in a cycle.

Ty Carmichael, Gothic Capital.

Yes, good morning. Thanks for take my question.

I was hoping you might be able to provide some additional perspective on -- and I jumped on the call a little late, if you already addressed this I apologize -- but additional perspective on the upcoming court case against SASSA in the sense of if this goes against you what happens at that point? Also I guess more specifically within the context of the guidance you've given, how does that change if the court case goes against you?

Right, well the court case you obviously are talking about is the one in October which is really, for lack of a better word, it's an order that we are seeking for the judge to tell us exactly what the Social Assistance Act of 2004 actually means when it refers to a deduction compared to a debit order. Strangely enough, the word debit order does not occur in the 2004 Assistance Act in South Africa at all.

So we all believe that since 2004 most of us at least have understood what the word deduction means and I think most of us of also understood what the word debit order is. So we are not on my side I am remotely concerned or are not concerned at all about the fact what the judge is going to rule upon because the answer is obvious, that in fact the two things are different.

However, to answer your question, there is always a possibility that the court might come back and say, well, actually a deduction is the same as a debit order. And, therefore, if the Act says the debit orders must be prevented then, therefore, we would have to implement such a technological change to our systems.

Now in order to do that it probably would take anything between three to six months anyway. That's number one. And we believe as we are seeing right now that what that would actually lead to is that most beneficiaries today that enjoy debit orders because they actually do need debit orders in order to transact their own business would probably then open bank accounts such as they are doing currently with ourselves as one bank called EPE and in order to be able to continue to enjoy the flexibility that the debit order is actually providing them.

So if we had to look by the time we get in the next because even in the court cases in October and there is decision made in November, there may be an appeal either by ourselves or in fact by SASSA depending on who wins or loses, this could take another year. It could go to the Constitutional Court.

In other words, the final decision on that particular case might take a long, long time. That point number one.

During that time the status quo will remain. And during this time, of course, we will continue to advertise and to tell customers that if they want to ensure that they can continue to run their own affairs according and making to make their decision rather than to be told what to do by government. The best thing for them to do is to actually use the law itself which is the Act itself to open a bank account where they would have the freedom to actually enjoy debit orders.

So by the time this actually happens I actually believe that, in fact, the decision to go against debit orders might actually help us to sign up even more EPE account holders than the decision not to have debit orders. So either way we look at this we are feeling that it's not going to change anything drastically in any way going forward.

Just to add to that, in an extreme case, and let's assume that the use of debit orders and deductions and all these things are banned and people have don't have bank accounts, unfortunately you revert to the only other method of payment for your products and services which is cash. I think what's important to note is that Net 1 as a Company has the most extensive cash acceptance network in the country.

Through our EasyPay network and our own point-of-sale network we've probably got more than 60,000 connected point-of-sale devices. We've got 1,000 ATMs. Between ourselves and our affiliates we've got more than 500 branches.

So the reach that we have across all of South Africa I think is much more extensive than any other financial services provider. So if the worst really has to come to worst I think that we are in a much better position than any of our competitors or any of the other participants to enable people to still buy and pay for their financial services.

I think just to conclude on this issue, which is an important one, is that we must think that at the moment the fact that these court cases actually occur actually hurts us simply because from the press point of view people ask exactly the logical question like you are doing at the moment what will be the impact and what the hell this is all about? And that's the real reason, funnily enough. Why we are going to court, simply because we want clarity. So we want everybody in the country and outside of the country to know what the hell does it mean.

At the end of the day, between you and me and a bar of soap, I don't really care what it means because it's not going to make any difference to what we do or how we do it or candidly in the longer term it's not going to make any difference to how much money we are going to make. Where it will make a difference is that we will not appear in the front page of the newspapers on a willy-nilly basis to actually for somebody to say we are breaching some sort of the law that we are not breaching and that is really the whole intent of us going to court is to make sure that we have clarity which I think will be good for the country as a whole, it will be good for us and it will be good for beneficiaries. No other real reason I think.

Ladies and gentlemen, that is all the time we have for questions. Thank you for joining us. You may now disconnect your lines.