Lesaka Technologies, Inc. (LSAK) Q1 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Net 1 UEPS First Quarter 2015 Earnings. [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, Devon. Welcome to our First Quarter 2015 Earnings Call. With me on the call today are Dr. Serge Belamant, Chairman and CEO; and Herman Kotze, our CFO. Both our press release and Form 10-Q are available on our website, www.net1.com. As a reminder, during this call, we will be making forward-looking statements, and I ask you to look at the cautionary language contained in our press release and Form 10-Q regarding the risks and uncertainties associated with forward-looking statements. In addition, during this call, we will be using certain non-GAAP financial measures, and we have provided a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures. We will discuss our results in South African rand, which is a non-GAAP measure. We analyze our results of operations in our 10-Q and our press release in rand to assist investors in understanding the underlying trends of our business. As you know, the company's results can be significantly affected by currency fluctuations between the dollar and the rand. With that, let me turn the call over to Serge.

Thank you very much, Dhruv, and good morning to all of our shareholders. Our first quarter results will speak for themselves. $0.60 in fundamental earnings per share, which translates into a 74% growth in rand terms or 62% growth in dollar terms when compared to our first quarter 2014. Our businesses are currently firing on all cylinders, and the new opportunities we have created over the last few years are now bearing fruit. Today, Herman will provide the details of our financial performance, whilst I concentrate on 3 major issues. The first is our growth strategy going forward, the second is the new SASSA request for proposal, and the third is an update on our growing businesses. Firstly, let me point out that our strategy has always been conservative. We first and foremost focus on ensuring that the company can survive any potential disastrous event. Our risk factors certainly spell out what some of these calamitous events could be, and it is my job as Chairman of the group to guard against these eventualities if they, in fact, came. I make the statement not as a way of the warning that those calamitous events will occur but rather to give you, all, an insight in how we grow our business and make plans for the future and in response to the many questions we have received from our stakeholders. Our strategy has always comprised of both offensive and defensive components. Offense is always easier because it's clear[ph]and fresh. And realistically, the new initiatives do not work are certainly not disastrous for the company. Our offense strategy is based on creating new opportunities in different market segments in which we currently operate, thus minimizing the risks associated with single-trend business models with a limited number of customers. More importantly, we wish to ensure that [indiscernible] certain of our product reach the end of the line. In other words, reach a level of maturity whereby the growth becomes limited because of market saturation or other market boundaries such as price. But then we have new innovative products to replace them, thus creating a continuous wave of products without jeopardizing the customer base we have created over time. These new products have to be more technologically astute, quicker to develop, faster to scale and financially more attractive as it is our view that in the long term, it is volume that will drive profitability rather than either -- higher margins but with limited focused solutions. Technological innovation continuously accelerates, but it is clear that the winners are those who can continue to drive an advantage from the credibility they have earned with their customers over time, rather than complete newcomers. This is where our track record will play a huge part in our future success as the ability to deliver functional and industrial-strength solutions becomes more and more critical to any business or government venture or requirement. Our defensive strategy is far more complex, and it is based on preventing the loss of our business lines, the loss of our customers and to inhibit the moves of our competitors. This is far more difficult to achieve. For example, we made a play a few years back of financially backing a small micro-financier. This was a risky move. The reason for us to take such a risk was that the micro-financier was in the process of applying for a banking lawsuit in South Africa, a very difficult initiative to achieve successfully. Many of our business line requires a bank to operate optimally and not to be intermediated, including our SASSA business. Although we had an agreement with Grindrod Bank, we felt that it would be prudent to create a backup in which we could have our greatest stay -- say. Our investment in Fincoff [ph] paid off because the banking lawsuit was granted. And as a result of our initial decision, we now own 25% of this growing and listed financial group. Such a group can become a further uplift to our payment technological solutions, thus ensuring further market penetration in addition to our SASSA customer base. We often reinvent ourselves and, in a way, become our own competitors. This can be seen when analyzing our EasyPay numbers where airtime and activity sales, to some extent, move up to our mobile channel. This has resulted in higher sales and increases in margins that could not have been achieved by the old delivery channel. We will continue to enter into partnerships with competitors whenever we believe that the smaller part of the whole is likely to be more lucrative than the larger piece of the part thereof. Such partnerships often accelerate the scaling that is a key to capturing the market before anyone else can do so. There can be no doubt that as a result of our strategy, the company has once again delivered exceptional results. Although the company is clearly firing on all cylinders, its sustained good performances do not reflect in its share price. This mismatch continues to be instrumental to the growth in shareholders' value. The management of the company has attempted to rationalize the reasons behind this misalignment and is currently finalizing proposal that was submitted to the board for approval in the very near future to attempt to rectify this unfortunate abnormality. There is no doubt that the SASSA contract to distribute welfare grants to more than 10 million South Africans has been at the core of the share price volatility and improved performance. This is due primarily to the incessant needs that exist regarding this contract, it's longevity, ongoing profitability and a continuous legal battle that resulted from this award. 2012, Net1 won this contract for a term of 5 years because the company could deliver the most advanced technological solution available in the world. After spending in excess of $100 million to create a national infrastructure that was successfully used to capture and to impart visitor information among the 21.5 million South African visitors, the company focused its attention on cutting costs and the creation of new income stream, such as the provision of financial solutions to millions of South African citizens. The company once again succeeded admirably in both of these areas, as demonstrated by our 2013 and '14 annual results and then, of course, of Q1 of 2014, 2013. These ongoing good results have resulted in a share price appreciation that's unfortunately very short-lived. [indiscernible] to profit and exited the stock. This could possibly be explained at some point in time, but the other hand, created by return of G8 stock. But all of this is no longer a factor as stock has not been re-rated in any meaningful performance-related way. The reasons are thus far deeper rooted. The DOJ investigation into Net1 in December of 2012 created a collection of stock, and such collect became an opportunity for certain larger institutions that appreciated the fundamental value of the company's business plan and the diversification potential of our business units. This resulted in millions of shares being bought at a very low value, creating the potential for a substantial overhang over time. It appears that the majority of our stock would have to churn before one could expect a sustainable re-rating and stock value appreciation. To make things worse, SASSA has now issued a new RFP, and thus, greater uncertainty lingers over the future performance of the company going forward, specifically for those income streams that are directly dependent on this government business. More re-rating event is likely to take place for a substantial amount of time as the SASSA tender may not be adjudicated or awarded for a lengthy period of time. It must be noted that SASSA has made its intention clear that it wishes to take over the payment function as soon as possible or certainly by April of 2017. Management is part of this offensive and defensive strategy and, over time, grows a number of businesses that our government independent. These businesses are not also African-based in order to guard against taxing- and currency-related risks and that mature to the extent that they now form a substantial portion of the company's EBITDA. These businesses incorporate EasyPay, KSNET, SmartSwitch, Namibia and Botswana, FIHRST, crypto solutions, VVC card solutions, VTU and, of course, a range of both our related applications. These businesses are driven by technology, can operate in both developing and developed regions and can scale extremely rapidly under the right management focus. These businesses should be driving much higher price multiple than reflected in our current share price. But because they are part and parcel of Net1, they are relegated to the overall low Net1 earnings multiple. Management believes that this income can be solved in the short to medium term, and more on the subject will be disclosed as soon as possible. Management will continue to focus on creating and growing shareholders' value. I will now make a few remarks on the SASSA tender for the request for proposal that it is called. As we have disclosed, a new RFP was issued, and bidders are required by December 12 to submit their proposals. No information regarding the content of the RFP or any that is associated information can be released by bidders without the express permission of SASSA. Although we have asked for this permission as we are both a U.S. and RSA-listed entity, such permission has not yet been granted by SASSA. Suffice it to say we will be submitting a bid as we believe that our solutions is robust, convenient as well as cost-effective that's been published with SASSA, it said billions of rands and continues to do so as a result of our technological products and of the rational management and abilities. There is no doubt that our response to the RFP would have to be more aggressive in terms of both prices and functionality, but we feel confident that we will continue to play a significant role in this critical government initiative. Management has created a war room in order to respond to this new RFP and hope that our lateral solutions will be well received by SASSA during the evaluation and adjudication processes. You will have noted from our financials that a number of our businesses continue to perform admirably. The first is KSNET that has had a very good quarter as a result of its management strategy to address the needs of smaller merchants rather than to focus entirely on large retail chains that command a huge discount for their transaction in return for the transaction volume. In fact, the smaller merchants can create the same volume of transactions as a chain store but are not individually as demanding as the large retailers and, by definition, remove the concentration risk inherent in larger-capital ones. We are of the view that this trend will continue as we have positioned ourselves as a major player in this underserved market segment. The second is our Financial Services business that incorporates micro loans as well as life insurance products. This business goes from strength to strength based on the facts that we offer the most affordable products available in the market. We have shied away from long-term and larger-amount loan as our goal remains to provide financial assistance to the poorest of the poor but only for specific and focused reasons such as food, medical expenses, educational requirements, clothing, nutrition, electricity, communication and other critical products that the most vulnerable require to survive or improve their lives or better their children. Microfinance has been under attack from many NGOs as, at first glance, it seems unjust or unethical to grant a loan to a person that is indigent. We agree with this social responsibility and moral conundrum, and as such, we will continue to ensure that our loan products are focused on alleviating poverty rather than to fuel it. We understand, however, that the most indigent and vulnerable will, at some point in time, require some sort of financial assistance in order to simply survive, put food on the table, allow their children to study or take an elder to receive medical attention. It is a difficult path we have to walk on, but the company's vision has not changed over the last 20 years, and that is to provide a full range of financial, socially responsible financial services to all, regardless of their social or economic circumstances. The third business unit that is growing exponentially is our mobile division. This is a set of assets such as our SIM licensing and production business, our virtual top-up or VTU product and, of course, our mobile solutions branded as Umoya Manje in South Africa, Pasavute in Malawi or VCpay elsewhere in the world. I'm pleased to say that we have now reached the 6th million mobile plan in South Africa alone. These plans utilize our prepaid products, such as airtime and electricity, as well as our banking products, such as my account, my loan and my deductions. We continue to sign up in excess of 95,000 new customers a month, distributed as follows: airtime usage, around 40%; electricity, 25% and growing faster; and banking services, 35% and growing at an incredible rate. In Malawi, for example, our advanced airtime product is going from strength to strength, where [indiscernible] 14 million vouchers this quarter, a 51% increase on last quarter. Since the commencement of this business 6 months ago, more than 1.7 billion [indiscernible] of prepaid electricity and prepaid air card has been sold in our system. The ARPU for this product has now reached the $1 mark per user per month. In Algeria, we have recently signed an SLA for the creation and distribution of prepaid electricity vouchers as well as advanced data. This is made possibly due to the versatility of our VTU product, which is utilized extensively in Africa. Filling electricity lack [ph] through vouchers is a breakthrough, which indicates the willingness of large institutions to use our services to provide a myriad of financial services that are not of their own making, such as, for example, airtime. Recognizing the size of the Nigerian population, we believe that this breakthrough will then fuel our African mobile initiatives. Our SIM licensing businesses continues to outperform the business objectives we have set. We are now the leading provider of SIM licenses in the Philippines. We have grown by more than 56% from last year and are now supplying our SIMs to a number of card manufacturers and [indiscernible] throughout the world. Finally, earlier today, we announced the launch of our VCpay product in India under the brand name Smartpay. We are excited of this breakthrough as this product is integrated [ph], it can address the massive Indian online payment market that has been estimated to reach more than USD 30 billion by 2016, but its current position is approximately USD 13 billion. The opportunity for VCpay continues to create business to us, and we are currently working on numerous proposals, some of which will then likely become a reality. To ensure that our international expansion is accelerated, we have incorporated a Net1 subsidiary in the United Kingdom and are relocating some of our executives to London to kickstart and drive the business with voracity. . To conclude, we expect the company to continue to perform but, more importantly, to arrive at a solution that will ensure that shareholders' value is realized. We have been able to grow our top and bottom line but, unfortunately, not a straight line. And we now intend to find solutions that will rectify this unfortunate misalignment. Thank you very much for your time today, and Herman, over to you.

Thank you, Serge. I will discuss the key results and trends within our operating segments for the first quarter of 2015 compared to a year ago. For Q1 of 2015, our average rand dollar exchange rate was ZAR 10.76 compared to ZAR 10 a year ago, which negatively impacted our U.S. dollar-based results by approximately 7%. The U.S. dollar, which is our reporting currency, is currently enjoying a period of strength against all major currencies due to ongoing global economic and political uncertainties, while the rand is one of the world's more volatile currencies and has been adversely affected due to South Africa-specific risks. The rand is currently trading at around ZAR 11.25 to the dollar, and the stronger dollar will have a detrimental impact on our overall fiscal 2015 results. We have led a solid foundation for what is promising to be a very eventful year. We have continued to sustain our top and bottom line growth during Q1 2015. On a consolidated basis, for the first quarter of 2015, we reported revenue of $156.4 million, an increase of 36% in constant currency. We reported fundamental earnings per share of USD 0.60, which grew by 74% in rand compared to a year ago. Our fully diluted weighted share count for Q1 was 47.3 million shares and partially reflected the positive impact of our repurchase of 1.8 million shares from one of our BEE partners in August 2014. Our Q2 2015 share count should fully reflect this repurchase and is expected to be around 46.5 million shares. Let me now turn to a discussion of our segments and their financial performance during Q1 2015. South African processing recorded revenue of $60.3 million during Q1 2015, 13% higher in local currency, driven primarily by increased low-margin transaction fees generated from beneficiaries using the South African National Payment System and more intercompany transaction processing activities. In addition, revenue from the distribution of social welfare grants grew modestly during the year and was in line with the increase of 4% to 5% in unique welfare cardholder recipients, net of removal of invalid and fraudulent beneficiaries, but partially offset by the loss of MediKredit revenue as a result of the sale of that business in Q4 2014. South African processing segment operating margin was 23% in Q1 2015 compared to 11% a year ago. EasyPay volumes were again up mid-single digits despite the fact that as we continue to expand our value-added services offering through alternative channels such as mobile, the volumes and revenues for those services are recognized by the respective units even though they rely extensively on the EasyPay platform and distribution. The inflationary increases over time in our costs could modestly depress our South African processing segment profitability, and segment margin may vary depending on the mix of products, particularly volume of transactions through [indiscernible]. We will, however, continue to seek opportunities to increase efficiencies and rationalize our cost structure in order to provide stability in segment margin. Intersegment transaction processing activities are eliminated on consolidation but had a meaningful contribution to the segment this quarter. International transaction processing generated revenue of $43.2 million during Q1 2015, an increase of 24% in rand, mainly as a result of South Korea-based KSNET's continued revenue growth during Q1 2015. KSNET is a major component of the segment and also drove the increase in segment operating income, which improved to 17% from 15% last year. KSNET's great performance during Q1 2015 is reflected by revenue growth of 21% in Korean won to $42.3 million, while the EBITDA margin of 28% was up 200 basis points compared to last year. Financial inclusion and applied technologies represents our initiatives that provide various services and products to customers, that resulted in their inclusion in the formal sector, as well as the provision of our technology, both Hardware and Software, across our broad product portfolio. This segment encompasses smart card accounts; Net1 mobile solutions, including their mobile-driven prepaid solutions; Financial Services, including lending and insurance; and our Hardware and Software businesses. Our financial inclusion and applied technologies segment delivered revenue of $65.2 million, 91% higher on a constant currency basis. The primary drivers of top line growth were, again, Net1 mobile solutions and financial services. Segment revenue was also impacted by a meaningful increase in intersegment revenue, which is eliminated on consolidation. Net1 mobile solutions facilitated 58.1 million transactions through its mobile delivery channels during Q1 2015, an increase of 355% compared to Q1 last year and a sequential increase of 10%. Our UEPS-based lending book, at the end of Q1 2015, was approximately ZAR 606 million compared to ZAR 560 million in Q4 2014 and ZAR 175 million in Q1 2014. Notwithstanding the national rollout expenses incurred in Q1 2014, operating income margin for the financial inclusion and applied technologies segment decreased to 27% from 35%, primarily as a result of more low-margin prepaid airtime and the sale of competitively priced financial inclusion products to address the needs of the broader market. Corporate eliminations include amortization of intangibles, stock-based compensation, U.S. legal expenses and general corporate and overhead costs. Our Q1 2015 net interest income increased to $2.8 million, driven primarily by lower average debt outstanding and higher average cash balances during the period. Capital expenditures for Q1 2015 and 2014 were $9.4 million and $5.6 million, respectively, and relate primarily to the acquisition of payment processing terminals to both expand and replace our retail processing footprint in Korea. At September 30, 2014, we had cash and cash equivalents of $81.2 million, up from $58.7 million at June 30, 2014. The increase in our cash balances from June 30, 2014, was primarily due to the expansion of all of our core businesses during the quarter and, to a lesser extent, due to the cash conservation resulting from the sale of loss-incurring businesses. We continue to fund the group's operations and capital investments, utilizing our cash reserves and cash generated from our business activities. During the next 12 months, we expect primary uses of cash to be the funding of our Financial Services offerings, investments in our new and high-growth businesses, reservicing of our debt, share repurchases and strategic acquisitions. Our effective tax rate for Q1 2015 was 32.4% and was higher than the South African statutory rate of 28% as a result of nondeductible expenses, including legal and consulting fees, 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. We expect our effective rate to increase sequentially and expect our rate for the year to be between 36% to 40%. In preparation for the new SASSA tender, we repurchased the shares of our common stock of one of our BEE partners, and they agreed to subscribe for a 12.5% shareholding in CPS. As a result of these transactions, our share count is now approximately 46.5 million shares. After the great stock in Q1, we are raising our guidance for fiscal 2015 to fundamental earnings per share from $1.92 to $2.14. Our guidance assumes a constant currency base index to the fiscal 2014 rate of ZAR 10.40 to the dollar and a share count of 46.5 million shares. As mentioned on our call on August 29, we announced that our executives are expected to sell in aggregate between 500,000 to 600,000 shares, depending on the share price. During the quarter, the company's executives sold a total of 630,000 shares, net of shares used to exercise stock options. Depending on our available trading windows at the share price at that time, there may be further sales of 150,000 to 200,000 shares during the next few months. Should any of you have any specific questions around these sales, we are more than happy to address them directly during the Q&A session. With that, we will gladly take your questions.

[Operator Instructions] Our first question comes from Dave Koning of R.W. Baird. David J. Koning - Robert W. Baird & Co. Incorporated, Research Division: So I guess first of all, I just wanted to review the financial inclusion segment. You've done a great job managing extremely fast growth there, and this quarter's sequential growth wasn't quite as big as the last few. And certainly over time, it's hard to grow as fast as you were every quarter. But I'm just wondering, are there any new products that are going to start to help us? The benefits from the lending business and from mobile top-up isn't so good for a while. Is there a new product that might start to layer on that, that might keep the growth engine going?

Yes. It's Serge here. Obviously, I think apply to unit, so it's difficult to sort of describe a strategy clearly in a few lines, written lines. But the concept of our lending has never been based around purely lending money to people for the sake of doing so. So for example, I think at one stage, if you remember, we spoke about our initiative in terms of putting out or warding out a massive amount of solar-driven lamps but simply because we face the major problem in South Africa vis-à-vis electricity. Electricity is not only not available in many places, but it's also really expensive, and this actually affects the lives and specifically the educational ambit of young children that live in deeper and rural areas simply because they have no ability to be able to actually study or read because there is no way that they can see anything with just a single candle. Now we've rolled out already 1 million of these lamps as a test to ensure that, in fact, something like this would actually work out. And it is working out. Now more importantly, I also mentioned that our latest lamp pushes in us doing something that quite while certainly is the world's first, also incorporates cell phone chargers and is also a WiFi hub. And we are currently working with organizations, for example, such as Google and Facebook, in order to provide basic communication to the poorest of the poor again for educational purposes at least to engage them in the so-called greater arena of being able to communicate between themselves. Now once again, our loans are going to be driven around providing to them such lamps on a loan basis, allowing them to be able to purchase it as quickly as possible but focusing the loan to something that is far more useful than simply money given to them whereby the money could be utilized for the wrong reasons or for the wrong intentions. And these are the type of products, we brought half a dozen of those, including job creation or at least job identification or job matching, which we are currently rolling out. And we're already starting to get a very, very, very good market reception to all of those particular products. So that's the way we're going so we get to see a lot of our extended loans migrating to becoming focused loans and, by doing that, being able to actually create a new growth potential business simply because of the fact that we are bringing additional value except simply by saying we're simply being able to offer a new loan. So that's the type of stuff that we are doing at the moment.

And Dave, just to add to that, outside of the loan space but also in the part of the financial inclusion segment would be our insurance initiatives. So we are working very hard to ensure that our insurance license is restored. And hopefully, in the next couple of quarters, we will be commencing the sale of very specific insurance policy, life insurance policies for our base of cardholders and customers. And we obviously hope that over the next year or 2, we can certainly show the same kind of exponential growth in the marketing and the selling of those specific policies as we have with the loans. David J. Koning - Robert W. Baird & Co. Incorporated, Research Division: Okay, great. And I guess just secondly, just on the share count, a couple of things. I guess, one, you mentioned selling some stock, some insider selling in. And just, I guess, wondering what the rationale is just behind that given that the stock still seems pretty reasonably priced, and then you mentioned repurchase activity from a corporate perspective. You mentioned that's one of your uses of cash. Could that ramp up over the next couple of quarters as well?

I can probably answer that because I'm one of the parties that is selling some of the stock. And the reason for that is because I myself at my tender age of 61 years old have got to make sure that my future is a little bit more, let's call it, cash-based rather than share-based, number one. But more importantly, I did mention the fact that we are creating or that we have created a new company in the United Kingdom, and I will be spending quite a bit of my time in that particular region in order to spearhead the new company and the new sort of activity that we are going to be conducting from Europe. I am after all European, and so I have quite good connections in the Greater Europe. And because of that, I decided, as I needed to, I have a little bit of spare cash to be able to make sure that I could provide myself with the right sort of accommodation and the right standard of living. So I don't think there is anymore sort of [indiscernible] around that than this, considering that I don't think I've sold a share also in the last 5 years. So I hope that, that sort of answers the question.

On the repurchase side, that -- obviously that's one of the uses of cash that we will be looking at. And obviously, we prioritize the use of cash as demanded by the business development activities at the time. But if the opportunity presents itself at the right price, obviously, buyback is something that we will consider.

Our next question comes from Bruce Galloway of Galloway Capital.

Getting back to the insider selling, that obviously looks pretty bad to the investment community that there's so much insider selling. And I understand that a lot of it is due to the high tax rate for the employees. But is there any way -- with the company's cash balance at $81 million, is there any way that the company could lend their key employees capital to pay the taxes instead of doing the insider selling? And also, with regard to the financial inclusion business, it seems that that's the real growth worth of this company, and it seems like that's the crown jewel and the technology play. Have you considered spinning that off to the shareholders and possibly locating it in -- from UTA or some place like that where they could get a higher multiple?

Again, I'll let Herman answer the first part because it's more financial in nature, but the second part I can answer. During my sort of introduction, I did mention the fact that we are certainly spending a lot of time and we have spent a lot of time looking at what we believe are the reasons why the company's financial performance is not reflected in the share price. And candidly, I know a lot of our shareholders are very upset about it, and so are we. So to be totally honest, it's certainly something we now are applying our minds very seriously to it. And normally, when we apply our minds to anything seriously, we normally come out with a solution. So I think what you just mentioned is certainly, and without going into too much detail, it’s certainly in the books, and probably on a fairly larger scale than a single business line simply because we do believe that the majority of our businesses outside of our government business should be attracting P/E ratios way up north of the 10 rather than to be sitting on the 3 or 3.5 or 4. And candidly, we all are very much reducing. I think we've reached the stage where both businesses can stand on their own 2 feet and are sizable enough in terms of EBITDA because they do represent a very significant part of our EBITDA. And we believe that you are quite right. If they had to be separated with the rest, new shareholders to be -- to participate when I think, without a shadow of a doubt, that they would probably regain or at least attain the sort of P/E ratios that they certainly deserve. So that is something that we've been working on for quite a while. We are working for 1 or 2 little parameters to -- for specialists to [indiscernible]. But we were certainly hoping that by the next quarter, we should be able to come back to our shareholders and to tell them exactly what we believe can be done, then how quickly it could be done. And candidly, at my age, I like things that are done rather quicker rather than slower. So I hope that we'll give you at least a little bit of confidence that we are not ignoring this particular very, very tricky and tricky issue. Herman, do you want to answer the first part?

Sure. So just on the first part of your question, Bruce, obviously, unfortunately, SEC regulations and other legislation prevents any form of financial assistance from the company to any of the directors or officers. So that's obviously something that prevents us from doing so. And if -- even if that were not the case, I should also just point out in terms of South African tax legislation, the granting of the loan itself would probably constitute a perk. So you would be caught in a kind of an iterative process of starting to pay more taxes on taxes. So for that reason, the company can't do it.

[Operator Instructions] Our next question comes from Russell Anmuth of Gotham Holdings.

So a couple of questions. One, could you pick up from last conference call where you talked about a new comprehensive full-blown mobile product. Obviously, seen the terrific announcement this morning in India. Is that strictly for the VCC product? Or does that lead into something that's more encompassing also? And then in general, right, what's the mobile strategy? And then secondly, can you offer any kind of an update on activities with MasterCard and -- right, and the countries you're trying to break into around the world?

Okay. Well, 2 very good questions. The first one is quite simple. Our mobile strategy, as you know, was always groomed[ph] around our ability to generate, for lack of a better word, onetime credit card numbers completely offline, which resulted into -- communicate with the issuing bank, which could be protected either by fingerprint, which now we know with the iPhone, fairly easy to do it but could be protected by fingerprint or by voice in an offline environment, which therefore makes these particular onetime cards absolutely secure and impossible to clone or to copy. Now one thing we've done is that we have licensed people in Spain to actually use that technology for their own good, and that's purely a licensing agreement. We have launched this particular product in United States, which is starting to ramp up reasonably too slowly for my liking, but it's actually ramping up. We've now signed a deal in -- as you know, in India, and we are utilizing this particular product already in South Africa. Now one thing that is clear is that it is a -- purely a payment product. And I think your question, if I understood it correctly, was, well, what can you catch? In other words, shouldn't we be creating the opportunities to actually be able to use the payment in sum, as a package? In other words, let's create the need for the payment, not only to have the payment solution. And that is something that, without a shadow of a doubt, that we decided we want to do. And the latest mobile application that we are launching are also providing not only the payment part but the substance of what, of the reason why you would want to use that payment. Suitable example could be that you want to buy something online related to electricity or airtime or pay a loan or, for example, pay for a taxi, and you need to pay. Well, the VCC or what we call VCpay will be the portion that we would use to pay for it. But more importantly, we'll provide the application that also governs or supplies the actual product, therefore making it not only on a payment piece of it but on the product supply as well. So that is something that we are looking at. We don't want to fall into the trap to have too many millions of these applications available all over the world. And we'd rather become the payment instrument for them all rather than to start competing with some of those applications themselves that actually also require a payment instrument. So we're going to be very, very careful of only providing or developing applications which today do not exist or are not available. And a number of them are not available because, in fact, they do require payment, and they are lacking their payment. So this will be really the strategy going forward, and you will see some exciting news coming through simply because we want to scale. In order to scale, you need to do the deals with fairly large corporations worldwide. And that's what the guides we have been working on and, I think, are pretty close to achieving. So I will certainly let you know or let everybody know as soon as we get closer to these particular contractual or contractual signatures, which I think are going to be enhanced. That was one of the -- that was one, I think, of the question. What was the other question?

MasterCard.

Oh, the MasterCard. The MasterCard, once again, I'll tell you, I will tell everybody that now that we -- in fact, we have signed a deal with -- in one particular country together with MasterCard. So that's a good news. We've actually cut right in the hurdle. Is it worth talking about, probably not, okay? It's incredibly small, but it's a start. What's more important today is that we actually, at the moment, tendering with MasterCard on 2 other much larger deal. One of them includes 11 countries, and the other one includes one fairly large country. So I'm not saying that MasterCard, I don't think, that was the fastest organization in the world, and I don't think they quite excel or focus or nimble just like we are. But one thing is for certain. They have taken us seriously, they're taking our products seriously, and at the moment, they're really looking at us as the solution for government or government-based, let's call them, people that are wanting to help the poorest of the poor on the worldwide basis. And they're looking at us as being able to provide a solution. We would like to grow a little bit further than that simply because we believe our product should actually be applied to anybody that there's a MasterCard, including you and me. We are not there yet, but we'll start with what we currently doing. And I'm starting to get a good vibe that I think we're going to land up with some very, very good margins after the relationship.

Okay. So on the -- just can I follow up a little bit on both? So on the tendering, are you -- just sounds that there's 2 separate tenders going on. One for 11 -- one that sounds like a consortium for 11 countries, and the other is a very large country. So are those situations that should play out over the next 3 to 6 months? Is that how one to think about it?

I think it's about right because I know one of them is already on the second round, and I believe there is only 3 rounds to it. It's always technology and then it's passing and then it's decision. So I think there is no doubt that to me, if we do not have those countries within the next 3 to 6 months, then we're not going to get them.

Does any -- does the competition, "whomever they are," are they able to offer an online, offline solutions like yours?

No. That's the beauty that I think even MasterCard knows this, is that -- remember that as soon as you're dealing with government, it's more than just payment. There is normally some other baggage that they want to be able to deliver that we can do. That's normally where other people have been quite strong. The Bolognese, these other solutions that do not interoperate with National Payment Systems that, for example, can access a MasterCard or a Visa asking them both. And this is what really gives us this tremendous advantage, and we really strongly believe that with the name of MasterCard beyond it as well, that must give us more than enough to be able to actually finalize these deals and claim these deals. So I still feel and so do my IT people feel very comfortable, and -- that, in fact, we are going to win a couple more, and we should rather win them sooner rather than later.

Okay. All very exciting, look further or that -- or not comes to [indiscernible] puts the company in a different light and a different zone, so to speak. On the mobile, can you talk -- right, talk about a more comprehensive product, right, which the tail doesn't wag the dog, and you're creating a -- right, an ecosystem? Where do you -- to drive demand? Where do you think geographically that you work to target that solution first? Or do you think about it in terms of geography?

Well, in terms of geography, it's obvious that obviously, we did not see in South Africa because here, we can test things out, and we can see how things work. And some of these are sort of legislative environment here, and banking environment is actually very, very, very controlled. So if you can penetrate the South African market, obviously, you're never going to make millions out of it because of obviously people. But certainly, it tells you that the product can work, and that, I think, we've done. We felt comfortable that the product line is ready for launch. Now it's obvious that India has always been, I think, in the mouths of anybody that wants to do any business. And you're counting 1-point-something billion people off your radar. Of course, you need how much money are you going to make per person. So for us, again, India for us is a question of scaling, and it's a question of getting hundreds of millions of people to use it through different channels. Although how much sooner are you going to be selling to individual people, we're going to be selling to companies that themselves are requiring the payment solutions to actually do what they want to do. And remember that our payment solution concept, debit card into credit card, which is not really a big thing in the U.S. because you accept debit. But in the rest of the world, a debit card cannot be utilized as a payment instrument on the Internet, whereby converting the debit to your credit card, we suddenly open up all the debit cards that have been issued to be utilized as payment instrument on the Internet. So then we see countries like, for example, India, the Philippines. We see, in some way, we already have a footprint with our SIM cards, which you -- which we are by far the largest supplier of, and other countries, which are not developing countries, from that point of view. But the latest breakthrough is through MNOs in countries, First World countries, including the United States, Britain, France, where, in fact, there is still a lack of a secure mechanism to be able to use in a simplistic manner a credit card to be able to be used to pay across the Internet in a safe manner. We can do that. And people are starting to realize that, in fact, our solution is simpler than anyone else's solution. And although that we've seen the number of releases from very, very large companies, that a couple of them might actually also be infringing on our operators. And it's something that we are looking at strongly at the moment because I would tell you that during the latest stream of press releases that I've seen from the U.S., there is a good possibility that there is 1 or 2 people that have been naughty and therefore, brought on the dark side that the technology that they have launched actually is our technology. So I think there is some exciting news coming down that angle, not because we intend to sue people or whatever the case like what you have here. But it's [indiscernible] to enter into very nice partnership with huge companies in order to scale up on our own initiatives.

Okay. The -- to pick up off of that for a second, where is -- why exactly are you going to London? I kind of missed that. Is that to try to penetrate this market and to try to enable the VCC to -- right, to take off?

100% based on the [indiscernible]. They are 2 -- there are a couple of reasons why we have opened London. One of them is because we believe our products can be utilized in Europe in a big way. It's also a lot closer to the United States, so it also allows us to actually, let's call it, tackle the First World countries from the work environment. And also because after the previous discussion we had with the previous gentleman, there is also a good chance that a number of our businesses might then be starting to be operated from the U.K. rather than from South Africa.

What kind of partnerships do you have to construct to enable the VCC to really [indiscernible] the adoption phase?

Yes. We've got 3 models because [indiscernible] space, which is purely a licensing model. We license our patents to a particular organization, and they go out and do whatever they want. Then we've got an -- a second early model whereby we actually provide the engine of the solution. In other words, we sit beyond the issuing bank, and we make sure that this particular -- this number comes to us, and we are the ones that are going to ensure that, in fact, this particular VCC or that we call the VCpay Virtual Card is actually valid or not. That's what we started to do in Mexico. And then we've got a third model. It is where we provide a turnkey solution, sort of particular institutions, they need a credit card issuer bank to actually do it themselves and to do it completely outside of us, in which case, we provide a license, we provide support, and we obviously get a piece of the transaction fee. So that's the sort of the 3 models that we've currently implemented and with all 3 model implemented in different places. And we are sort of looking to see which one, in our view, is going to be the one that we want to scale, depending on what are the best returns for us. The danger sometimes about licensing or purely licensing is if somebody sits with the license and pays you a very small fee on a yearly basis, but you're not at all in control to actually scale. And we prefer, at this point in time, to be part and parcel of the scaling mechanism because we quite good at these operations, and we can -- or we're quite good at scaling. And we prefer to actually play a substantial role in deploying the particular technology or deploying the use of the technology rather than to rely on somebody else to do it on our behalf.