Lesaka Technologies Inc (LSAK) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Net 1 Second Quarter 2018 Results Conference. (Operator Instructions) Please also note that this call is being recorded.

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

Thank you, Chris. Welcome, everyone, to our second quarter fiscal 2018 earnings call. With me on the call today is our CEO, Herman Kotzé. Our press release, Form 10-Q and supplementary financial presentation are available on our Investor Relations website, ir.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-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 U.S. dollar and the South African rand.

Before I hand the call over to Herman, I want to remind you that while we will have a question-and-answer section following our prepared remarks, given the current sensitivities, we will not be taking any questions about SASSA or CPS.

With that, let me turn the call over to Herman.

Thank you, Dhruv. Good morning to all our shareholders. We have continued to press forward over the past quarter, and we have observed a number of exciting developments as a result of our actions. The establishment of a blockchain department at Bank Frick, accelerates our ability to reposition our core UEPS solutions at the forefront of offline and biometric blockchain technology. Meanwhile, our core financial inclusion initiatives in South Africa are starting to bear fruit, with an acceleration of our EPE offering in late 2017 and early 2018.

We have additionally begun to realize certain synergies with Cell C and DNI, and our new mobile banking product is in beta testing. We have achieved all of these despite considerable time and effort spent on restructuring of the group and closure of certain business lines, while of course, addressing some of the challenges in South Africa.

As we get closer to the March 31, 2018 SASSA contract expiration, we expect the frenetic pace of activity, news coverage and opinions from all and sundry will only intensify. We will as always lend our support to the most vulnerable citizens of South Africa and government, while protecting the interests of the company, the 5,500 employees and its shareholders. We are proud of our track record of having delivered the right grant to the right person on time for the past 71 months and having saved the government more than ZAR 10 billion over the contract period, which is more than the fees paid to us.

For Q2 2018, we reported revenue of $148 million, which was down 2% in dollars and 4% in South African rand. While we had positive contributions from our South African transaction processing businesses, including EasyPay and ATMs as well as financial services and non-Korean international businesses, these gains were more than offset by lower ad hoc hardware sales, fewer prepaid airtime sales and regulatory changes in Korea.

We also reported $0.39 in fundamental earnings per share, which was adversely impacted by our higher share count, inflationary increases in costs and a higher tax rate. In my view, our financial performance over the last few quarters has been average, as a result of a number of events, including some exogenous ones, and do not currently reflect the true potential of what we are capable of delivering and what synergizes management given the actions on multiple fronts that we have taken over the past 6 to 8 months.

To summarize some of the corporate restructuring actions taken over the past quarter, we sold XeoHealth in the U.S. effective November 1, 2017. Additionally, we have decided to exit the traditional working capital finance business of Masterpayment for non-payment solution customers, and as a result, took an allowance for doubtful accounts of $7.8 million related to its U.S. book and sold the remaining $36 million European book to Bank Frick in January 2018 after a detailed due diligence process. Lastly, we have incorporated our new JV focused on international UEPS/EMV opportunities in January 2018, and this entity will now start gearing up operationally in Q3.

Next, I will discuss the developments in our South African businesses. First, on our EPE initiative, during Q2, we rolled out 500 additional portable enrollment workstations, along with a roving sales force. By the end of the quarter and early in Q3, we have begun to see a reacceleration in EPE account growth. Growth previously had slowed as a result of the saturation of our physical and immovable branch infrastructure.

Commensurate with the demand for our low-cost bank account, we also observed a meaningful increase in our loan book during Q2. While rapid growth in our loan book pressures near-term profitability, as a result of our policy to provide for the loan and its initiation, which cost us $1.4 million in pretax or $2 -- sorry, $0.02 a share in Q2, the corresponding revenue associated with these loans will become more evident during Q3.

Smart Life also continued to grow during Q2, despite it being a seasonally slower quarter for this business. One additional point on Smart Life, if you recall, once the suspension of license was lifted a couple of years ago, the FSB, which is the regulatory authority, required us to have a court-appointed statutory manager to oversee our business. I am pleased to note that the FSB is satisfied with the way we operate and no longer deems it necessary to have a statutory manager in place.

Our prepaid airtime and electricity business, which has been adversely affected by the introduction of our biometric-linking security features, appears to have bottomed out, and revenue during Q2 2018 was flat sequentially compared to Q1 2018.

Second, I will address Cell C and DNI. As I mentioned previously, our South African businesses, infrastructure, technology, products and distribution fits directly into our recent investments in Cell C and DNI, which closed in early August 2017. This transaction allows all of us, Net 1, Cell C and DNI to leverage common denominators of our businesses, mainly overlapping customer characteristics as well as the pervasive adoption of mobile telephony to offer bespoke and disruptive products to the market. In a short period of time, we have made good progress towards the realization of our anticipated synergies.

Cell C has now certified our SIM card mask, and we are ready to commence delivery of our first batch of SIM cards to them during Q3.

Cell C also launched Black, a revolutionary product offering digital media content with flexible payment options including payment using Cell C airtime. We believe we can further expand the distribution through our various channels.

We will also be handling Cell C's EFT collections for their postpaid customers starting later this month.

Lastly, in December, we launched a pilot for our new lifestyle product, and based on customer feedback, we are currently tweaking the component of the bundle product to ensure that it provides real value and therefore, demand when we roll it out on a large scale.

DNI continues to trade well ahead of budget, and we are extremely happy with the operational efficiency of this business and the progress made with the roll out of revolutionary new products, such as the micro-jobbing platform. Lastly, within South Africa, we have also accelerated our cooperation with Finbond where, in addition to deploying our ATMs in their extensive branch infrastructure, we are enabling them to become an issuer of UEPS/EMV cards.

I will now shift focus to our international business and strategy. Starting with the International Payments Group, or IPG for short, which following our restructuring includes our various e-money licenses, issuing, acquiring and payment gateway businesses and related activities around our growing involvement with Bank Frick.

Let me first discuss the strategic decision to discontinue the working capital finance activities of Masterpayment. While we firmly believe that working capital financing is an integral part of our IPG offering to SMEs, we have decided to exit the traditional financing business to merchants who are not payment solutions customers of IPG, as it is not a core competency, and it does not fit with IPG's strategy, outlined in our Investor Day in December.

Following the decision to wind down this part of the book, we took a nonrecurring allowance for doubtful finance receivables related to the U.S. portion of Masterpayment's book in the amount of $7.8 million, and the remaining $36 million of the European book has been sold to Bank Frick at face value, the proceeds of which we used to pay off the credit facilities received from Bank Frick to fund the book.

We believe we have now addressed our exposure to this specific line of business and do not anticipate any further financial impact as a result of these actions. The only thing to note is that the revenue associated with these products will naturally disappear, starting in Q3 but so will the related costs.

For the first half of fiscal 2018, these businesses combined contributed approximately $4 million in revenue. For the second half of 2018, ITP segment revenue will reduce accordingly, with minimal impact on segment operating income.

Bank Frick is focused on enabling new financial technology products and applications and recently became the first bank in its own country to launch a certificate in cryptocurrencies. Our recent additional investments in Bank Frick will help to establish and accelerate the expansion of a dedicated team focused on the development and various applications of blockchain technology.

In collaboration with Philip Meyer and our international transacting team, significant progress has already been made in defining new opportunities, such as reciprocal expansion of the group's access to issuing and acquiring memberships of the global card schemes and associations, including Visa, MasterCard, China UnionPay, WeChat Pay and Alipay as well as the development of prepaid card technology, focused on multi-currency and cryptocurrencies, and the provision of bank accounts and services to our expanding, acquiring and issuing client base.

Looking to blockchain and cryptocurrency space specifically, the bank has been the first-mover amongst the peers, and there are multiple opportunities for it to provide custodian, settlement, clearing and acquiring services to exchanges and for ICOs. The new blockchain department at Bank Frick will work closely with our IPG team to develop and roll out various applications of blockchain technology.

Let me spend a few minutes on blockchain and why we are not only equipped to be a leader in this space but also why we have the capability to address this opportunity. An important element of our strategy will be to reposition Net 1 as a payments company at the bleeding edge of technological innovation with a specific focus on blockchain technology.

From the outset, it is important to note that we are focusing on the application of blockchain technology in the payments space, which by its very nature, implies that we need to take cognizance of cryptocurrencies, and we require the ability to support and interact with this particular blockchain application. However, we will not own or trade any cryptocurrencies for our own account.

It is a little-known or understood fact that the UEPS technology has always been based on a form of blockchain technology. Instead of using the term "blockchain", we have used "multiple audit trail", and we have always performed independent payment verification of transactions by always using 2 smart cards for a UEPS transaction that exchange cryptographic keys to validate transactions.

Technically, we have always deployed our own form of a cryptocurrency as we use 10-digit codes to tokenize monetary value. In our case, however, the 10-digit codes are underpinned by actual fiat currency. In a way, UEPS was and still is the world's first offline application of a distributed ledger payment system. Net 1's deep experience in offline payments, biometric authentication and our highly regarded cryptography applications for smart cards, point-of-sale devices and hardware security modules optimally positions our core UEPS solution in line with the global adoption of blockchain technology.

While the rest of the world's focuses on online blockchain applications using distributed networks, we can position ourselves as a leader in offline blockchain payment applications. And through our expertise in IPG and Bank Frick, we have the ability to provide end-to-end solutions in both online and offline applications in a completely secure and regulated manner.

Based on discussions between Net 1, IPG and Bank Frick, we have identified multiple short-, medium- and long-term opportunities, and our strategy will be formulated accordingly. Our IT experts are in the process of upgrading the UEPS platform's inherent ability to operate the distributed ledger systems, manage and issue tokens, et cetera. Our close cooperation with Bank Frick, which is a well-anchored -- with a well-anchored technology platform within a fully regulated custodian environment, combined with our bespoke decentralized solution, could provide immense exposure and revenue possibilities for the group.

There are several opportunities that can be leveraged with existing assets, retail infrastructure and know-how. We will provide further updates during Q3 and Q4 in terms of how we can facilitate banking, payments and the provision of existing core products for the burgeoning virtual currency markets.

Coming to IPG, specifically. A lot of the difficult parts of our restructuring is complete, and we now have the right management structure, strategy and operational support teams largely in place. One of the most meaningful recent wins, as a result of joint efforts by the T24, Masterpayment and Bank Frick teams, was to perform credit card acquiring for Bitstamp, one of the largest exchanges in the world in November 2017.

Bitstamp began processing in December 2017, and IPG's credit card acquiring volume more than doubled in December from November. There has subsequently been a number of additional opportunities and exchanges and ICOs that now form part of the sales pipeline. As cryptocurrency exchanges are currently classified as higher-risk businesses, we will ensure that extensive due diligence is performed on any new client that makes it through the pipeline.

There has also been growing interest, particularly from crypto exchanges, to offer our T24 Payvault prepaid card, and there are obvious synergies between prepaid card issuing and our acquiring efforts.

On our last earnings call and in our December Investor Day, we spent a fair amount of time articulating our UEPS international strategy, which will be executed by way of a joint venture run by Carl Scheible out of London. In short, the JV's focus is exclusively on large-scale financial inclusion opportunities in emerging economies globally. I would like to refer everyone to our Investor Day presentation for the detailed strategy and today, try to provide updates on what progress we have made since the last update in New York 2 months ago.

Our new JV entity was incorporated late last month and now will be capitalized, and staffing of the entity will commence over the course of Q3. In the meantime, we have had multiple detailed strategic discussions about go-to-market strategy and target markets independently with teams at the IFC and at MasterCard. We have both a pipeline of relevant and seasoned executives to employ in the group, and offers will be extended as soon as we are in the position to do so.

In India, our VCC pilot with MobiKwik has gone extremely well, and the product is ready to be rolled out to the market at large. In December, the Central Bank in India also issued new guidelines for KYC and co-branding for prepaid instruments, which resulted in some changes having to be made and the compliance operations upgraded.

Most of this work is also complete, and we are awaiting sign off from the bank imminently. Once live, this is most likely going to be one of the largest virtual or even physical, for that matter, card deployments anywhere in the world. Meanwhile, we continue to make further progress on being able to introduce UEPS in India as well as on our international remittance product and we expect to receive our certification from Visa to be a certified ACS processor in India in the next 30 days.

Lastly, for KSNET in Korea, the VAN companies continued to remain under pressure as the result of the regulatory-driven pricing pressure and the elimination of certain authentication requirements for low-value transactions. Q2 was also impacted as the result of being a seasonally weak quarter, including a particularly harsh winter, and volume was lower due to elimination of low-value transactions that I just referenced.

While we continue to expect KSNET revenue and operating income to decline mid-single digits through calendar 2018, we believe there will be a sequential improvement in Q3, and we should be able to return to modest growth after the end of this calendar year. To provide further clarity, these regulatory issues affect largely the card VAN business and our banking VAN, payment gateway and new services are growing and showing good traction. These services currently only account for approximately 10% of KSNET's revenue, but as they scale, the impact will be more meaningfully felt for KSNET overall.

Before concluding and handing over to Dhruv, I would like to spend a few minutes on SASSA. To recap quickly, the Constitutional Court extended our contract with SASSA for 12 months to March 31, 2018, on terms and conditions that are substantially the same as our 2012 agreement with a few nonfinancial amendments. Both the expert panel and SASSA filed several reports with the Constitutional Court during Q2 and in early 2018, while a separate process was conducted in Parliament by SCOPA and the Inter-Ministerial Committee or the IMC.

The most significant development was the announcement by the IMC that it had brokered an agreement between the South African Post Office and SASSA in terms of which the Post Office will assume responsibility for the distribution of social grants will effect from 1 April, 2018. The agreement was high level in nature and did not outline specific details or tasks. Post Office informed SASSA that it was unable to perform the obligation for cash payments on 1 April 2018 and advised SASSA that a separate tender for this function should be issued.

Post Office themselves published 3 tenders on December 22, 2017: one for the procurement of EMV cards; the other for a multichannel biometric identification platform; and the third for an integrated grant administration system, presumably to equip themselves to provide the required services to SASSA. These tenders closed 2 weeks ago, and we did not submit proposals for any of the Post Office tenders.

On 12 January 2018, SASSA issued a tender for the cash payment of grants at pay-points only. This is for 2.5 million recipients that, according to the tender, will reduce by at least 8% per annum over the 5-year contract. The current closing date for this tender is February 28, 2018.

In the meantime, and in line with the recommendations made by the expert panel in its second and third reports to the Constitutional Court, we wrote a letter to SASSA on December 27, advocating the use of commercial bank accounts, subsidized by SASSA to limit the impact of bank charges for the distribution of grant payments. SASSA has indicated that the subsidization of bank accounts will be considered if agreement can be reached with prospective participating banks regarding the functionality of the accounts being offered.

SASSA has since engaged the South African banks to determine the feasibility of such an approach. This subsidy will enable grant recipients to access their grants through any bank account of their choice, including the current Grindrod Bank SASSA cards or EPE cards, through the national payment system, like ATMs and point-of-sales or at pay-points. Our proposal allows any financial institution to participate in the payments of grants, both as issuers and acquirers, and provides beneficiaries with the choice to utilize the bank that is most convenient and cost efficient for them.

On February 6, 2018, SASSA filed a notice of motion with the Constitutional Court, asking them to allow CPS to continue to provide cash payment services to the social grant beneficiaries of SASSA, who received their social grants by way of cash payments without personal identification numbers on an interim basis and on the same terms and conditions as to payment as to those currently in place between CPS and SASSA for the period 1 April 2018 up to 30 September 2018. This is the record from the notice of motion. We will respond to this notice of motion as necessary.

To conclude on SASSA, we are doing our utmost best to cooperate with all the stakeholders, who choose to engage with us, to ensure uninterrupted grant distribution and an orderly transition process. The infrastructure and technology established by CPS remains uniquely capable of providing transacting services in the rural and remote areas, and there are multiple applications for these capabilities beyond the payment of grants that we are eager to pursue when our engagement with SASSA terminates. As always, we will continue to monitor the progress and provide updates to our shareholders.

The Net 1 management team, including myself, appreciate the opportunity to meet with a number of our shareholders at our inaugural Investor Day in New York in December. We look forward to many more opportunities in 2018.

I am also delighted to be welcoming Alex Smith as our new Chief Financial Officer, effective March 1, and look forward to introducing him to our shareholders over the course of the year.

Dhruv will now go over the financial performance and metrics in more detail, and then I will circle back to provide guidance and closing remarks before opening it up for Q&A. Dhruv?

Thank you, Herman. I will discuss the key results and trends within our operating segments for the first quarter -- second quarter of 2018 compared to a year ago. For Q2 2018, our average rand-dollar exchange rate was ZAR 13.67 to the dollar compared to ZAR 13.90 a year ago, which positively impacted our U.S. dollar-based results by approximately 2%. The rand-dollar across continues to be volatile and has strengthened significantly in recent weeks to around ZAR 12 to the dollar.

Revenue of $148 million in Q2 2018 was down 2% year-over-year in dollars and 4% in constant currency. Our fundamental earnings per share decreased by 9% relative to Q2 2017, and our fully diluted share count for Q2 2018 was 56.8 million shares, 8% higher than last year, largely as a result of the sale of 5 million shares in Q3 2017, partially offset by the repurchase of approximately 1.2 million shares in late Q4 2017. Our quarterly results were impacted by an allowance for doubtful working capital financial receivables of $7.8 million.

By segment, the South African transaction processing reported revenue of $64 million in Q2, up 7% year-over-year in U.S. dollars and 5% on a constant currency basis. In rand, the increase in segment revenues was primarily due to higher EPE transaction revenue as a result of increased usage of our ATMs, increased intersegment transaction processing activities and a modest increase in the number of social grants distributed.

Operating income and margin decreased primarily due to an increase in intersegment charges, the impact of annual salary increases granted to our South African employees in October 2017 and the increase of goods and services purchased from third parties. These decreases were partially offset by the aforementioned increase of intersegment revenue.

Our operating income margin for Q2 2018 and 2017 was 21% and 26%, respectively. We continue to expect our South African processing segment margins to be in the low to mid-20% range during fiscal 2018. The margin will be affected by the continued roll-out of our ATMs during 2018 and inflationary pressures on our cost base in South Africa. Intersegment transaction processing activities are eliminated on consolidation but continue to have a meaningful impact on the segment's results.

International transaction processing generated revenue of $44 million in Q2 2018, flat on a year-over-year basis. Segment revenue was impacted by regulatory changes in South Korea on KSNET's revenue, largely offset by increased contributions from Masterpayment.

Operating income and margin during Q2 2018 was lower due to the allowance of doubtful working capital finance receivable of $7.8 million discussed previously, a decrease in the revenue at KSNET and losses incurred by all other major contributors to the segment.

Operating income and loss margin for Q2 2018 and 2017 was negative 11% and 9%, respectively. Excluding the Mastertrading allowance for doubtful working capital finance receivables, segment operating income and margin were $2.8 million and 6%, respectively.

For Q2 2018, KSNET revenue declined 7% in Korean won to $37.2 million while EBITDA margin declined to 21% from 26% last year. As Herman stated, we expect the impact of changes in Korean regulations to continue to have an adverse impact on reported results in 2018 and return to revenue growth in 2019. Accordingly, we continue to expect the EBITDA margin to stabilize in the low- to mid-20s in fiscal 2018.

Regarding the European component of the Masterpayment working capital finance book, we've entered into an arrangement with Bank Frick, under which they purchased -- excuse me for a second -- sorry, accordingly, while they purchase the remaining book of $36 million from us in January 2018 at its face value. We have used the proceeds from this transaction to settle the amounts due by us to Bank Frick under the EUR 40 million and the CHF 20 million revolving overdraft facilities in full. And these facilities have been canceled, and we will be released from our guarantees.

Our financial inclusion and applied technology segment revenue was $54 million in Q2 2018, down 10% compared to Q2 2017 on a constant currency basis. In rand, the revenue decreased primarily due to fewer prepaid airtime and other value-added services sales as well as lower ad hoc terminal sales, partially offset by increased volumes in our insurance business and an increase in intersegment revenues.

Operating income was also impacted by factors as well as an increase in the allowance for doubtful financial loans receivable of ZAR 19 million or USD 1.4 million, resulting from the commensurate increase in our lending book during the last lending cycle of calendar 2017.

Our gross lending book, comprising of capital out and deferred service fees at the end of Q2 2018 was approximately ZAR 1.2 billion compared to ZAR 942 million at the end of Q4 2017. We continue to believe that our financial services offering will sustain the segment's growth, along with the commensurate expansion of our physical and mobile branch and ATM infrastructures.

At January 31, we had approximately 2.3 million EPE accounts. Our life insurance business, Smart Life, continue to sustain its momentum, and we've sold more than 470,000 policies at the end of January 2018.

Operating income and margin for the financial inclusion and applied technology segment was 24% during each of the periods and was impacted by the factors discussed earlier. 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.

Corporate expenses have decreased, primarily due to lower transaction-related expenditures, a $0.5 million gain related to the sale of XeoHealth and lower executive compensation, which was partially offset by modest increases in U.S. dollar-denominated goods and services purchased from third parties as well as directors' fees.

Our Q2 2018 net interest income decreased to $2.4 million with high interest expense, driven primarily as a result of the South African facility we obtained to partially fund our investment in Cell C, somewhat offset by a lower average long-term debt balance on our South Korean debt and a lower interest rate in South Korea. And on the interest income side, interest income received from a loan provided to Finbond in October 2016, offset by lower average cash balances used to fund our investments.

We recognized earnings from equity-accounted investments of $1.4 million during Q2 2018 compared to $0.1 million last year. DNI and Bank Frick contributed for the full quarter, however, because Finbond is listed under JSE, we only include its reported 6 months results after they report, which is typically during our first quarter and fourth quarter of the year.

Capital expenditures for Q2 2018 and 2017 were $2.1 million and $3.1 million, respectively and have decrease, primarily due to the acquisition of fewer payment processing terminals in South Korea. We continue to expect our quarterly 2018 capital expenditures to be significantly lower than in 2017.

At December 31, 2017, our cash and cash equivalents was $64.9 million and comprised primarily of Korean won-denominated balances of KRW 28.1 billion, which is $24.4 million; rand-denominated balances of approximately $22 million; and U.S dollar-denominated balances of $11.4 million; and other currency deposits, primarily euros, of $7.1 million, with all amounts translated at exchange rates applicable on December 31, 2017.

The decrease in our cash balances from June 30, 2017, was primarily due to our investments in DNI, Bank Frick, Cell C and a $9 million listed note, scheduled repayments of our South African long-term debt, unscheduled repayment of our Korean debt in full and growth of our South African lending book and capital expenditures, which were partially offset by cash generated by most of our core businesses.

Apart from our lending arrangements, we continue to fund the group's operations and capital investments utilizing our cash reserves and cash generated from our business activities. We expect the majority of our cash generated in fiscal 2018 to repay the principal and interest on the South African lending facilities and to fund our internal growth investments.

Our effective tax rate for Q1 2018 -- Q2 2018 was 53.8% compared to 31% last year and includes $0.9 million related to the change in U.S. federal statutory law. Our Q2 effective rate was higher than the South African statutory rate as a result of the valuation allowance provided related to the $7.8 billion allowance for doubtful working capital financial receivables created, nondeductible expenses, including transaction-related expenditure and nondeductible interest on our South African long-term facility as well as the impact of the changes in the U.S. federal statutory tax law.

These changes to the U.S. tax laws are not expected to have a significant impact on our future consolidated effective tax rate as we generate the majority of our taxable income in tax jurisdictions with higher tax rates, mainly in South Africa, where income is taxed at 28%, and Korea, where income is taxed at 22% and the new federal statutory rate of 21%.

We continue to expect our effective rate for 2018 to be in the 34% to 36% range, excluding the impact of the valuation allowance in the amount of $7.8 million. Our weighted share count for Q2 2018 was 56.8 million versus our actual December 31 share count of 56.8 million. Compared with Q4, our weighted share count was higher due to the inclusion of the 5 million shares sold in Q3 2017.

I will now hand the call back to Herman for closing remarks before we open it up to Q&A.

Thanks, Dhruv. To conclude on guidance, and to reiterate from last quarter, we expect the funding of our Cell C and DNI investments to be dilutive to our fiscal 2018 fundamental earnings, partially offset by DNI's equity-accounted earnings but to be accretive on a combined basis from fiscal 2019. We therefore anticipate our fundamental earnings per share for fiscal 2018 to remain at least $1.61. Our guidance assumes no significant disruption in any of our key business units, a constant currency base of ZAR 13.62 to the dollar, a share count of 56.6 million shares and a tax rate of between 34% and 36%. For clarity, our guidance, as always, is on a constant currency basis and does not reflect the recent strengthening of the South African rand.

With that, we will gladly take your questions, but as Dhruv mentioned at the outset, we are unable to take any questions related to SASSA or CPS at this time.

(Operator Instructions) Our first question is from Dave Koning from Baird.

I guess, first of all, which of the key initiatives that you talked about is really going to move the needle? And I guess, my big question here is the international segment and the financial inclusion segment, both are declining about 7% to 10%. I'm wondering, when does that -- both of those shift to growth mode. I know the Korea business is part of that. But what really is the catalyst to get those both back to growth mode? And what's the date kind of by which both of those should be growing again?

Dave, I think the short answer to that is in the near term, our initiative in South Africa around financial inclusion and specifically, with Cell C and DNI are the ones that will contribute meaningfully to the bottom line in the shortest period of time. Most of those are either complete in terms of the development that was required from a product or a tech point of view. And so we expect those to start contributing meaningfully, sort of commence in Q3, scaling up in Q4. But definitely during fiscal 2019, I think we will see a really meaningful contribution from those specific initiatives. And then second of all, the traction that we've now got in the International Payments Groups, specifically, with the consolidation of the various business activities and units and the sales pipeline that we have in place on the specific markets that we are focusing on, those have already started to show significant growth. If you look at our processing volumes in December, they were already significantly higher than in the previous quarters or months. And so I expect that those will scale and ramp up as well significantly during Q3 and Q4. UEPS international joint venture is a longer-term opportunity. The sales cycle, as you know, for those little systems is quite long. So we expect that to be sort of a 1 -- 12 to 18 months initiative before we start seeing real results. But of course, once those initiatives are concluded and implemented, they have a significant impact just in terms of the scale of what we anticipate to do.

Okay, good. And then I guess within the financial inclusion, it's -- the prepaid airtime, is that continuing to decline? And is that -- that's kind of meaningless, I guess, to the margin side of it. But does that turn and get better at some point? Or maybe it doesn't matter?

It's flattened out. So if you look at the growth that, I think, we've presented on the supplementary slide show, we've seen a bottoming out of the impact of introducing the biometric identification tool. Those implementations will anniversary, I think, during Q3 as well in terms of when we first introduced them. So there has been a flattening out. And you're right, it doesn't have a very big impact on the margin side of things, simply because airtime is a very low-margin product. But, obviously, it's got an impact on the revenue side of things. So the margin impact, although small, I think have now been stabilized. And going forward, we will see -- I don't think we'll see any further declines. And with the introduction of the new products and services that we've got planned with Cell C, I think we should see an uptick and specifically, the sale of prepaid airtime.

Great. And just one last quick one, the margin profile of the company, it looks like the Masterpayment working capital finance (inaudible) it's a small revenue but also small profit dollars, there's investments and other things. I'm just wondering on the puts and takes, is there something over the next 12 months margins should lift as the mix changes or decline? Like how are you thinking of margins over the next several quarters?

Well, I think, we're looking at definitely improving the margins. There were a couple of contributors that had a particularly significant impact on lowering the margins over the last few quarters. The key ones we obviously spoke about, KSNET's experience, a bit of a margin squeeze as a result of the introduction of the new regulations in Korea and also the no CVM authentication for transactions less than $50. And as you know, KSNET score consists significant contributor overall to both the revenue and the operating margin lines. I think that's now stabilized, then we'll also anniversary out over the next few quarters. The Masterpayment book, obviously, had a very low-marginal impact on us. So the removal of that business should result in our margins improving. And I think the continued focus on costs and the management of the group overheads over the next 12 months, there's obviously an active and conscious attempt to make sure that those are well controlled. It will also result in an improvement in margins. So from my perspective, going forward for the next 6 to 12 months, I believe that we can get our margins back to where we used to see them a couple of years ago.

(Operator Instructions) Our next question is from Allen Klee of Sidoti.

So these Cell C and DNI investments, can you just walk us through a little bit of the time line and potential economics of how you see -- how you're going to make money there?

Sure. So Cell C, obviously, just to put it in context, is 15% investment for us. It's not a controlling stake, and it's even below an equity-accounted stake. DNI, on the other hand, we are a 45% shareholders. So we have a significant influence in DNI, and we equity account for that accordingly. And the way we're going to look at this is how do we combine the strength, the relative strength of all 3 components. So Cell C brings to us the ability to define and come up with products that we believe are missing from the market segment that we service. And so yes, when we look at the financial inclusion side of the market, the same segment where our EasyPay Everywhere account offering is pitched at, our Smart Life insurance offerings are pitched at, et cetera, there is an enormous need for specific products that provide a combination of voice and data and social media communication capabilities. These are products that are prepaid and are micro amounts in nature. Our knowledge of that market makes it possible to assist Cell C to define the right products to address that market segment. That is the process that is not instantaneous. So although we know exactly what it is that we want, the definition of those products and the ultimate loading of those products onto the Cell C system, obviously, takes a couple of months. We've -- we ran our first pilot based on what we believe the desired product offerings are in December. We are tweaking those. So we think that we can be in a position to launch it in a meaningful way in the next quarter, so Q3 for us is going to be a significant quarter in terms of launching those, what we call, lifestyle products. DNI is obviously a significant component of what we do because they bring to us the ability to expand our footprint from a distribution point of view into the urban areas. So yes, Net 1 has a particular strength in the rural areas through our branch network and our sales forces that we've bulked up in our Moneyline business units. So we've got roughly 2,500 employees in our segment. DNI brings another 2,000 employees, probably more urban and semi-urban based. So there's no real time line to win the investment that we have in DNI will provide us with synergistic benefits. That is simply a function of us getting the right product fit together and then getting it out into the hands of the sales force to sell and to roll out into the entire national footprint that we have. So if you look at all of the products combined, and in association with Cell C and DNI, I think, we said that by 2020, we expect them to generate between $0.25 and $0.50 of earnings per share. So 2020 is not that far away, we're talking in 2- to 3-year period. And so we expect them to contribute between, I would say, 1/4 and 1/3 of our earnings per share -- of our current earnings per share at that point in time.

Okay, great. And then for your Hong Kong, Chinese-related business. Can you just give us a little more of an update on that?

Sure. So our business in Hong Kong, Transact24, is now part of the International Payments Group. So we've consolidated all of the licenses that we have, our e-money licenses as well as our various issuing and acquiring relationships under one umbrella. The founder and CEO of T24, Philip Meyer, is now the business unit leader for all of these activities. That's not only the Hong Kong-based business but the international business when it comes to issuing and acquiring and processing. On the areas that we focus specifically on when it comes to the east, or specifically in China, the processing volumes that we've seen from our Chinese processing activities, there is a slide, I think, that we've provided to show that there has been quite an increase in Chinese processing. It is a business that is seasonal and to an extent, so we would expect to see a larger increase during some quarters than during others. But the business is growing, and it's doing well. And of course, the introduction of the processing for Bitstamp, which is our European-based exchange, not really sort of Hong Kong- or China-based, has -- had a very positive increase overall on the processing volumes for the International Payments Group. And in the other area, where you will see, if you look at the deck, we have had a particular strong increase in processing volumes based on the SEPA, which is an acronym, I think, for Single European Payments Area, which is really the equivalent of EFT debits in the European Union. That's an area where we spent a lot of time and effort in terms of getting our systems ready to perform those transactions. And if you look at the deck, you will see that there has been a magnitude of, I think, 3 or 4x increase in the processing volumes. So we are very excited about the way that all of these individual components that we had accumulated over the last 2 or 3 years has finally come together. I think that we now have under our control all, in association with our investments in Bank Frick, every aspect of what is required to provide and to run a true end-to-end solution as far as international payments, processing, acquiring and issuing is concerned.

Good. If I can ask one more thing. In India, you've talked about MobiKwik. I missed -- you were referring to something else after that. But if you could just remind me what that was? And then just how you think about the opportunity in the country.

Alan, this is Dhruv. So what we have said, beyond just the VCC project is that we are making progress in terms of identifying how to deploy our new UEPS solution in the country, and that obviously requires a number of local stakeholders that will have to be educated and brought into the fold. We've also made some progress in terms of developing international remittance products, which we will start within -- with remittances into India and then eventually, look at the group for other countries. And then the last part that we talked about was receiving an ACS certification from Visa within the next 30 days, which would allow us to do effectively the second factor authentication, which is a requirement for card not present transactions in India. So those are the things that we talked about. I mean, how we think about the market. First of all, for the group, it's critical for us to demonstrate success. But if we can succeed in India, we can succeed anywhere in the world. The second is the margin profile in the country is generally across the board, very thin. So it has to be a volume and scale game. And that's why the partnership with MobiKwik is critical for us because they help us bring the scale much faster. And then as we sort of expand on that with the additional product offerings, that's how we start to build a long-term and sustainable and sizable business model for the group.

(Operator Instructions) Our next question is from Stephen Ranzini of University Bank.

My question revolves around Bank Frick. And the regulatory Liechtenstein regime there with respect to the opportunity to outline with cryptocurrencies. So I think it's obvious that many bankers around the world have thought hard about getting into the cryptocurrency business, but local regulatory restrictions from their own bank regulators has held them back. Can you describe a little bit, the regulatory regime in Liechtenstein? And what practical or legal limitations you do have on your cryptocurrency business there? Or is it truly unlimited?

I don't even know. Unfortunately, I think they days of having unlimited capabilities from a regulatory point of view are long gone. And so in Liechtenstein, specifically, there is a very, very active and dynamic banking regulator. The country is, as you know, quite small, which means that -- and the number of banks are also quite limited, so there is very active oversights in the banking sector. I think what we do have is a regulator that is very progressive in terms of how the emerging trends across the world in terms of payments and currencies emerged. So we have a regulator that's willing to engage, willing to listen and willing to assist us to figure out what is doable, what is not, most importantly, to come up with fully regulated solutions. So if we look specifically at things like crypto trading and crypto exchanges, it is, I think, vitally important these days, with all of the various events that we've seen and the hacking that's taken place with some of these that an absolute requirement for ICOs and exchangers is to have the ability to do safe custodianship of the underlying assets. And that's something that, I think, only a bank that is fully regulated can really bring to the party. So that's a very critical component of what we think Bank Frick can bring. The key thing to understand is that whatever it is that we do is still at the full mercy and oversight of the regulator. But as I said, the benefits we have is that we have an accessible regulator that is really willing to listen and to look at any application that is submitted and to debate that, no matter what the underlying instrument is.

We have no further questions. And with that, we will conclude today's conference. Thank you for joining us. You may now disconnect your lines.