Lesaka Technologies, Inc. (LSAK) Q1 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Net1 UEPS First Quarter 2014 Results. [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 First Quarter Fiscal 2014 Earnings Call. With me today are Dr. Serge Belamant, our Chairman and CEO; and Herman Kotze, our CFO. Both our press release and Form 10-Q are available on our website at www.net1.com. As a reminder, during this call, we will be making 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 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 U.S. dollar and the South African 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. And with that, let me turn the call over to Serge.

Thank you, Dhruv. Good morning to all of our shareholders. I'm very pleased with our quarter 1 2014 results, but specifically about the progress we have made towards the execution of our overall strategy. I'm particularly pleased that we have been able to reach an agreement on terms for a new BEE transaction, which we believe will lay the foundation to our company's sustainable growth in South Africa, specifically. For quarter 1 2014, we reported revenue of $123 million, which is a year-over-year increase of 34% in constant currency. Fundamental EPS in the quarter was USD 0.37, an increase of 77% in constant currency. Our core established businesses, which include, of course, CPS, KSNET, EasyPay, together in Q1 2014 accounting for approximately 75% of our revenue. Q1 was our first quarter in which there were no expenses related to the registration portion of our SASSA contract, and during this quarter, we began focusing on both our complementary and supplementary growth areas. As we highlighted last quarter, there were roughly 292,000 beneficiaries who did not present themselves for reregistration, and therefore had their grant is suspended by SASSA in September 2013. We actually expect that more beneficiaries will be removed from the payment file, in time, as our IT systems continue to identify areas of fraud and corruption. We did not, however, believe that over time the number of grant recipients will decrease as the savings achieved by SASSA will be redeployed into the Social Security arena, and more beneficiaries will be targeted to provide them with some form of financial assistance. As established, our UEPS technology is 100% EMV compliant, but amongst other functionality allows beneficiary to be biometrically verified, which is a worldwide, as you know, innovation. On our real time authorization systems, specifically South Africa, at peak times, are now processing in excess of 600,000 transactions per hour with response times which are way under 1/3 of a second. Our national UEPS/EMV solution, in partnership with MasterCard and Grindrod Bank, is now fully operational and has become an increasing integral part of the South African national payment system. The technology and implementation has truly provided a framework for our emerging markets and governments, financial institutions can achieve their financial inclusion objectives, while using existing infrastructures and ensuring interoperability with international standards. Our MasterCard issuing platform, together with our fully-integrated banking platform, as well as a myriad of advanced secure mobile solutions, we now believe that the potential to change the way banking is performed today in South Africa and in many other developing countries of the world. At Net1, we continue believe that the disruptive technology will not fully accelerate inevitable change to business model and outdated technological solutions, resulting in lower cost, better functionality, personal security and a financial inclusion of all people regardless of their financial resource or status. I always say Financial Minister, Pravin Gordhan, during his budget speech 2 weeks ago mentioned that social welfare spending in South Africa is expected to continue growing for the ensuing 5-year period. But that SASSA has already demonstrated over a ZAR 2 billion savings, mainly due to our technology. As you are aware, our SASSA contract was legally challenged by AllPay, and its final challenge is in hands of the Constitutional Court. The con court heard all agreements -- arguments from all concerned parties in September 10, 2013 and has reserved judgment. The con court will decide either to grant AllPay leave to appeal, and if so, will make a ruling based on the merits of the application. We, of course, cannot predict the timing or outcome of the Constitutional Court's proceeding, but should they decide not to grant a leave to appeal or rule in our favor, it will bring to an end this long and arduous and tedious legal challenge. There is no further updates as it relates to the U.S. government investigations. We have been informed by our corporate attorneys that they delivered to the DOJ all the outstanding documentation the DOJ requested. We therefore now await the DOJ's instructions or decisions concerning this particular matter. From our point of view, we now consider this matter, from my end, to be closed. Moving on to our proposed BEE transaction. I will let Herman discuss some of the specific terms and financial implications, but from a strategic standpoint, we have often iterated that it is imperative for the South African business, particularly, one that it is to engage extensively with government to be in doubt and express its commitment to the principles and objectives of BEE, and to comply with the established codes of good practices and transformation charters. We believe the proposed transaction provides a good balance between the requirements of building a long-term sustainable South African business and the interest of our global shareholder base. Our South African business, which incorporates CPS, merchant acquiring EasyPay FIHRST, our Grindrod Bank underwriting contract and parts and parcel of our Net1 mobile solutions, is focused on becoming the largest card-issuing organization in South Africa, targeting existing 10 million cardholders, and additionally, the founding 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. Having effectively facilitated the financial inclusion of over 9 million South Africans to date, we can utilize our infrastructure, technology and expertise to address the similar needs of all those citizens who also require a low-cost banking service with all of its functionality, such as our biometric fee-based security, our money transfer system, as well as our financial services. We, of course, provide all of our soliciting compliance with all the various South African rules and regulations. EasyPay, which is an integral part of our distribution network, and given its growing importance in the country, has continued to gain traction with new retailers, bill issuers and the like. However, the lines between EasyPay and our other South African transaction operations are blurry as we begin to process more and more transactions across multiple customer segments and now new delivery channels. For example, the resounding success, even though at an early stage of our Net1 mobile Umoya Manje prepaid airtime product, although no longer reflected in EasyPay's volume, leverages on that relationship. As of October 31, Net1 mobile had already registered in excess of 2.1 million Umoya Manje customers, with peak time effect over 1 million transactions per day. We believe that this momentum and the sizable penetration rate we have achieved over such a short period of time further demonstrates the relevance, the affordability and the power of our products and of our new mobile channel. It is important to note that at this point in time we have only targeted approximately 50% of the customer base available to us. In addition, we have launched new products targeted at the similar demographic base by the same mobile channel. Some of these products includes the ability for our client to check their bank balances, the number and types of deductions and debit orders effected on their accounts, the grants for which they have qualified or are qualified and many other functions, ranging from short message systems alerts when transacting to the -- when transacting on their account, where the closest ATM is relative to the client's current position, the closest SASSA office and the closest pay-point or merchant store at which they can transact at the lowest possible cost. Since the launch of some of these new -- excuse me, since the launch of some of these new transactions towards the end of October, we have already registered in excess of 360,000 new clients, and performed more than 850,000 transactions. While the individual ticket items are relatively small, over time, sheer volumes, due to the range of our product and the cost of our mobile channel, will make these income streams very meaningful for the group indeed. Meanwhile, we remain actively engaged with MasterCard in pursuing opportunities for our UEPS/EMV solution in multiple geographies. Both organizations have continued to remain extremely active in the pursuit of new opportunities globally. We are starting to see some momentum in the initiatives identified, and in some cases, we are providing quotations for a number of systems and services. I must say, however, that we have not as yet completed any new joint initiatives outside South Africa, but I would be disappointed if we did not do so in the near future. Our financial solutions business unit commenced with a national rollout of its UEPS-based lending activity during first quarter 2014. We did incur substantial setup and staffing costs as we address that market opportunity. Similar to our mobile prepaid ATM product, our financial services product saw very specific challenges, our borrowers faith dramatically improves the affordability, and in many instances, the dignity in the way they are able to conduct business and facilitate inclusion into the formal financial services sector. Finally, for KSNET in quarter 1, we posted an 11% local currency revenue growth, and once again, driven by solid gains in our core card VAN business and meaningfully stronger growth in our smaller, but higher-margin banking VAN and payment Gateway businesses, driving year-over-year revenue and operating income growth. During fiscal 2014, we also plan to accelerate the implementation of some of our strategic initiatives in Korea in order to drive incremental long-term profitable growth. We have also begun to review some of our smaller business units who still require funding and are no longer core, and we are first exploring the possibility to restructure, or even sell these by introducing partners who can add value, not only in financial terms, but also in focused time and contracts with potential -- and contacts with potential customers. We may exit certain contracts that have not delivered their intended value, in order to focus the business and the group on our key growth areas, which remain in South Africa, of course our EMV/UEPS solutions for the rest of the world, our financial services and our new mobile solutions, as well as KSNET. To conclude, we expect fiscal 2014 to be an inflection year, with a growing top and bottom line, with timely and successful resolution of the legal challenges and various investigations and a creation of real and sustainable long-term shareholder value creation. With that, let me hand over to Herman. Herman over to you.

Thank you, Serge. As usual, I will discuss the key results and trends of our significant operating segments for the first quarter of 2014 compared to a year ago. I will also discuss, to the extent possible, the outlook for our business in fiscal 2014. For Q1 of 2014, our average rand dollar exchange rate was ZAR 10 to the USD 1 compared to ZAR 8.26 a year ago, and negatively impacted our U.S. dollar based results by approximately 21%. On a consolidated basis, for the first quarter of 2014, we reported revenue of $123 million, an increase of 34% in constant currency. We reported fundamental earnings per share of USD 0.37, which grew by 77% in rand compared to a year ago. Q1 2014 results do not include direct implementation and significant smart card costs because we substantially completed our SASSA implementation in Q4 2013. Our Q1 2013 results included direct implementation costs, including smart cards of approximately $16 million. We measure the group's profitability by analyzing the operating income and margin of our business segments. Our South African transaction-based activity segment posted revenue of $63 million during Q1 2014, 24% higher in local currency, driven primarily by more low margin transaction fees generated from beneficiaries using the South African National Payment System and incremental mobile airtime sales driven by the rollout of our Umoya Manje product. Our segment operating margin, excluding amortization of intangibles, improved to 22% from 13% last year, primarily due to the elimination of direct implementation costs. CPS volumes were flat year-over-year due to SASSA's suspension of former grant recipient cardholders who had not presented themselves for enrollment during the first quarter of fiscal 2014. These grant recipient cardholders will have to apply for restoration of the grant and present themselves for enrollments should they want to reinstate their grants. These suspensions did not impact our Q1 2014 results. However, we expect an adverse impact on our volumes and revenue for the remainder of fiscal 2014, but we expect the decrease in volume and revenue to be partially offset by new grant recipient cardholders approved by SASSA during the year. Over time, we expect inflationary increases to modestly erode our segment profitability. Segment margins may vary depending on the mix of products, especially depending on the impact of airtime sales. But on an absolute basis, we expect operating profit to increase in constant currency assuming a stable beneficiary base. Our International transaction-based activities posted revenue of $37 million during Q1 2014, which is an increase of 16% in the reporting currency as the result of growth at KSNET, despite a weaker macroeconomic environment in Korea and the loss of the Iraqi customer. Segment operating income, excluding amortization of intangibles, improved to 14% from 9% last year, and was boosted by greater contribution from KSNET's smaller yet higher margin businesses, but was offset by the loss of an Iraqi customer and ongoing startup costs related to the launch of our Mobile Virtual Card and XeoHelath initiatives. As part of rationalizing our underperforming contracts in some of our small international businesses, we received payment of approximately USD 1 million during Q1, which had a positive impact on the margin in this segment. For Q1 2014, KSNET revenue grew 11% in Korean won, to $35 million, while EBITDA margin of 26% was up 200 basis points compared to last year, and flat sequentially. For fiscal 2014, we continue to expect continued local currency revenue growth in this segment driven by KSNET. Our Smart Card Accounts segment posted revenue of $11 million, 64% higher in constant currency, based on 9.4 million active cards, up from 5.8 million last year. Segment operating income margin was 28% and 29%, respectively for Q1 2014 and '13. Our financial services segment revenue for Q1 2014 grew 112% year-over-year in constant currency to $2.4 million, principally due to the substantial increase in the number of loans granted as we rolled out our product on a national basis. Segment operating margin declined to 2% in Q1 2014 from 79% last year, primarily due to startup expenses incurred to establish a national workforce and infrastructure dedicated to our financial services product rollout and the reallocation of UEPS-based lending corporate and administration overhead expenses. We expect the operating margin to improve in Q2 2014 as we scale the operation. For Q1 2014, Hardware and Software revenue was $10 million, 34% higher on a constant currency basis. Segment operating margin was 31% compared to 23% last year due to more ad hoc terminal and smart card sales. Profitability in the segment can vary depending on the timing and quantum of ad hoc sales. Corporate elimination expenses in Q1 2014 includes $2.1 million of legal costs we incurred as a result of the DOJ and SEC investigations, bringing the total, so far, to approximately $8 million. Our Q1 2014 net interest income increased to $1.6 million, driven primarily by lower average debt outstanding and higher cash balances during the period. Capital expenditures for Q1 2014 and 2013 were $5.6 million and $6.5 million, respectively, and have decreased, primarily due to lower capital expenditures as our SASSA contract implementation is now complete. At September 30, 2013, we had cash and cash equivalents of $47 million, down from $54 million in June 2013. The decrease in our cash balances from June 30, 2013 was primarily due to the expansion of our UEPS-based lending business, offset by cash generated from operations. For Q1 2014, net cash used in operating activities was $1.7 million, compared with net cash provided by operating activities of $25.7 million in Q1 2013. 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, share repurchases and strategic acquisitions. In October 2013, we refinanced our long-term Korean borrowings. We used KRW 76.1 billion of this new borrowing and KRW 16.3 billion of our surplus Korean cash reserves to repay the old facility. Our new 5-year facility removes KSNET as a locked in party, provides a KRW 10 billion revolving facility, which can be used to pay interest due, includes an interest rate that is 100 basis points lower than the old facility, eliminates certain KSNET-specific financial covenants and reduces the security provided to the lenders. We expect to pay arrangement upfront and other costs of approximately $1 million in Q2 2014. In addition, we have historically used our South African cash reserves to pay principal and interest due under the old facility, and this attracted dividend withholding taxes. The extended payment terms under our new facility greatly reduces our use of South African cash reserves over the next 12 to 24 months as we should be able to service our commitments utilizing our Korean generated cash reserves. Our effective tax rate for each of Q1 2014 and 2013 was 36%, and was higher than the South African statutory rate as a result of nondeductible expenses, including interest expense related to our long-term Korean borrowings and stock-based compensation charges. Our tax rate will fluctuate depending on our intention regarding undistributed South African earnings and the timing of any payments, and we continue to expect our effective rate for 2014 to be around 40%. Serge has already discussed our new BEE transaction. The financial impact of this deal will be primarily on our interest income and share count for the calculation of earnings and fundamental earnings per share. Please note, however, that the actual accounting treatment of this transaction will only be finalized once a definitive agreement is concluded. Our fully-diluted weighted share count for Q1 2014 was 45.8 million shares and our expected fully-diluted weighted share count, following the implementation of the BEE deal, is 46.2 million shares for Q2 2014 and 50.1 million shares for Q3 and Q4 2014. And therefore, a fiscal 2014 full year weighted average of approximately 48 million shares. Taking into account the solid base provided by the Q1 results and our anticipated issuance of 4.4 million shares as part of our proposed BEE transaction, we continue to expect fundamental earnings per share for fiscal 2014 of at least $1.50, assuming a constant currency base of ZAR 8.71 to USD 1. The share count assumption in our guidance represents our fiscal 2013 weighted average share count of approximately 45.7 million shares, plus approximately 2.5 million weighted average number of shares related to the proposed BEE transaction. With that, we will gladly take your questions.

[Operator Instructions] Our first question comes from David Koning of Baird. David J. Koning - Robert W. Baird & Co. Incorporated, Research Division: I guess my first question is just, the core South African business is doing outstanding now, growing 24% constant currency off of a tough comparison. I mean, I guess, is the SASSA revenue flattish year-over-year? I know by last year already you had most of the recipients on. And I'm just wondering, if that part is just stable year-over-year, it means of the rest of that business is probably growing 50%. And so, I'm just wondering, maybe you can kind of disaggregate how the SASSA business is doing, how the rest of the businesses are doing. And then I guess the second part of it all is, you said there was a margin dilutive impact from some of the mobile ramp, yet the margins were extremely strong. And maybe you can just talk about how margins kind of go from here too.

All right. Let me kick off, and then Herman will get into the detail. I think we had mentioned long time until -- well, long time ago that our fundamental strategy was to obviously, with the SASSA contract, to be able to create an infrastructure that was going to deliver to us approximately 10 million clients. And on top of that, of course, we could then build around that 10 million client base by utilizing the same infrastructure. In other words, at very little cost to actually perhaps attract another couple of million clients that were more financially, for lack of a better word, financially active. Now the next step has been done. The plan was, of course, not to rely long-term in terms of the growth of the SASSA contract, because we knew that over the next 5 years, the SASSA contract was going to remain flattish for 2 reasons. One, we knew that the price was going to remain the same. And two, we knew that the expenses were going to go up because we have to keep on giving salary increases to our people on a yearly basis. So we knew that, that might be offset by new customers coming into SASSA, but we assumed that, that would remain neutral over time. So the growth of the business was never built on growing the SASSA revenue, it was built on growing the product range around, first and foremost, the SASSA customer base. And two, the new customers that we're going to be able to drain our, for lack of a better word, our businesses, and simply because we were now in areas where there was no service available. And this is what we've started to see in, I think, the end of the last quarter and the beginning of -- and definitely this quarter, whereby our financial services, primarily, have grown exponentially, and you are quite right that, that, of course, shows a much greater growth than simply 24%. Our new mobile service candidly has surpassed any of our expectation because we were not expecting to pick up that number of clients, we're talking about millions of clients in the 3 to 4 months period. And our new services that we have just launched only 2 weeks ago already have reflected another 350,000 or 400,000 new clients that are generating massive amounts of transactions. So that's where we are seeing as the real growth of the business is what I call the complementary or supplementary products that we can build on top of the infrastructure that we have built, that we can now start utilizing at marginal costs, and of course, to utilize that same infrastructure to service the 10 million clients we have, and at the same time, to start delivering products to new clients. I think, Herman, if you want to add a little bit more to that.

Yes. And, Dave, I think from -- analyzing from margins in the business, there are couple of factors that have contributed to the solid base that we've seen in Q1. One of them of course is that we've seen a continued trend of our cardholders in terms of them also utilizing a broader base of channels to access their grants, so some of them utilized the ATM network on an increasing basis now. A lot of them utilized the merchant acquiring network that we have in place, to access their grants, and of course, that results in additional revenues to us in accordance with the interchange fees as they have been set by the national payment system. On the other end, we've also got the impact of the mobile airtime transactions, where it's different kettle of fish in terms of the volume, which, obviously, is quite high. The accounting treatment for the prepaid airtime sales obviously takes the full voucher value into account as revenue. The profit effectively is the margin that we make from the operators through the distribution of the airtime. And of course, because we're using a very efficient channel in the distribution of the airtime being through mobile, rather than the traditional sort of fixed infrastructure-based models, the margin on our airtime sale product is also much better than it would be if we looked at what's traditionally happened, for example, in EasyPay, where that distribution has been the traditional way. So overall, I think that's really set the basis for the solid increase in the margins. Of course, if we look at what happened in the past year, and whether we do the comparison sequentially, or if we look at Q1 last year compared to Q1 this year, there were obviously a number of expenses related to the implementation, and we know what those were. We strip them out. But I think as the implementation is now largely complete, there are a number of costs that were, maybe, not direct implementation costs, but resulted in indirect implementation costs, and those relates around the management of 8,500 people that we had at 1 stage in time. The head office logistics that we had over -- the hiring of infrastructure, et cetera. We had direct costs, we also had indirect costs, simply because of the management that was involved, and I think what we've now managed to do over the last 2 quarters is to make sure that we've removed all of the cost elements associated with the initial implementation, and that we're now getting back to really running that side of the business as lean as we possibly can. And we hope obviously for that trend to continue going forward. We would have -- we're going to have to ensure that we continue along this trend to make sure that the increased expenses, those are largely inflationary, both from a staff cost perspective as well as from the other suppliers that we utilize, as we need to contra the impact of the inflationary increases on the expenses, we obviously going to have to make sure that we improve the efficiencies of that business, and I think we have the right team to be able to do that. David J. Koning - Robert W. Baird & Co. Incorporated, Research Division: Great. And if I might just add 1 other question. You've talked about a lot of good opportunities. Is there anything today that's small, that, that could be 10% of revenue in a year? In the 3 places that I can see that this mobile offering that you're talking about seems like it could potentially be one, maybe the financial services business if you keep lending out more money, and maybe a new client out there. I'm just wondering if any of those 3 buckets could just all of a sudden go from very small today to being 10% of revenue in a year?

I think it's -- obviously, it's an excellent question. And there's 2 -- again, from a strategic point of view, there's 2 things that I'm trying to drive here. One, either we have to capitalize on what we've done in the base, and you are quite right, there are some opportunities in that field alone that can become, if not an equal to the current revenue we get from CPS, certainly can actually climb up to be at least as good as a 50% to 60% of the actual revenue that we make out of CPS today. And financial services is obviously one of them, and there's no doubt that mobile is another one. So I think you've identified those 2. However, those 2 are very much related and associated with one, the SASSA tender, and two, the infrastructure that goes with it. Part of our strategy is obviously to diversify that risk. We are -- we believe that there will be 2 other areas of business that we really believe must and should grow outside of the South African context. One, we talked about before, which is our Association with MasterCard and the potential of that association. And it's too early to say, but so far, I'm almost getting excited about some of what I've heard through my business development team, simply because it's starting to take quite a bit of their time, for lack of a better word, and I'm starting to get involved in terms of looking at contracts and looking at agreements and looking at fee structures, which means -- and looking at the size of these opportunities. And the size of this opportunity is, in my view, gigantic, it's multiple times that of the size of 10 million cards of SASSA. So that, to me, is something that we are putting on the forefront, and that we want to drive to see if, in fact, we can turn it into, let's call it, another SASSA card business, but not based in South Africa. The second one, of course is, is still very much something that we strongly believe in, and that's our Virtual Card, which people are talking about, and we have yet to deliver something, in my view, which is really exciting. But I think we are close to showing that this is in fact a great product, and this is a product that can scale once it's going very, very quickly. It can make a substantial amount of money with very little debt or investment. So that's really the plan. It's 2 major products outside of the South African context that can size outside of KSNET to the size of a SASSA. And of course, the doubling of the SASSA scale in South Africa itself through mobile, and of course, financial services. So to me, I see the future of the company, in my view, in any case, to be extremely exciting, both locally, specifically now that we've done or almost finished the BEE deal, but also, internationally, which I think is even more important, simply because we all know that otherwise the risk is too centralized to South Africa and to SASSA itself.

And Dave, if I can add to that. Obviously, from our perspective, adding a product rapidly, an extra product or a business that equals 10% of revenue, as we expect it to be for the full year, is one matter. It's probably easier for us to add a product line or a business that will be an extra 10% of operating profit, because 10% of the smaller number is a smaller number. But I think that's probably also the way we need to look at this. That some of the opportunities that we are pursuing, the focus is obviously for us to maximize the margins on those business. Although they may be small in terms of the transaction values, which means that we would need enormous volumes for it to make a big impact on the top line, we certainly think that a lot of the businesses that we are working on at the moment, including the ones that you identified, specifically the financial services and the airtime product, that those can rapidly contribute in excess of 10% of the operating margin of the business as it stands at the moment.

Our next question comes from Kevin Tracey of Oberon Asset Management.

I wanted to ask a few about the financial services business. And I guess the first being is, here, we have read a number of things that have described behavior that seems to be quite aggressive among both lenders and borrowers in South Africa, including things like falsifying information on account applications and so on. And this has all led to quite quick unsecured lending growth in South Africa, and the situation sounds a lot -- sounds familiar to what we experienced here in the years that led up to our financial crisis. And I guess I'm just curious if you could talk a little bit about your procedures to manage credit risk, and how UEPS will prevent the losses that we have seen at places like African bank and other unsecured lenders in South Africa?

Once again, that's obviously an excellent question. Again, our philosophy on loans, specifically to the poorer population, is not quite the same as I think a lot of what we refer to here as micro lenders. We not -- we don't believe that if possible poorer people should actually have loaned at all, simply because they probably can't afford them. But we've also realized that it is unfortunately a matter of survival for many of them to actually have loans. So it's one of these battles to actually say, well how do we go about ensuring that the people that really need loans, and let's put in inverted commas, for the right reasons, can have access to these loans and can have access to a loan, whereby they will be able to number one, of course, afford it, and on the other side, do not create a very, very large risk to the company that is actually affording them the loan. Otherwise, as you know yourself, the price would definitely go up if your bad debt ratio is 30% or 40% or 50% like a lot of micro lenders in South Africa today. So what do we do? Well, the first thing we do is that our loans are managed very differently to anyone else, because it is the computer that actually grants loans and not a person, that's a very, very important criteria. So the computer decides if you are qualified for a particular loan, and over what period do you qualify to repay that particular loan in terms of affordability. And we have access to the correct databases to find out if a person can afford it or not. Of course, we also know categorically who took out the loan, because the system is 100% biometrically driven. In other words, not only do we know that the particular person actually did enter into the loan agreement because we have a fingerprint to actually prove it, unlike many other systems in South Africa whereby it is based on the card and pin, which means anybody could have come and actually taken out the loan. Or sometimes it's based on the signature, which for people that can't write becomes a little bit meaningless. So once we've tried to secure the entry point, not only from the person taking out the loan, but also for the person that is giving out the loan. So we have complete evidence of who took out the loans and who gave the loan in order to ensure the people giving out the loans are also correctly registered, correctly trained and are actually providing, if any advice -- are providing advice under the laws and regulations of South Africa. So that's number one. Number two, the system then does all of the work that is necessary to actually say, who is this person, what is their regular income, how much do they spend on a month-to-month basis, which -- and a lot of these information, of course, we have through simply transaction systems. And of course, we also go and check through the other credit bureaus to actually find out if those people have other loans from other people, and of course, through our banking system we also know if these particular people have debit orders that are coming from a third party. So we can package and we can look at an individual probably better than any single organization can. And therefore, not only make sure we don't give a loan to somebody that cannot afford it, but also make sure that by doing that we're minimizing the sort of bad risk or bad debt that we're going to have, which, at the moment, by the way, is lower than 3% in our particular book, which is quite amazing compared to the 30s and the 40. And the last thing we do, which I think is also very important, is that we tend to identify or try to identify what the purpose of the loan is. Lots of people could say, well, it's really got nothing to do with you. But if that's case, we say, well, if it has got nothing to do with us, then we're not going to give you a loan. So we want to know what you want to do with the loan. If the loan is, for example, for medical expenses, if it is for education, if it is for Christmas, sort of presents at the end of the year, if it is for transportation, then we tend to give these loans not directly to the person that is requesting it, but we tend to go out and pay the people from which they're going to be buying the goods or services, being it the doctor, the pharmacy, the store that sells the books or whatever the case might be. By doing that, we know that the loan is actually being applied for the purpose that was presented; very, very important, because if it is presented for the right target at the right organizations, we, then, can negotiate and do negotiate substantial discounts with those suppliers, which we can pass on, of course, to our loan -- the clients that are actually requesting the loan. And that allows us to actually bring down initiation cost, as well as rates of -- the rates for the loan itself. So by putting all of that together and changing the way that we manage loans, the way that we allow people to enter or exit, the lengths of a particular loan, which is never longer than 6 months, by the way, the size of the loan, which is obviously based on how much they earn, what is their track record, and of course, how they can spend the money, we found that we are providing a service, which is incredibly necessary for a large portion of the South African population, specifically the poorer people, but at the same time, almost eliminate the risk of a bad debt book. So that's the way we've done it. At the moment, the proof of the pudding is, is that it appears to be working according to expectations, and we don't see that changing in the near term.

Okay. I guess I'm surprised to hear the number of less than 3% of bad, I guess, bad debt. It seems to be from the outside looking is, it seems like it would be quite risky lending. And I guess outside of all those explanations you've gave, is there anything that positions you uniquely and that you're distributing these social grant payments that you can allow the user to -- or allow the borrower to apply those grant payments to payoff the loan, and that contributes at all to the, I guess, much lower bad debt ratio that you have compared to some of these other unsecured lenders?

It could be wonderful if we could be in that position. But that could be -- but that is a position we are not in. We are no different in terms of being able to make a deduction or to effect a debit order on behalf of a particular person, compared to anyone else in the actual market. I think it's purely because, one, we have -- I believe we have customer confidence, which I think is very important. I think we have a track record. I think the customers know that we are obviously cheaper than the majority of our competitors. And I think we focus our loans for the right reason. And on our side, we're probably limiting our market by targeting certain people, like I've mentioned. But to be totally honest, we're not really that interested in giving out loans to the general public at large, simply because they want one, depending on they must just decide to go out and do something that in fact, maybe, they should not be doing with it. So we're very, very -- we've narrowed that market down for ourselves in order to be, I believe, helpful, from a social point of view to the poorest, but at the same time, to limit the risks that we will have on our side, and thus, being able to offer a much, much cheaper product than anyone else.

Okay. Understood. And then is there any, I guess, target or expectation about how much capital you plan to put into this business? I think the number was $17 million or so in the balance sheet at the end of September?

I know that Herman can answer the question because we had an audit committee meeting for a couple of hours talking about this. And to be quite honest, we're very excited about the fact that the loan book can grow. But obviously, it is to grow and become something very specific within the organization, and not something that we might have to just separate it from the rest of what we're currently doing. But, Herman, maybe you can qualify that.

Yes. For us, the maximum cap, obviously, will be determined by a number of factors. Firstly, you have to determine at what point do we see a saturation point. We've only really commenced offering this product on a national basis over the last couple of months. So I believe we're still in the firm growth phase, but I think given another couple of quarters, we will see where the demand kind of levels out. In doing so, we're obviously keeping a very close eye on the group's liquidity reserves, and what we have available, both from a cash point of view, as well as our prearranged facilities. And there are specific figures that have been put in place to ensure that we don't fool -- foul off any of our self-imposed sort of limits. And once we get to those limits obviously, on the 1 end, it will be quite a nice problem to have when we get to the point where we need more capital than what we have available to fund this specific business. But again, we already have a specific set of plans where we would be able to house this sort of a special-purpose vehicle and arrange a dedicated line of funding for this specific line of business. And I think again, from our perspective, it should be relatively simple or much simpler to do than most of the other South African lenders who have increasingly gone to longer period loans. So if you look at the big lenders, many of them started out giving 12 month loans as an example, and today the average loan period is 50 or 60 months. We are simply not in that business. Our maximum term of a loan is 6 months. The amount of money that we lend out is really very small in comparison to what other lenders are providing. And so, for us to prove the annuation of our loans and the repayment record on those loans will be a relatively simple exercise. And I think to convince any prospective funder, should we get to that point, will be relatively simple exercise, and hopefully, we'll be able to get that funding at very competitive rates.

Okay. Great. And if I could just have one quick clarification, and I'll pass it on.

Kevin, this Dhruv. Can I just ask you to get back in queue so that we can receive the other questions.

Our next question comes from Russell [indiscernible] of [indiscernible] Holdings.

So the question, I kind like to, or the topic I'd like to get a little bit more into is the VCC. If you could provide a little color update on progress with the largest mobile phone maker in the VCC? And then secondly, if you elaborate a little bit on the VCC opportunities you've discussed in the past in the U.S. and in Africa. In some of that, I think you've noted a couple of different initiatives you have going in the U.S. and Africa with the VCC.

Yes. Excellent. The VCC product, as you know, is not new. We've been trying to find the right formula for the last 2.5 years, more or less. And obviously, it involves, or at least we kicked off, as you know, playing a little bit with the operators, thinking that, that would be the right -- the mobile operators, thinking that this could be the right approach. Unfortunately, I think they want to take everything and didn't leave too much for us on the table. On top of it, of course, as you know, need a bank, which underwrites the -- actually, let's call it a brand, being it a Visa, MasterCard or Chinese UnionPay brand. So we experimented with a few of those models, and we really found that one, we actually don't need the operator at all, and that we can probably get away by being 1 bank that allows us to issue cards -- virtual cards internationally. And we have that bank already in the U.S. that we had entered into an agreement with couple years back with our MetroPCS. So we believe that now the model is probably correct. Now it's all a question of funding the methodology of actually marketing this particular product without spending billions of -- billions and billions of rands or dollars for that matter. And in order to do that, the best is actually to do it through partnership with different entities. Once again, the mobile operators come back into the game, because they're not -- they are interested in actually assisting us to market it. As long as now we do all of the work, we take all of the risk and they just pick up a piece of the action. And that's not necessary a bad model, and we know that we have a player in Africa that is currently in a very advanced discussion with 14 different countries. And the 14 different operators in these countries that are all very, very keen on launching of EasyPay, with probably about a 40% share in the actual product. We're quite happy with the other 60, because the work, the marketing, which is really the cost, would be done by them, and we would simply basically provide the underlying license -- banking license, as well as the technology. So we still -- and I love on the next quarter to be able to tell you a bit more, but I would rather tell you once it's done rather than to tell you about it now. We love to be able and actually to tell you that we've achieved that, and we've managed actually launch this thing that can scale not to a few hundred people, but a few million people that is throughout Africa. We've also got a similar project in the U.S., which I think is closer to launching because that has been signed, rather than renegotiating. There the negotiations are over; the contracts has been signed, the technology been tested and we final queue at the moment, and we're hoping to -- I think it's in the next -- launching in the next right couple of weeks. So in the next couple of weeks, you should hear about it, and we'll certainly make a certain specific announcement on that. Again, the customer base is not huge, we're talking around 3 million, 4 million people. But 3 million or 4 million people for us, I've always used the simple formula to say it's $1 a month. So even if we don't get the 4 million and we get 1 million, that's $1 million a month for us, and certainly, would be a fantastic kickoff to a VCC, which obviously somebody in the U.S. has now looked at and decided what's the solution for their problem. Once that is done, and this I think the trick here, once we've got that on record and people are seeing the simplicity of this product, the security of this product, and the fact that people like it, and they're going to like it for a specific reason initially, of course they will then start using it for any other purpose, and hopefully, it will become a little bit like our mobile solution in South Africa, which really my people tell me has gone viral. So if we can get that going with VCC, then I think it will become a world beater as a single product on its own. So that's where we are. I'm sorry, I can't tell you much more than that.

Okay. Obviously that was very helpful. If I can go on to another topic, with XeoHealth in the U.S. If you could just outline the prospects there, and if you can think health care reform in the U.S. plays into XeoHealth's favor.

XeoHealth is a strange animal. As you know, what we've determined is that the big advantage of XeoHealth is twofold, depending which country you're in. The main one, is that they can do real-time, for lack of a better word, analysis and authorizations of claims, according to certain rules as given by the health providers. That's something funnily enough that we understand in the U.S. does not exist. That's all done in a bench mode, it's actually fairly archaic by what I understand. However, to penetrate the U.S. market, one mustn't fool themselves, we might be, for lack of a better word, the big fish in South Africa. But we're nobody in the United States, and that's something we need to understand. So what we've been trying to do is to find a local partner that has got credibility, reputation, the right context, track record, and of course, money, to be able to funding such an initiative. And at the moment, we have not identified that animal yet. So after what you've heard, we've made at this point in time a decision that we are trying -- we are now going to focus and invest our money in the products and the projects that we know we can grow and we can control. We are not going to continue to spend millions of dollars in other projects, which are really non-core to some extent, although show great opportunities, but non-core. So we might actually offload, in fact, MediKredit as a total project, and simply provide technology or the technological solutions that we believe we can provide to somebody that is in healthcare, rather than someone that is in transaction processing, which is us, and is getting into healthcare. Healthcare is a very complex, very, very complex business, for lack of a better word. And I think, unless we have somebody that is in that game to bite into it, I think we're going to be throwing a lot of money in this thing for a long period of time, and actually achieve nothing at all. So the plan is to, as I said, you find the right partner, provide technology, and let them actually grow the healthcare portion of it. South Africa is a bit different, because South Africa, as you know, plays such a thing such as a national health initiative, or which they want to provide for all South Africans. We already have 21.5 million of these South African registered on our system, and all of them, funnily enough, fall under the NHR program. Now if we could provide the South African government with an engine that allows them to actually do claim management, claim verification, online realtime according to their rules, then you can -- I'm sure you can easily jump to the conclusion that, that would be probably the cheapest way for them to actually kick off national healthCare in South Africa, without having to pay the existing players that, in fact, are making money out of processing claims, rather than actually providing medical aid services or more. So that's where we are at the moment. But once again, I think we've made the call that we are going to focus on our core business. We are good at it, we think. We've made great strides in it. We see huge potential in it, and we're going to stick to that and allow other players to actually drive healthcare, for lack of a better word, because they understand it better than we do and we'll simply sit behind them, and provide them with the technological breakthroughs we've made.

Can I just add one quick follow-up. What's the progress against AllPay at this moment, the lawsuit against AllPay in South Africa?

All right. That's -- unfortunately we can't say much more. It's with the Constitutional Court. We are expecting to announce it, if it's what you're looking at. That's on the one end. Hopefully, they'll come back to us quickly. And as you know, we also filed the lawsuit ourselves against AllPay and the number that we are going to be claiming gets bigger and bigger, and we're hoping with a good constitutional proposition, and of course, the finalization of our own 34A investigation in South Africa, whereby we ask for the police to investigate why we were being investigated, and for what reason. We hope that the conclusion of those 2 things will certainly give us the ammunition that we require for a judge in South Africa to actually say, yes, it sounds like if somebody was going offside and need to pay us a little bit of -- in terms of damages.

Our final question comes from Timothy Wojs of Baird. Timothy Wojs - Robert W. Baird & Co. Incorporated, Research Division: I just had a couple of modeling questions. I just want a couple of clarifications. I guess, first on the international business, did you say there was $1 million nonrecurring gain in that line, and I just want to clarify that, that was what I heard?

Tim, that's correct. There was a -- as we're winding up in search of some of the more, sort of unprofitable businesses, we've been terminating certain contracts. And as a result of that, there was a $1 million inflow in Q1, which is probably of a one-off nature. So certainly, modeling that going forward, I would not include that going forward for the rest of fiscal 2014. Timothy Wojs - Robert W. Baird & Co. Incorporated, Research Division: Okay. That makes sense. And then I guess just on the debt charges. Are those going to be -- I think you have mentioned about $1 million of refinancing cost in Q2. Is that going to be in fundamental EPS or are you guys going to back that out?

Well, we normally back that out of fundamental earnings per share. Timothy Wojs - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then just on free cash flow. Historically, you guys have talked about free cash flow maybe being in line with fundamental EPS, and just curious on an update there, and then as you look at the cash balance, how should we think about that going forward as you grow the lending book, but then also as you fund the BEE transaction?

So on the free cash flow, approximating fundamental EPS, that obviously works in an environment where there isn't a business that grows exponentially from one quarter to the next, and consumes a lot of the cash. So if we exclude the impact of the growth in our lending book, I think that free cash flow will still approximate to fundamental earnings per share basis. The very nature of the lending book that we have, because that it's fairly short-term, is that it will become self-funding at some period in time, which hopefully won't be many years from now. Certainly, I would hope that in the next 12 to 48 months, the book becomes self funding. But I think that's important to keep in mind. And in terms of further uses of cash, of course, we'll have to be quite judgmental, it's not the right word, but we'll have to assess all the opportunities that come our way in terms of the use of the surplus cash. From the BEE deal perspective, I think it's important to note that the net results of funding the BEE deal is that there is no cash outflow from the group. So we have a subsidiary company in South Africa that's providing the loan to the BEEs, also gets the repayment on that specific loan, but there's no cash outflow or any impact on the group's cash position by providing the loan to our BEE partners.

Thank you, ladies and gentlemen. On behalf of Net1 UEPS, that concludes this conference. Thank you for joining us. You may now disconnect your lines.