Lesaka Technologies, Inc. (LSAK) Q4 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Net1 Fourth Quarter and Full Year Results Conference Call. [Operator Instructions] Please also note that this conference is being recorded. I would now like to hand the conference over to Dhruv Chopra. Please go ahead, sir.

Thank you, Dylan. Welcome to our fourth quarter 2013 earnings call. With me today are Dr. Serge Belamant, our Chairman and CEO; and Herman Kotze, our CFO. Both our press release and Form 10-K are available on our website at www.net1.com. As a reminder, during this call we will be making forward-looking statements and I ask you to look at the cautionary language contained in our press release and Form 10-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 dollar and the rand. As was the case last quarter, we will be making limited comments regarding the government investigations, but we will not be taking any questions on the subject. With that, let me turn it over to Serge.

Thank you very much, Dhruv. Good morning to all of our shareholders. On today's call, I will provide an update on the accomplishments and developments in fiscal 2013 and share some perspectives as we look out to fiscal 2014. For quarter 4 2013, we reported revenue of USD 118 million, which is a year-over-year increase of 25% in constant currency. Fundamental EPS in the quarter was USD 0.28, an increase of 22% in constant currency despite the inclusion of USD 9 million in implementation expenses related to our new SASSA contract. Our core established businesses, which includes CPS, KSNET and EasyPay, together in fiscal 2013 accounted for approximately 80% of our revenue. We've concluded our bulk enrollment during the quarter on time and in accordance with our agreements with SASSA, despite enrolling a significantly larger number of beneficiaries than originally planned. During quarter 4 2013, we have paid approximately 9.6 million beneficiaries, almost ZAR 9 billion per month. The complexity and challenges in rolling out the project of this magnitude is unmatched providing further evidence that SASSA chose the best solution when awarding its national tender to us. It is therefore no surprise that earlier this week, MasterCard recognized SASSA and this implementation as the best social grants payment program worldwide. Many articles have been written about the success of this project since then and I firmly believe it is important for me to pause at this juncture and to spend a minute or 2 to acknowledge different entities and personalities that made this massive initiative plausible and possible. First and foremost, credit must be given to our South African government and its Ministry for Social Development led by the Honorable Minister Bathabile Dlamini. Her vision, dedication and unwavering goal to provide the best possible service delivery experience to the most vulnerable citizens of South Africa has been accomplished and to date without any doubt. Secondly, minister Dlamini's SASSA team, headed by CEO, Ms. Petersen, has proven that focus, hard work, selflessness and passion will always win the day regardless of the forces that always attempt to derail what is right and socially responsible because of either political or commercial gain. Thirdly, MasterCard, which has made the decision to support the government's programs and financial inclusion initiatives even when these compete with the existing financial models. Fourthly, Grindrod Bank, which show an opportunity to enter the retail space and become organized, one of the largest, if not the largest, card issuer in South Africa. Last but certainly not least, Net1 and its fully owned subsidiary, CPS, Cash Paymaster Services, the company to which SASSA awarded the tender to distribute welfare grant to, on a national basis for 5 years. Net1 is to date enrolled in excess of 21 million South Africans, some of whom are babies as young as 3 months old. Net1 employed and trained in excess of 5,500 temporary employees to achieve this goal in less than 12 months. In addition, Net1 deployed its banking platform in association with Grindrod Bank which platform allows for both off-line and real-time processing of millions of transactions per day. The Net1 technology is 100% EMV compliant and allows beneficiary to be biometrically verified, which is a worldwide innovation. Net1's authorization systems process, at peak times, more than 550,000 transactions per hour with response time under 1/3 of a second. Net1 selected MasterCard as the brand with which to launch its technological innovations and certified its card solutions with EMVCo certifications partners, namely FIME and Thales for CAST certification. Net1 provides its own biometric One to Many search engine and its own matching algorithms. Our biometric database is the largest biometric database in the country with more than 200 million fingerprints and 10 million voice prints. Net1 also provides a MasterCard issuing platform, a fully integrated banking platform, as well as a myriad of advanced secure mobile solutions, which Net1 believes will change the way banking is performed today in South Africa and in many other developing countries of the world. Net1 is, over the last 20 years, committed and focused on providing payment solutions to all citizens of developing economies and has become, in many fields, a disruptive force, which hopefully will accelerate inevitable change to business model and outdated technological solutions, resulting in lower cost, better functionality, personal security and the financial inclusion of all people regardless of their financial or social status. Our experience in South Africa has demonstrated thus far that not only does our technological solutions identify and eliminate duplicate grant registrations, but also lead to a number of non-eligible beneficiaries returning the existing cards because they fear being caught out during the reregistration process. From SASSA's original database, approximately 370,000 grant recipients have not been registered at June 30, despite SASSA's best efforts to reach them all. SASSA has stated that these grants will be suspended in September should the beneficiaries not come for enrollment. While some beneficiaries may trickle through, we believe a large proportion may not reregister as they were not supposed to be receiving grants in the first instance, and thereby fear getting prosecuted. By suspending such a large number of grants currently being paid, SASSA should save the South African treasury billions of rands per annum over and above savings already achieved from lower service delivery fees. Equally likely, however, SASSA may reinvest such savings in providing assistance to those who need it most. As you know, our SASSA contract was challenged in court by AllPay, one of the previous contractors. We are very pleased with the Supreme Court ruling at the end of March, which unanimously ruled in favor of SASSA and us on every single count. On April 18, AllPay filed an application for leave to appeal the Supreme Court's ruling to the Constitutional Court, the highest court in the country. And SASSA and us are opposing the application on the basis that it does not raise any constitutional issues. AllPay's previous appeals to the Constitutional Court before the Supreme Court hearing and ruling was rejected at that time. The Constitutional Court has set a date of September 10, 2013, when they will hear the arguments from all of the parties before deciding whether, firstly, to grant leave to appeal and if so, to make a ruling on the merits of the application. We cannot predict the timing or outcome of the Constitutional Court proceeding but should they decide not to hear the matter or rule in our favor, it will bring to an end this long and arduous legal challenge. As it relates to the U.S. government investigations, we continue to cooperate with authorities and several of our executives and directors have been interviewed and that process is ongoing. These investigations, however, continue to cause a burden on the company, both financially and operationally. We continue to devote substantial time and resources to respond to the investigations, which has come at the expense of focusing on certain strategic areas of the business. Our substantial legal costs are incurred in the U.S. and we have to upstream rand at unfavorable exchange rates, while also triggering additional taxes in order to meet obligations. These investigations and the subsequent decline in our shipments [ph] have also resulted in us being unable to conclude our BEE transaction. We continue to expand substantial efforts to attempt to reassure our existing and new customers and partners that our business continues to operate normally. We have also had to respond to certain South African regulators who have expressed concerns regarding potential acquisitions or product offerings such as insurance. And we have stated before, we believe it is imperative that we conclude the BEE transaction to demonstrate our commitment to the objectives of BEE and compliance with the established codes of good practice and transformation charters. Despite these tiring, demotivating and emotionally stressful challenges, our staff members remain committed to the group and its vision and have not wavered in their duties or motivation. And I commend them all. Our South African business, which incorporates CPS, merchant acquiring EasyPay FIHRST and our Grindrod Bank underwriting contract, is focused on becoming the largest card issuing organization in South Africa, targeting, first and foremost, our existing 10 million cardholders and additionally their family members as well as all of the citizens who live in or in proximity of the areas we visit and service on a monthly basis. Through our 800 mobile banking vehicles, we visit in excess of 10,000 pay points throughout the country. We intend to leverage this infrastructure to not only service SASSA beneficiary, but also to service all of those citizens who also require our low-cost banking service with all of its functionality such as our biometric based security, our money transfer system as well as all its associated financial services. We provide all of our services in compliance with various South African laws and regulations. The lines between EasyPay and our other South African transaction operations are blurring as we begin to process more and more transactions across multiple customer segments and new delivery channels. EasyPay is an integral part of our distribution network and given its growing importance in the country, has continued to gain traction with new retailers, daily shares and the like. EasyPay will play a more and more important role in providing our millions of bank customers with value-added services from which we will derive new revenue streams. Meanwhile, we remain actively engaged with MasterCard in pursuing opportunities for our UEPS/EMV solution in multiple geographies. There have been several tenders we have responded to jointly and in some cases, we have hosted delegations from countries wishing to see what we have accomplished in South Africa. None of these tenders, however, have yet to be awarded. Our mobile solution division, which now incorporates Pbel, has been focused on the integration of the various smaller business units, as well as creating strategic plans for VCC, variable pin, kiosks, voice biometric solution and of course, our mobile wallet related opportunities. We have made significant progress in refining the structure and business model in which to scale going forward for MNOs, financial institution, loyalty scheme operators and health care payment contractors, while also rationalizing redundancies with projects that have not delivered or are not likely to be economically viable. Despite spending a significant amount of time on structuring the business so as to yield the best possible synergy, we have commenced with a number of new opportunities, including the launch of a product called Yumoyac Manje [ph], which means Airtime Now [ph] in South African, which allows our customers in South Africa to electronically purchase prepaid airtime or hybrid [ph] contracts immediately using our mobile wallet. During the first 25 days of operation, we have already registered in excess of 850,000 users who currently effect more than 200,000 transactions per day. We believe that this strength will continue and expect the number of customers to increase substantially over the next 2 quarters. We also intend to launch new products targeted at the same customers and thus increase the average spend per customer. While the individual ticket items are relatively small, over time, volume would make this income stream very meaningful to the group indeed. VCC is finally getting momentum and 2 sizable deals are being finalized with the combined potential customer base in excess of 80 million users. We hope to see some strong traction in this field very shortly. Our NUETS and its groundbreaking UEGS platform and MediKredit and its real-time claim adjudication system continue to attract attention from many different governments in various jurisdictions. We are currently strategizing how to exploit these technologies in an unfettered manner. These businesses have long selling cycles, require ongoing bridging finance and would probably strive better in a more entrepreneurial environment. We are exploring the possibility to restructure these businesses by introducing partners who can add value, not only in financial terms, but also in focus time and personal contact with a potential customer base. Finally, for KSNET in quarter 4, we posted 14% local currency revenue growth, accelerating modestly from quarter 3 and once again driven by solid gains in our core card vend business and meaningfully stronger growth in our smaller but higher-margin banking vend and payment gateway business, as was the case with the prior quarter having largely completed a special promotions for agents, capital expenditure requirements in Korea were lower than a year ago and both these strengths help drive year-over-year revenue and operating income growth. Looking ahead to fiscal 2014, we will continue to provide the highest level of service to SASSA and the South African citizens and identify additional cost savings opportunities for government. Consistent with our strategy, in 2014, we have already begun to increase our focus on providing additional services, including UEPS-based loans, airtime, electricity to our cardholder base, whilst addressing multiple opportunities in South Africa, Korea and other international markets. Our UEPS/EMV technology, which, together with our mobile division, and the products such as VCC, delivers an integrated and comprehensive payment solution for both the developing and developed worlds. To conclude, we expect fiscal 2014 to be an inflection year, with the growing top and bottom line. The timely and successful resolution of the legal challenges and various investigations and the creation of real and long-term shareholder value. With that, let me turn over to our CFO, Herman.

Thank you, Serge. As usual, I will discuss the key results and trends of our significant operating segments for the fourth quarter of 2013 compared to a year ago. I will also discuss, to the extent possible, the financial implications of the fully implemented new SASSA contract and the outlook for our business in fiscal 2014. For Q4 of 2013, our average rand-dollar exchange rate was ZAR 9.19 compared to ZAR 8.03 a year ago and negatively impacted our U.S. dollar based results by approximately 14%. The year-over-year comparability of our results for the quarter now reflects the inclusion of our new SASSA business for a full quarter in both periods. On a consolidated basis for the fourth quarter of 2013, we reported revenue of USD 118 million, an increase of 25% in constant currency. We reported fundamental earnings per share of USD 0.28, which grew by 22% in rand compared to a year ago. Q4 of 2013 includes USD 9.1 million of direct implementation cost and include USD 1.1 million of smart card costs. While Q4 2012 results included an equal amount of USD 1 million of direct implementation costs, but there were no smart card costs for that period. In rand, direct implementation costs, including smart cards, were 15% higher. We measure the group's profitability by analyzing operating income and margin by segments. Within our segments, SA transaction based activities posted revenue of USD 59 million during Q4 2013, which is 16% higher in local currency, driven primarily by higher volume from our SASSA contract and our other South African transaction processes. Our segment operating margin, excluding amortization of intangibles, improved to 16% from 12% last year, primarily due to increased transaction volumes. We expect segment profitability to continue showing improvements in fiscal 2014, as contract implementation and smart card costs will not recur, but we could potentially have a short-term impact on both revenue and profits if the 370,000 beneficiaries remaining to be enrolled do not show up as per SASSA's directive and they will have their grants suspended in September 2013. We believe this could represent lost revenue of roughly USD 6 million in fiscal 2014. In the short-term impact, however, it should be offset over time by new beneficiaries added to the system by SASSA. Based on our experience so far, SASSA has been adding between 20,000 and 50,000 new beneficiaries each month. As of July 31, 2013, we were paying 9.6 million beneficiaries including organic growth in SASSA's beneficiary base. Our temporary headcount declined to 1,392 at June 30, 2013, from a peak of 5,500 for most of fiscal 2013. Our International transaction-based activities posted revenue of USD 36 million during Q3 2013, an increase of 31% in constant currency and driven predominantly by growth at KSNET, despite a weaker macroeconomic environment in Korea and a loss of the newest Iraqi customer. The investments we've made in Korea over the past 2 years through our special promotions are now also starting to bear fruit. Segment operating income, excluding amortization of intangibles, improved to 12.7% from 10% last year, given the greater contribution from KSNET smaller yet higher margin businesses, but was offset by the loss of newest Iraqi customer and ongoing start-up costs related to the launch of our mobile Virtual Card and XeoHealth initiatives. For Q4 2013, KSNET revenue grew 14% in Korean won to $35 million, while EBITDA margin of 25% was up 100 basis points compared to last year and flat sequentially. For fiscal 2014, we expect continued local currency revenue growth in this segment, driven by KSNET, as well as increasing contributions from XeoHealth. Our Smart Card Accounts segment posted revenue of $12 million, 64% higher in constant currency, based on 9.3 million active cards from 5.6 million last year. Segment operating margin remained consistent at 29%. For our financial services segment, revenue in Q4 2013 grew 53% year-over-year in constant currency to $2.1 million. With our bulk enrollment obligations largely completed in Q4, we were able to refocus on providing additional products and services, including loans to our end users, which we now provide in 3 provinces. Segment operating margin declined to 17% in Q4 2013 from 54% last year, primarily due to the allocation of UEPS-based lending, corporate administration and overhead expenses to the segment from the South African transaction-based activity segment. We allocated all of fiscal 2013 overhead expenses to the segment in Q4 2013. Going forward, we will continue to allocate such expenses on a quarterly basis and therefore expect segment margins to improve sequentially, but remain below historical levels. We also expect to employ an additional 1,400 permanent employees in this business over time to facilitate the growth of our financial services offering nationally during fiscal 2014. For Q4 2013, Hardware and Software revenue was $9 million, 28% higher on a constant currency basis and improved due to an increase in royalty fees and ad hoc hardware sales. Segment operating margin was 24% compared to 25% last year due to a higher marginal mix of ad hoc hardware sales. Profitability in the segment can vary depending on the timing and quantum of ad hoc sales. Corporate elimination expense in Q4 2013 includes $1.2 million of legal costs we incurred as a result of the DOJ and SEC investigations, bringing the total so far to approximately $6 million. Our Q4 2013 net interest income increased to $2 million, driven primarily by lower average debt outstanding and higher cash balances during the period. Our SASSA contract operating margin was anticipated to be at its lowest level during Q2 and Q3 of fiscal 2013 as this is the period where our enrollment volume was at its highest level and has since demonstrated sequential improvement as bulk enrollment was largely completed early in Q4. We incurred $1.5 million in capital expenditures during Q4 2013 related to implementation. Since inception of the implementation, we have incurred cumulative capital expenditures of $28 million and we do not anticipate any further CapEx requirements related to the implementation. Our total cash outlay related to the implementation through June 30, 2013, was $105.5 million for direct implementation expenses, smart card costs and capital expenditures, which is roughly in line with our expectations of $100 million to $105 million. At June 30, 2013, we had cash and cash equivalents of $54 million, up from $39 million at June 30, 2012. The increase in our cash balances from June 30, 2012, was primarily from cash generated from operations, offset by implementation costs and capital expenditures incurred to implement our SASSA contracts, scheduled repayments on our Korean debt and the acquisition of Pbel and SmartSwitch Botswana. We continue to fund the group's operations and capital investments utilizing our cash reserves and cash generated from our business activities. In 2014, we expect primary uses of cash to be funding of our loan book for financial services, investments in our other businesses, debt repayments, share repurchases and strategic acquisitions. The company's effective tax rate for the 3 months ended June 30, 2013, was 48% and differed vastly from the South African statutory rate, primarily as a result of nondeductible expenses, including interest expense related to the company's long-term Korean borrowings and stock-based compensation charges and South African dividend withholding taxes, which is paid when we have to upstream rands to settle our U.S. dollar-based legal obligations. Our tax rate will fluctuate depending on our intention regarding undistributed South African earnings and the timing of any payments and we expect our effective rate for 2014 to be around 40%. Our fully diluted weighted share count for Q4 and full year 2013 was 45.7 million shares. In fiscal 2014, we intend to focus our efforts towards growing our suite of products and services for our end users, having largely concluded our bulk enrollment obligations in fiscal 2013. As I mentioned previously, there were roughly 370,000 grant recipients at June 30 in SASSA's payment file who have not appeared for reregistration. Should all of these grants lapse in September as communicated by SASSA, we would anticipate annual revenue to be negatively impacted by approximately $6 million before taking into account any organic growth. Including the impact of such actions for fiscal 2014, we expect fundamental earnings per share to be at least $1.50. Our guidance also assumes a constant currency base of ZAR 8.71 to the $1 and our fiscal 2013 share count of 45.7 million shares. With that, we will gladly take your comments and questions.

[Operator Instructions] Our first question comes from Dave Koning of Baird. David J. Koning - Robert W. Baird & Co. Incorporated, Research Division: I guess my first question, just now that the SASSA work, it seems like it's largely done now, you probably spent significant amount of time working through all that. Are there a lot of other opportunities out there now for either new countries or new work that you can kind of re-devote time to? And are there things that are going to materially help in the next couple of years just now simply that you've got that in the rearview mirror and you guys can really work on some new initiatives?

David, it's Serge here. Yes, obviously, your point is valid. Certainly, the team that has successfully now completed what we believe was a huge task of registration and stabilizing the payment infrastructure, there is no doubt that many of them are now going to be reassigned to, number one, capitalize on the infrastructure in South Africa that we have created. It would be silly now not to actually, basically provide new products and new services on top of that infrastructure for the simple reason that then the cost would become purely small incremental and most of the cash would then fall to the bottom line. So that will be the very next stride that we're going be taking and therefore, start really capitalizing on what we've spent USD 105.5 million to actually build. Outside of course of South Africa and there are of course other initiatives in South Africa itself, but outside of South Africa, there is no doubt that what we've achieved here has been noted by many different organizations. I did mention the fact that MasterCard has awarded SASSA a prize as the sort of best social welfare program implementation that they've ever seen in over 200 countries throughout the world. And there's no doubt that therefore a number of those countries are likely and I believe it will be done probably either by directly the South African government or through MasterCard, are likely to assist us to actually build or deploy other programs of this nature throughout the rest of the world. There are already some people that have approached us, vis-à-vis, those particular type of systems. But at this point in time, it's a little bit too early to get excited about these. We would rather get excited about what we can continue to achieve, which is completely under our control, and worry or start looking or focusing on what we can do outside of South Africa through the association that we might create with organizations such as MasterCard. David J. Koning - Robert W. Baird & Co. Incorporated, Research Division: Great. And then I guess my second question just on margin. I guess, what do you think the core South African transaction based segment, what will margins be kind of normalized as we go forward over the next couple of years on that business? And then also on the international business, we've seen that the core margins go from 15% I think in fiscal '11, down to 12% in fiscal '12. And then this year, fiscal '13 was about 10%. So we've seen kind of a degradation in margins there. But maybe where can margins go in that business as well? So I guess in both of those core segments, where do you think margins eventually go in the next couple of years?

Dave, obviously we are at the beginning stage of the normalized margins specifically in the South African processing business, and we believe a lot of the noise has been removed and remember, it's not only the pension payments processing side of things that impacts the margin, it's also driven through the results that we see at EasyPay, specifically at FIHRST and MediKredit. Although, obviously SASSA is a major component of that mix. And so looking forward for the next year or so, we think that we would be able to achieve more or less 25% to at the low end of the range to a 30% sort of margin in that business in the South African side of things. That, obviously, assumes that things remain more or less as they are. It assumes obviously that they will be a slight decrease initially in some of the revenues as some of those grants get suspended. But obviously, they will be an increase, an organic increase from SASSA, we don't know exactly what that number is. But if we take a sort of a high-level view of that, we think that the 25% to 30% margin overall in our transaction -- South African transaction process are basically achievable. And also from an EasyPay perspective, I think there's been a lot of investment done over the last 2 years of which we should start seeing the fruits to prop up that margin to the 25% to 30% level. Internationally, obviously, the key contributors to that specific segment obviously is KSNET by a long shot. I mean, we have a few smaller contributors. That margin has been under pressure over the last 3 years. There are a number of reasons for that. In Korea, primarily, obviously we had quite an intensive marketing campaign that spanned across 2 years where we invested quite heavily in new equipment, new infrastructure, new point of sales devices that we basically give away to our merchants over there. There was obviously a lot of time and sort of efforts spent on defending our competitive market position. There's no doubt that there's been an intensifying competition in the Korean marketplace over the last couple of years, which has resulted in a mini price war, if you want to call it that. I think that, that's also bottomed out to a large extent. We have already seen the impact over this last quarter, the EBITDA margin specifically for KSNET is now stable. It was 100 basis points better than last year. So from our perspective, we would certainly hope to maintain that margin at the level that it currently is. Again, that assumes that there's no specifically regulatory pressures in the Korean environment on capping or determining the interchange fees, which has been quite topical around the world, as you know. It's happened in the U.S., it's happened in Europe. Korea, certainly, is also very, very active in this field, where they are looking at the various interchange fees and who owns what in the value chain. So barring any sort of calamitous event, which we're not foreseeing at this point in time, we believe that we can sustain the margins at the very least at the level that we've seen in Q4 this year.

[Operator Instructions] Our next question comes from Kevin Tracey of Oberon Asset Management.

I guess quickly, I wanted to ask about your guidance. You talked about say at least $1.50 per share. But I guess I'm puzzled, you're using an exchange rate of ZAR 8.71 to the $1. And I understand that, that's what it was for prior year, but today I think you sit above ZAR 10. So I guess I'm wondering how does that affect your guidance?

Kevin, it's Dhruv. The practice that you're talking about is something we've put in place to avoid variability quarter-to-quarter based on movements in the FX rate. So if you go back to fiscal '13, our guidance was based on the fiscal '12 rate, which was ZAR 7.72. And it's that same principle that applies to the fiscal '14 guidance. And so, I mean, you guys can obviously take into consideration what the actual exchange rates are. But if we were to do that, the guidance we'd be showing every quarter would be up, down 15% or more. So this is just to provide consistency.

Okay. Understood. And next I wanted to ask about as you continue to amortize the debt related to KSNET, I'm curious if KSNET's earnings have been able to fully amortize that debt, or if you're having to move money out of South Africa? And if so, are you having to pay tax to get that money out of the country?

So one of the determining factors for the Korean debt repayment at the moment for us revolves around the -- and what really determines also the use of the local cash at KSNET is the fact that we're not 100% shareholder of KSNET. We own 98.7% of KSNET, so there is a very small minority, which actually has been quite an impediment on us freely utilizing the KSNET cash reserves. In other words, basically collapsing the debt directly into the KSNET operating subsidiary. What we've done to correct that, to the extent that it's possible, is we have embarked on a minority squeeze out, which until last year was a concept that wasn't really regulated under Korean law. That has changed and legislation was passed about a year ago that now allows or dictates the process of a squeeze out. We hope that, that process will be complete towards the end of this year. And once it is done, I believe that KSNET, by itself, will generate sufficient cash to repay the quarterly interest repayments at the very least. Hopefully, also the biannual capital repayments. And then if we had to sort of look at the position as it stands today or over the last year, were it not for the fact that we have these minority shareholders that -- and by the way, the other impact of that is of course that it prevents us from optimizing the tax structure in Korea as it relates to the date. But if we manage to squeeze out the minority on a pro forma basis, we would be able to service the debt utilizing the cash flows from Korea now that our capital sort of investment program is slightly lower than what it's been over the last couple of years. Obviously, in the last 2 years we spent in excess of $50 million just putting out new terminal real estate in Korea. So all things being equal, once we've got the minority squeezed out and we've gone through the process, we are actually the first company in Korea that is really testing the new squeeze-out legislation, so we're in some uncharted waters. But so far, it's going really very well and according to plan. Once that's done, we should be able to collapse our debt, get the tax benefit in Korea and that, by the way, will then also obviously have a knock-on effect to the corporate level where our corporate tax rate should also decrease quite substantially to reflect the Korean -- or to get on sort of get closer to the Korean tax rate, which is approximately 22% at the moment.

Okay. Good, good. And then finally I just want to ask about, you talked about the capital expenditures related to the enrollment program and rolling out your infrastructure have been completed. Now on an ongoing basis, I guess what's kind of your expectation for CapEx to support the business?

If we just -- looking at the South African side of things, yes, Korea obviously -- our CapEx is determined by our special promotion programs, as well as the replacement of the terminal infrastructure base. In the South African environment, if we go back to the CapEx programs that we had 2 years ago, before the implementation of the new SASSA contract, we were at approximately $5 million to $6 million per annum in capital spend -- sorry, per quarter. Going forward, because we really, as part of this implementation drive, not only have we expanded our asset base, we also really replaced the entire former asset base. And obviously, we hope that we won't have to go through an intensive replacement cycle. There's always going to be a bit of an expansion cycle to what we're doing, specifically as we're building out the financial services business that's where most of our CapEx will be focused in the next year or 2, but I would think that in South Africa, we would be able to manage our CapEx spend for the foreseeable future around sort of $3 million to $4 million a quarter level.

Our next question comes from Russell Emmett [ph] of Dawson Holdings [ph].

A couple of questions, one, Nigeria. MasterCard's made a lot of noise about traction in Nigeria. Can you speak to that at all?

Yes. The Nigerian program is still very much at the moment, in our view at least, under evaluation in terms of what will be the real program that they're going to roll out. We do understand what's involved in terms of them wanting to have a combination, let's call it ID card, with the added facility to be able to make payments. We also know that obviously that MasterCard is involved and in fact yesterday we were talking to them to actually find out if their intention is to roll out the UEPS/EMV system that we've deployed in South Africa, or if it is simply going to be initially a pilot with MasterCard that is going to be, let's say, run for a little while utilizing local companies. And so at this point in time, we certainly have not, on our side, included any revenue from any program that might -- that we might get involved in, in Nigeria in association with MasterCard.

Okay. But to -- but it's certainly a possibility, right, that this system, the MasterCard -- the Nigerian government could certainly look to replicate the system. That's a thought, that's one of the thought processes?

Of course we would hope that, that would be the case. But all we would like to say on our side at this point in time is that because we haven't done it, we're not really going to certainly say that just because we wish it to happen, that it is actually going to happen. So we haven't -- we just haven't included it at this point in time.

Okay. Fair enough. So just to speak just a little further, so on MasterCard, so you're looking at, or you're looking to expand to other countries with MasterCard and you have initiatives going, I assume, without them, is that both -- is that fair to characterize?

100% correct.

Okay. If we could switch to the VCC and to maybe mobile wallet in general for a second. On -- in the second quarter call, you mentioned that you had a VCC pilot going with a large global handset manufacturer, right, with phone with NFC capabilities. Can you speak to that a little bit further?

Yes. This continues. We are, I think, pretty close to doing something with them. And this is very large handset manufacturer, and I think this is not very large one, I think it is the largest one. It's certainly very, very keen on VCC and the integration of VCC within their own wallet, and that is something that is ongoing. But once again, we are not waiting for them or anyone else, for that matter, to basically provide us with a VCC platform. We have got 2 other fairly massive initiatives, one of them which covers most of the African cellphone operators. The other one which is a U.S.-based program, which represents around I would think a potential about -- the calculation we made about 60 million-odd potential customers, of which about 4 million or 5 million of them would be in the United States. The rest of them are within the African continent. And those particular programs are now based on the sort of reward, which is a sort of reward we were always looking for. I don't know if you remember in the past, we were always talking about we wanted to derive a minimum of $1 per month per customer. In the U.S., we can obviously push that up because at the moment, the numbers that are being talked about is more around $4 per month. While in Africa, the chances are is that it's unlikely to be $1 a month, it's more likely to be $0.50 per month. But nevertheless, and of course there's interchange fees that you've got to add to all of this. So I think these programs are now about to be rolled out finally. These things tend to take always longer than one thinks. But it's certainly looking very, very, very exciting, specifically in view of what we've also achieved with our straight mobile wallet like I've mentioned, by registering 800,000-odd people in less than 30 days. So I think this is to me, anyway, where certainly I'm going to spend time and effort. And where, I believe, the company can grow not only on the South African or African continent, but it's a product that we can certainly sell anywhere in the world, including first world countries. So that's where the excitement I think is going to come from.

So if you look at the largest global handset manufacturer that could utilize VCC, so how does that happen? Essentially they market, they let -- the operators are very aware of this, consumers are aware of this, end merchants, like Amazon, et cetera, how does that ecosystem build up so this becomes a real technology application, so to speak?

Well, as you know, mobile wallets all over the world have been spoken about by many people and just between you and me [indiscernible] most of them don't do anything. And so we focus on something a little bit different is that our mobile wallet is a payment instrument, and that's really what VCC is about. So the basic concept here is to have a wallet which could be automatically distributed through a mobile, let's call it, a mobile manufacturer, therefore preventing or not having the hassle of having to download the particular application on to the particular phone, although this is becoming easier and easier to do as technology grows. More importantly though, is to allow -- if you look at our VCC, what we call our Virtual Card program, this is something which is completely and utterly interoperable without any changes whatsoever on any website that is being created anywhere by anybody in the world. In other words, no changes are required by any website producer or enabler, for lack of a better word, in order to accept the VCC payment. And that's really the beauty about the product. So it's more a question of funding an underwriting bank, obviously, in a particular country that is going to take the responsibility of either the credit or the debit that is going to be utilized to create VCCs. And at this point in time, the people that are underwriting this particular product for us in countries such as the U.S. and Africa is, of course, MasterCard. So MasterCard is once again involved as part of this particular solution. In terms of the obviously how do we share the benefit to all of this is quite interesting and is quite complex as well and it's something we could certainly talk about at a latest stage, because I think it will take too long to discuss now what the business model looks like. But let us say that we have found, we believe, a solution that is attractive for the manufacturer of the phones, that's attractive, not so much for the network operators unless they are directly involved in doing something constructive, simply because we do not require them in any way whatsoever to actually provide or to participate in the product unless of course they intend to market it in a big, big way, in which case they would be cut in. But otherwise, everybody else is certainly involved as part of the interchange fees or as part of the fees that would be charged to the end users.

Our next question comes from Will Settle of Woodmont.

I just wanted to clarify something you said earlier about the MasterCard relationship and the joint tenders, joint submissions. When you said none of the tenders have been awarded, does that mean you haven't been awarded any or just no one's been awarded any, they just haven't decided who they're going to use on those particular tenders?

Well, it's actually -- I like your distinction between the 2. We are not aware that any of the, let's call it, the very large opportunities that we have bid for, we are not aware that any of those have been awarded to anybody at this point in time. And therefore, we are still very, very much in the game. Unfortunately, we are not the ones that are directly driving the actual either tender or the opportunity. That is clearly in the hands of MasterCard as our partner in that particular channel. So we simply don't want to tell our shareholders that until these things actually become fact, we don't want to sort of jump the gun simply because we do not have as much color on exactly what is going on as we are not the people that are actually facing the actual client.

And then my second question is, I noticed in the 10-K filed last night that the board, I guess, has granted or has a new authorization for the share repurchase of 100 million. Now that you have some of these investments behind you, does -- for implementing SASSA, does your perspective on that repurchase change or can you just talk to the board's thinking here?

Well, obviously, from our perspective, with $105 million spent over the last 18 months, which is now hopefully sort of not going to recur anytime soon on that sort of scale, it does obviously change our perspective on the uses of cash. When we look at the liquidity position and the uses of cash going forward for next year, stock repurchases obviously is one of the considerations we have. We do anticipate to invest quite heavily in some of our existing business activities, and specifically the rolling out of our lending products, which will require quite a bit of cash. And obviously, we will look at the most optimal ways of funding those whether with internally generated cash or externally sourced and or a combination of both. But there's no doubt that we now have the latitude at least, which we haven't had for the last couple of years, to think broader around the stock buyback program and obviously, how that also relates to our open window periods and what the stock price does.

Our next question comes from Jeff Livingston [ph] of Light Livingston [ph].

You gave guidance on the fundamental earnings for the year of 1.50. How does that or what does that relate to or are you able to tell us what that means in terms of hits?

So the guidance is fundamental earnings per share. In terms of hits, it would require, in the South African context of course, headline earnings and earnings per share is only really differentiated through the profit or loss on the sale of assets. But our fundamental earnings per share guidance that we've given, at least as it pertains to 2014, will in my view, have far less sort of reconciling items that's been plotted during the last couple of years by the once-off expenses that we've had. We've had the amortization charges obviously being quite high. And so, if we look at the 1.50 going forward, the 2 large, not unknown elements, but the 2 large components that we would have to sort of add back from the earnings per share calculation to get to the fundamental earnings per share calculation is obviously going to remain the stock-based compensation charges and the DOJ/SEC investigation costs. And so, if you take those things into consideration, it really gives you the difference between the fundamental earnings per share, which in my sort of head, should approximate really the cash earnings generation capacity of the group closer than what the normal earnings per share calculation gives us.

So what you're really saying is that even amortization charge that you see as the reconciling items in your Annex B to your results is not likely to recur?

There will be some amortization charges but not at that level. So a big chunk of those things would be out in the next year.

Will be gone.

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