Lesaka Technologies, Inc. (LSAK) Q2 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, good day, and welcome to the Net 1 UEPS Second 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, Dylan. Welcome to our second quarter fiscal 2015 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 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 dollar and the rand. And with that, let me turn the call over to Serge.

Thank you, Dhruv. Good morning to all of our shareholders. We kick off by saying our second quarter results were, in my view, very, very impressive. We achieved USD 154.1 million in revenue and USD 57 million -- USD 0.57 in fundamental earnings per share, which translate into a 12% and 43% growth in dollars, respectively, and 24% and 56% growth in rand terms when we compare that to the second quarter of 2014. Our businesses continued to perform at par or above our expectations, and we are pleased to report that our new and potentially massive growth businesses are beginning to scale and are on the verge of earning significantly to our bottom line. Today, Herman will provide the details of our financial performance while I concentrate on some business areas, which I feel are strategic to the group. Our business unit management teams have delivered on our strategy, which was to consolidate our existing businesses, continue to grow these at a decent rate and improve the operating margins. We have been very successful in this endeavor as our results demonstrate. Our CPS business continues to perform well as we are able to reduce cost further and commence the use of our national mobile and fixed infrastructures to address customers who are not grant beneficiaries but who are either unbanked or banked by other South African banks. We are achieving this by making our mobile banking units available to any customers in semi and deep rural areas of South Africa, where ATMs and other banking infrastructures are lacking or simply nonexistent. Our mobile banking units offer cash withdrawal, money transfers, airtime and electricity top-ups, microfinancing and insurance products to all South Africans, resulting in opportunities for us to generate transaction fees, product sales, initiation fees and collection fees at prices which are more competitive than those guaranteed offered by our competitors. These products and services are not currently available in the areas where we intend to operate. And we believe that, that road to customer strategy, rather than having them come to us, will be and is proving to be a differentiating factor that will result in the acquisition of millions of new customers over the next several quarters. The same semirural and rural-based service will also be offered to SASSA beneficiaries. We now prefer to operate a comprehensive banking account rather than one that is or could be limited by SASSA's basic requirements. Our existing 10 million clients have been operating at SASSA-based accounts for more than 2 years now and have become accustomed to our quality of service, product range, ease of access and security. But they're now demanding in terms of the banking experience, and they're becoming more demanding every day. We are ready to deliver these new requirements, including savings accounts, royalties programs, online banking and many other financially inclusive services. We have also recently commenced with the deployment of our EasyPay valid ATMs, which are both EMV- and UEPS-compliant, and provide biometric verification as well as proof of life functionality. We have already deployed just over 300 ATMs in a few months and target in excess of 1,000 ATMs before year-end. We are able to place these ATMs with our merchant partners as well as within our own branches, creating a new delivery channel where it does not currently exist. This project is already scaling admirably and already contributes towards our EBITDA. Our new EasyPay everywhere product will be officially launched within the next 2 months. This product incorporates a banking account, which is the cheapest available in South Africa, and comprises a MasterCard-branded EMV/UEPS-compliant debit card, access to all of the South African National Payment System infrastructure and mobile channel and Internet portal and, of course, the Net1 range of products and services, such as cash withdrawals, payments for goods and services in both the card-present and card-not-present space, money transfers, microfinance, insurance, advanced airtime, advanced electricity, prepaid products, loyalty programs and informative services -- in other words, a fully comprehensive package. This product, we believe, will allow us to put our banking to millions of South Africans who are employed but cannot afford the current banking costs or have access to only a few limited services. Let me now provide a short update on the new SASSA tender process. We have asked the Constitutional Court to review and set aside the current tender process initiated by SASSA. We await the court's further directions or decision in this regard. We have the view that the court will do all that is within its power to avoid any possible disruption to the payment system that would impact negatively on the way of life of the poorest of the poor. The court is also well aware of the shortcomings identified in the previous tender process and in the evaluating and adjudication processes, and I believe that the court will ensure that any fundamental shortcomings are addressed in order to prevent new lawsuits similar to the previous ones as these have had a negative impact on the country as a whole and have jeopardized the good intentions of government. An hour ago, we received further direction from the Constitutional Court instructing SASSA to indicate to the court whether they intended making any further amendments to the OSD by Tuesday, the 10th of February, and if so, to effect these -- those amendments by Friday, 13th of February 2015. The court also advised that it may issue further directions. During our first quarter earning call, I mentioned that we had tendered a EMV/UEPS Biometrics solution in one specific country as well as in a group of countries, plus 2 events to disclose either the countries or the business entity with which we had tendered. I am now pleased to announce that the Southern African Regional Office and the United Nation World Food Programme, WFP, has awarded us a tender for the entire SADC region, which comprises of around 12 countries, namely South Africa, Lesotho, Swaziland, Mozambique, Madagascar, Malawi, Namibia, Zambia, Zimbabwe, Republic of the Congo -- Democratic Republic of the Congo and Tanzania. The contract is for the distribution of cash and food grants to hundreds of thousands of WFP beneficiaries in these territories. Similar to our SASSA deployment, our technology allows the financial assistance provided by the WFP to reach the intended beneficiaries regardless of where they live and without the need for intermediaries. This results in massive cost savings and eliminates areas of certain agricultural nefarious activities. Our technology makes use of any infrastructure present in its territory and allows for the biometric verification of all beneficiaries regardless of the infrastructure being utilized even when such infrastructure is actually not biometric-enabled. In these scenarios, we'll utilize our patented variable PIN technology that uses fingerprint or voice verification method using any mobile phone. We are proud that our technology and solutions are increasingly recognized and that we are able to participate in social initiatives by organizations such as the WFP to assist millions of poor people that depend on these allowances for their survival and that of their families. I must add that I'm not of the great belief that this socially responsible tender will necessary translate into a meaningful financial contributor for our company in the short term. But I strongly believe that the exposure, credibility of winning and operating a project of this nature and scale will create further opportunities for us to implement similar or the same solutions for the more opulent citizens, resulting in greater income to cost ratios and, thus increase profitability. We are currently finalizing our deployment contract with the WFP office, which is based in South Africa, and we will announce this program, along with additional details, as soon as all the procedural work is completed. I'd like to take this time and recommend our special team that continues to work closely with MasterCard, our partner, to identify and seize these opportunities and expand our footprint, credibility, as well as our bottom line. Let me take now this opportunity to present a quick update on our mobile-based businesses in South Africa and elsewhere. The quick summary: Our Airtime Manje, the Umoya Manje product, continues to grow and had sold nearly 56 million vouchers in this quarter, a 71% increase on last year's second quarter. Our monthly ARPU has increased almost 20% to near ZAR 60, and we achieved our record trading there of 2.6 million transactions during the quarter under review; our Power Manje product now processes ZAR 2.7 million. Our monthly ARPU is now ZAR 655, and our users have grown to 790,000; our information services effected in excess of 4 million transactions during quarter 2 and now has 2.1 million users; our vast airtime product for Pasavute in Malawi has now processed 21.5 million transactions last quarter, which is 48% sequential growth, and now has 767,000 users and an ARPU of around MWK 470, MWK 4-7-0; our VTU 2.0 platform deployment in Nigeria is set for completion in February 2015. We have confirmed deployment in Cameroon, Rwanda and Colombia. VTU is used by mobile operators as an MTN to provide mobile/desktop services. We are pleased, however, that our partners have embraced our new utility offerings, including the sale of, for example, electricity, and will look to include these in this ever-growing channel in the near term. We also continue to develop GSM-based SIMs directly for customers, such as SMART in the Philippines, and through agents that are licensed with our technology. We've delivered 4.5 million SIMs in this quarter, and we'll deliver a further 8.75 million SIMs during the third quarter. We have recently signed an agreement with Bluefish for us to provide them with software for their SIM card to be used by SMART. On another note, we have now officially launched ZAZOO to oversee the global expansion of our mobile payments and value-added service businesses, including the activities currently conducted through its Net1 Mobile Solutions business unit based in Johannesburg. ZAZOO's management, led by its new Managing Director, Philip Belamant, will focus on worldwide growth opportunities, especially in the U.K., Europe, the U.S.A. and India and other developed and emerging markets. ZAZOO will coordinate all research and development, operations and marketing activities associated with Net1's mobile businesses. Mobile presents one of the greatest untapped opportunities in the payments industry, and we believe our mobile technologies and intellectual property are poised to capture these opportunities. With a dedicated brand, a focused management team and a strong sales pipeline, we are highly optimistic about driving the next leg of growth for Net1. We intend to take Net1's patented technology solution to new markets and new clients with London serving as a convenient hub from which we will coordinate all our global efforts, unlock the value of our products and solutions and build a technology company for the future. We chose the name ZAZOO as our new corporate logo because it's catchy and memorable and evokes a sense of energy that reflects the spirit and passion of our business culture. ZAZOO has scored the first win with an exciting collaboration with Microsoft and Cell C, one of South Africa's largest mobile network operators, for the launch of Microsoft's first branded mobile phone, the Lumia 535 mobile phone. 4,000 phones will each be packaged with a ZAR 250 VCpay voucher exclusively for new Cell C owners to use in completing the purchase of their choice when using the VCpay service. We are hopeful that Microsoft will extend the use of ZAZOO VCpay service to all of their phones in South Africa and, hopefully, in other territories as well. ZAZOO's mission is to sign up deals with companies that operate across the world, and a few new deals will be announced in the very near future. A quick update on India. As you know, we launched our MVC technology with Axis Bank in India at the end of last year. To target the unbanked's youth, we started with a pilot in university campuses in a Tier 3 city and saw an encouraging adoption rate of around 20%. Based on customer feedbacks and to simplify the registration and KYC requirement in India, we are currently in the process of retooling the application and expects that exercise to be complete in the next few weeks. Once completed, the registration and activation of the MVC app will become significantly more user-friendly and, more importantly, could then be made available to the bank's more than 15 million customers on a nationwide basis. Our second MVC project in India is with one of the country's leading prepaid digital wallet providers. Our partners are actively in the midst of the integration, and we believe are on track to commercialize -- for commercial launch in late March or April this year. While we are intensely focused on our first 2 MVC rollouts in India, we are also extremely pleased with the traction we are getting from other major Indian corporates, not only for mobile payments, but also for our global mobile and biometric offerings. Given our long-term optimism for our projects in India, last quarter, we also acquired our local joint venture partner's stake and now own 100% of that local subsidiary. Finally, management continues to investigate methods to globalize our business, on the one end, while also creating an environment where our valuation better reflects both the performance and the realizable potential of the company. Net1 has traditionally always had the steak but perhaps lacked the sizzle, and the time has come for us to change that. I am, of course, very pleased that this was the case rather than the other way around as what we have built not only is a significant blue sky opportunity, but also provides us with a solid base which protects us against any possible downside. I'm expecting the next 6 months to be positive, exciting and rewarding for all of our stakeholders. Thank you very much for your time, and let me hand over to Herman. Herman, over to you.

Thank you, Serge. I will discuss the key results and trends within our operating segments for the second quarter of 2015 compared to a year ago. For Q2 of 2015, our average rand-dollar exchange rate was ZAR 11.22 compared to ZAR 10.16 a year ago, which negatively impacted our U.S. dollar-based results by approximately 10%. The U.S. dollar, our reporting currency, has continued to strengthen against all major currencies while the rand continues to be plagued by South African-specific risks. The rand is currently trading at around ZAR 11.50 to the $1. And as predicted, the stronger dollar has progressively adversely impacted our fiscal 2015 results thus far. Notwithstanding the reporting currency pressure discussed above, we have continued to sustain our top and bottom line growth during Q2 2015. On a consolidated basis, for the second quarter of 2015, we reported revenue of $154.1 million, an increase of 24% in constant currency. We reported fundamental earnings per share of USD 0.57, which grew by 56% in rand compared to a year ago. Our fully diluted weighted share count for Q2 2015 was 46.6 million shares and includes the positive impact of our repurchased 1.8 million shares from our BEE partners in August 2015. Let me now turn to a discussion of our segments and their financial performance during Q2 2015. South African processing recorded revenue of $58.4 million during Q2 2015, 10% higher in local currency, driven primarily by increased low-margin transaction fee generated from our customers 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. The sale of this business also contributed towards the improvement in the South African processing segment operating margin to 22% in Q2 2015 compared to 12% a year ago. EasyPay volumes were again up middle to single digits despite the fact that as we continue to expand our value-added services offering through alternate channel, such as mobile, the volumes and revenues for those services are recognized by their 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 the National Payment System. We will, however, continue to seek opportunities to increase efficiencies, such as our ATM rollouts, and continue to carefully manage our cost structure in order to provide stability in segment margin. Some of our new initiatives, such as the ATM project, will result in increased capital expenditure and higher depreciation charges but should increase the EBITDA margin of this segment. Intersegment transaction processing activities are eliminated in consolidation, but had a meaningful contribution to the segment during this quarter. International transaction processing generated revenue of $40.5 million during Q2 2015, an increase of 18% in South African rand, mainly as a result of South Korean-based KSNET's continued revenue growth during Q2 2015. KSNET is the major component of this segment and also drove the increase in segment operating income. However, operating income and margin for Q2 2015 were negatively impacted by ad hoc incentives provided to staff due to the strong operating performance by KSNET during calendar 2014. Accordingly, the operating income margin was flat at 14% compared to last year. KSNET's strong performance during Q2 2015 is reflected by revenue growth of 11% in Korean won to USD 39.5 million while EBITDA margin of 25% was flat compared to last year. KSNET has sustained local currency growth of high single to low double digits for several quarters. Industry forecasters expect transaction growth to slow modestly in Korea as a result of macroeconomic factors and reforms in the rand and related industries going forward. We continue, though, to expect incentive targets for KSNET to outpace industry growth, given its competitive position and value proposition. Financial inclusion and applied technologies represents our initiatives that provides various services and products to customers that result 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 the 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 $67.5 million, 48% 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 64 million transactions through its mobile delivery channels during Q2 2015, an increase of 73% compared to Q2 last year and a sequential increase of 80%. Our UEPS-based lending book at the end of Q2 2015 was approximately ZAR 700 million compared to ZAR 606 million in Q1 2015 and ZAR 450 million in Q2 2014. Operating income margin for the financial inclusion and applied technologies segment decreased to 27% from 30%, 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 markets. The operating margin of this segment will continue to be affected by the relative contributions of the various high- and low-margin products and services comprising this segment. Corporate and eliminations includes amortization of intangibles, stock-based compensation, U.S. legal expenses and general corporate and overhead costs. Our Q2 2015 net interest income increased to $2.5 million, driven primarily by lower average debt outstanding and higher average cash balances during the period. Capital expenditures for Q2 2015 and 2014 were $9.1 million and $6.8 million, respectively, and relate primarily to the acquisition of payment processing terminals to both expand and replace our retail processing footprint in Korea. At December 31, 2014, we had cash and cash equivalents of $71 million, down from $81 million at September 30, 2014. The decrease in our cash balances from September 30, 2014, was primarily due to large provisional tax payments in December and the scheduled Korean debt repayment in October, partially offset by the improved cash generation of all our core businesses during the quarter. Following the repayment, our Korean debt at December 31, 2014, was approximately $60 million at prevailing exchange rates, and the next scheduled principal repayment is in April 2016. We continue to fund the group's operations with 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, such as ATM; the services of our debt; share repurchases; and strategic acquisitions. Our effective tax rate for Q2 2015 was 50.6% 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 can and will fluctuate depending on our intention regarding undistributed South African earnings and the timing of any payments and may result in an effective rate as high as 38%. As a result of our repurchase of BEE shares in August 2014, our share count is now approximately 46.5 million shares. For fiscal 2015, we now expect fundamental earnings per share to be at least $2.28, up from $2.14 last quarter. Our guidance assumes a constant currency base indexed to the fiscal 2014 rate of ZAR 10.40 to the $1 and a share count of 46.5 million shares. With that, we will gladly take your questions.

[Operator Instructions] Our first question comes from Dave Koning of Baird.

And I guess my first question, just -- it sounds like the food bank deal -- I mean, this is the first time I remember you really talking about it, and it sounds like something that could be meaningful near term. And maybe you could just talk a little bit about kind of what the kind of range or type of impact it could have and whether it's in your fiscal '15 guidance at all, some contribution is included.

Yes, sure. I think I did mention, not the actual company last quarter, but I did mention that we were working on a couple of tenders in unison or in association with MasterCard. And we're obviously very, very pleased that they have decided now, at least, the World Food Association decided that we were the right people to implement technology on a cloud-based -- on a cloud basis across all of these SADC areas. And what was interesting for me is that -- to try to learn a little bit more about how they operated -- and I don't know if you know this, but they actually operate out of Rome. And their model used to be that every country, and I think it still is like this to a great extent, used to decide as to how they were going to distribute their so-called food grants in the whole country that -- you can imagine that raises all sorts of problems. Number one, because their technologies were all different, but more importantly, because I think a lot of the money was simply not going or was not being received by the people to which -- to whom it was intended. So they've now been able to -- with us, to implement a system that can work in any country regardless of what the infrastructure is. It can be the most advanced infrastructure or it can be the most backward infrastructure, and our systems are capable of doing both. Of course, we've got the biometric security, and of course, I don't have to then worry about going to tenders in every single country in order to see what will be the technology that will be utilized. So from that point of view, it's very exciting. When we look at -- because we are doing -- because everything is through the cloud, we basically have one big fat computer that is going to be running out of South Africa. And that -- with a backup outside, of course, of South Africa. And that computer is going to simply make sure that we can actually deliver the service to anybody, anywhere -- candidly anywhere in a SADC country. What this actually means is that depending on the amount of money that they will receive from different organizations that are committing to obviously funding them, and there are plenty of those, the amount of money allocated to each country is very different, depending on population and depending on the need. But it could vary from a few million dollars to $20 million or $30 million to be distributed either on a monthly basis, semi-quarterly basis or annually. And the number of people again can vary from hundreds of thousands in a country to only 30,000 or 40,000 in one country and could go up as high as 0.5 million to 1 million in another country. So that's the plan that we're currently working on with them to say, where are we going to start, which countries do you want to do first, how many people are we going to address and how much money are we going to pay them. And these are the things that we intend to publish as soon as possible. The excitement for me, apart from the fact that it's great to know that we have been appointed for the entire SADC region because of what we've done, and they know it works. And it is a bit of a -- there's a social involvement in this. But once we are in these 10, 12 countries, the same technology can simply grow outside of that hub and start being implemented by everybody else that actually lives in that country. And these are not going to be the poorest of the poor, but they're going to be, hopefully, people -- that they have a bank account that earn a certain amount of money, and therefore, we're hoping that, that will allow us to germinate or to grow our businesses in each one of these countries and, therefore, start generating fundamentally much better revenues and much better profitability out of, let's call it, people that have rather than the people that have not.

Okay, got you. That's helpful. So this is -- I guess from a financial perspective, it sounds like this could be a tens of millions of dollars of revenue type thing, not just like a couple of million. And is any of that in the fiscal '15 guidance or not yet?

No. So none of that is in the 2015 guidance because we simply don't have exact visibility of when the various countries will take up the program. This is something that we will have more clearance or more clarity on as we progress and as we negotiate with the World Food Programme. So we have not taken that into account at all in our current guidance.

Our next question comes from Tom McCrohan of Sterne Agee.

A quick follow-up question on the World Food Programme. Were any of the card network, Visa/MasterCard, involved or partnered with you in this process?

Yes and no. MasterCard, my understanding -- and of course I think you can see it on their own website, my understanding is that they've got an agreement with the World Food Programme to provide them either with a payment solution or with consultancy vis-à-vis a payment solution. So either way, we work very closely with MasterCard. We certainly tell them what we do. They tell us what it is what that they are doing in that space. And obviously, the technology we're implementing is going to be an EMV MasterCard and chip-based product that either will be the real MasterCard M/Chip 4 product or it will be powered by MasterCard. So we intend to certainly keep MasterCard as our partner simply because at this point in time, we work very well them and they are attempting to open doors even if those doors are more in what I would call is the social environment rather than what I would call purely the business environment. But we all think that one is going to lead to the other.

Will the distribution of monies for the World Food Programme ultimately be given to someone on a piece of plastic card? Or is it going to their mobile device?

It's going to be both. Some people are going to be getting a piece of plastic where they can go to, if there are any, existing ATMs or point-of-sale devices, as there will be an implementation of POS devices by the World Food Programme in specific areas in order to make sure that the money may be spent in specific retail shops. So we're providing that to them as well. But of course, our mobile technology, if it is, of course, available in those territories, specifically if the right mobile phones are available, we would be able to do the tap and go, we'll be able to do the VCC, we'll be able to use any of our other developed mobile applications in those territories as well.

Our next question comes from Jordan Hymowitz of Philadelphia Financial.

Before I ask my question, I just have a request. If you could simply post the transcript of this call on your website, it's been very, very difficult to understand with the accent of -- for a number of people that I've been talking to. My question concerns -- you have a national food program with -- announced with MasterCard. You also said on the last call, there was another country with about 40 million people you were working with. Do you have any update on that?

Yes. What has actually happened is that the country we were talking about is not part of the 12 SADC countries. So we had, in fact, signed a deal already with 1 of the 12 countries, in fact, with the food program. And now I think this has resulted -- instead of us implementing that country on its own, it's now resulted in the World Food Programme actually awarding us with the tender for all 12. So it was part and parcel of that one. Funnily enough -- it's strange that you mention it, because now, we also are now working with another country, which is not part of the WFP, which also has around 35 million to 40 million people, but that is completely -- something completely new and is a completely different tender.

And what country was that just out of curiosity?

At this point, they basically mentioned to us that we should rather speak to the 12 countries. And I don't think -- I think there are some internal politics there, and I think they didn't want us to mention the specific one.

Our next question comes from Russell Anmuth of Gotham Holdings.

This time it's very particularly hard to keep to a limited number of questions, given everything you put forth, but give it a shot here. Just to circle back on something on the old sort of legacy situation. When do you expect the Hawks to come out on South Africa?

I like your forwardness. And as you know, and that is something I think that's important. We haven't heard much from the U.S. side at all from the -- from what is referred to as the government, which I assume is the SEC/the DOJ. And the reason is that they are probably waiting for the Hawks to actually finalize their -- their investigation. The latest thing that we've heard -- and again, I don't want to get our hopes to be too high, but we've heard that they have finalized their investigation, and it is now in the hands of the prosecutor. And it is up to the prosecutor now to actually decide what he wants to do. And my understanding is he has a couple of choices: one, he can prosecute; two, he can decide not to prosecute and to say that we've been cleared on all accounts; or three, he could ask, of course, the Hawks to investigate something else. I hope that it's not going to be a further investigation into something else because I fail to understand what it possibly could be. And obviously, we hope very much it's not going to be the first one, namely that he's going to prosecute. So with a bit of luck, in the next few weeks, we may have at least some finality in South Africa and hope that, that finality might assist in translating finality into the U.S. as well.

Okay, okay. May I ask a second question?

If it's a follow-up question. As long as it's a follow-up question. That was part A and this is part B, right?

Well, part B in a different topic. So you talked about Microsoft in Africa, which is very exciting. Now in the past, you've also alluded to doing -- to working with the largest handset company in the world. Are you still talking with them, right, to apply your technology solutions, some of the new undisclosed capabilities that you're referring to? Are...

We haven't given up. We're working, if you remember, with both. We're working with the big one, and we were working with Nokia, if I remember correctly at the time, which is now really Microsoft anyway. So we are chasing both. Obviously, we're not waiting for the one to do the other. We're really excited and I'll be sort of -- I'm even very, very excited about the Microsoft initiative, simply because it allows us to have our VCpay application, VCC application preloaded onto all of those phones. And we know that with Microsoft and advertising and Cell C behind it, those phones are going to start being used. And by definition, we know that then -- that this is going to start really putting our VCC on the map. So that's going to happen in South Africa, first and foremost. First, with Cell C, that in my view I think is going to go outside of the Cell C world as soon as Vodacom and MTN, et cetera, et cetera, are also going to be selling the same phones. But I'm more excited about some of the noises I'm hearing that perhaps there is already some application that Microsoft might be seeing in all of this outside of South Africa. South Africa is still very small. It's great for us to do something here, but we don't want to become a global company when it comes to VCC, not a South African company only. So that's what I'm hoping it's going to go down that route. And I hope that, that small win, for lack of a better word, is also going to push the other players that we are talking to, to perhaps say, "Hey [indiscernible]. Maybe somebody else is not committed to this. We'd better do the same thing." And you will see in the next 2 weeks, we're going to announce 1 or 2 other international or, at least, companies that are international that, in my view, are also keen and are going to commit in the next few weeks to also implement this technology. And that's going to happen. We can't -- we couldn't do it now. We're hoping it's going to be released in the next week to 10 days.

[Operator Instructions] Our next question comes from Jean Pierre Verster of 36ONE Asset Management.

Obviously, in September last year, the Minister of Social Security released a media statement regarding the issues that the Black Sash has found regarding the tender. And on the basis of that, said that they will, for the new tender, set a cap of ZAR 14.50 per month per recipient, which is obviously now this court case and the reissue of the tender regarding this contract. Now without getting into the actual court case, which I assume you don't want to comment too much about, if you look past the court case to 2017 when this contract expires, what would be the impact of a new contract from 2017 in the way that SASSA want to issue it on your business?

It's actually a fairly complex answer to this, but I'll try, if I may. Everybody talks the ZAR 16.50 goes to ZAR 14.50. It's quite easy to understand that there's ZAR 2 missing. And on 10 million people, it's ZAR 20 million a month. So that's not complicated to work it out. What is unknown at this point in time is a number of things. The first one is that, of course, there is growth in beneficiaries. And we know that we are going to be going towards another election, which means the South African government is likely to -- in my view anyway, to register more people and to put more people on welfare than less. SASSA had already projected I think 1 million people that are going to come onboard, and it could be substantially more than that with -- specifically with children. So that's an unknown factor that could easily perhaps make a difference between the ZAR 14.50 and the ZAR 16.50 anyway. So that's point number one. But that's not really -- that's more, for lack of a better word, a sort of defensive approach. To me, what I'm more excited about is the fact that the new contract or the new SASSA SLA, because of the allegations made by organizations such as the Black Sash -- who I think mean well -- but really, in my view, don't quite understand perhaps many of the aspects of financial services and that the fact that when you give people the ability to choose, well, at the end of the day, they might choose correctly or incorrectly. And it takes a lot of education before people that are being given their freedom can actually use that freedom in the best possible way. That doesn't mean, of course, that you should now withdraw the freedom and treat them as if they actually were incompetent. So that is something of interest. What I see happening or what I think will happen, if the tender, of course, is awarded because SASSA made it very clear that all of them will go to tender because of the Constitutional Court decision to basically tell them to do so. It does not mean that they will actually award the tender at all. But let's assume they do. The tender is very specific in the way that it wants to create what they call a very restricted account. And that restricted account is going to basically give absolutely, in my view, nothing to beneficiaries. It's going to allow them to receive money from the government and basically to draw that money out in a cash form. They will not be able to conduct any other basic business. What we will see then and what we are really seeing is that beneficiaries that have become quite comfortable with the sort of functionality we've been granting them are going to migrate to a fully fledged banking account rather than to utilize the SASSA-restricted account. So that, in a way, gives a new opportunity to rebank or unbank existing beneficiaries, but of course, without the restrictions on product and without the restrictions on pricing that SASSA is imposing in the new tender. So I don't -- it's an interesting paradigm we're getting into, but in a way I'm very excited about it because I think it's going to open up the entire market to basically be put to work outside of the SASSA constraint, allowing SASSA to do what they mean to do, which is to distribute grants and to make sure that people receive them, but afterwards, not to take any responsibility, accountability or liability of what it is that they will be entitled to do with the grant that they receive. And if that means that they decide then to open a bank account in order to become part of the South African economy in a greater way and to have access to financial inclusion, I think that can only be good for us and our products and the services that we supply.

If I could follow up -- obviously, I'm trying to get to how important the SASSA contract is, not just for your transaction processing revenue and profits, but also then for your financial products, which you sell to those same beneficiaries within -- post 2017, you technically would not be able to access via the restricted bank account. So if I want to get a feeling about how important that account is, you did a public interview here in South Africa, late last year with Alec Hogg and the transcript is on the biznews.com website. And Alec asked you what proportion of your income is generated outside of South Africa, and your answer is about 20%. It used to be 20%, now it's closer to 65% to 70%. I just want to confirm that amount because it was difficult for me to tie that up with your financial statements. What proportion of your income is non-South African?

Herman, I think [indiscernible].

Let me get back to you for you to answer this question exactly for you, so that I can be more specific...

Our next question comes from Jordan Hymowitz of Philadelphia Financial.

Most of my follow-up questions have been answered at this point.

Okay. And Dylan, hold on a second, let us just answer the last question because I got cut off. So yes, I mean, I think the reference was the -- what portion of the revenue and income was non-South Africa. I think the inference is not, not South Africa, but it's non-SASSA, yes.

So just to obviously clarify what you had asked, Serge's references to the revenue split, basically what he referred to was non-SASSA revenue. And obviously within South Africa, there are various other businesses that produce or that contribute significantly to the top line and those would include our EasyPay business, as an example, and all of our Umoya Manje product ranges. So the split that he referred to definitely was non-SASSA compared to the rest of the revenues. And so that's -- I think in your question, I think there was also an inference to say, well, what is the dependency on the SASSA account, which obviously is a very good question. And what's interesting is that, today, our financial services we offer, including our, for example, Umoya Manje, airtime and electricity sell [ph] ...

And financial.

And financial services are completely independent of that particular account. That is run through an independent set of people, an independent company and part of these are -- all of the deductions that occur, because of, for example, debit orders, these are actually run through the standard banking system and are not directly connected to the SASSA account itself. So most of that stuff is going to remain regardless of who wins the prize of having the SASSA account at the rate of ZAR 14.50, including that or not. If you take that into consideration with my previous statement, maybe that a number of beneficiaries will then choose to open up what I would call is fully fledged account, we see no reason at all why those beneficiaries would not open those accounts with us considering that our accounts right now are, by far, the cheapest in the market and, candidly of course, the most functionality for the buck that you pay for them.

Our next question comes from David Koning of Baird.

Just a couple of quick financial ones. I think you mentioned something about margin increasing a bit, EBITDA margins increasing a bit in the core South African transaction business. I can't remember what the reason exactly was, but maybe you could just talk about that for a minute.

Yes. The margins in our core South African business, Dave, in terms of operating margin, there's a bit of fluctuation depending obviously on the product mix, and it varies from quarter-to-quarter because there are also some cyclical trends in some of those underlying businesses. What I referenced in my prepared remarks is really looking at the EBITDA margin, specifically, of the South African transaction processing business is something that we hope to stabilize over the next several quarters. One of the prospective projects that may have quite an impact on both -- well, on -- mainly on the operating margin would be the rollout of our mobile ATMs across the country. We plan to roll out quite a significant amount of these fairly expensive machines. But obviously, we've done what we believe is sufficient research and homework in terms of the volumes that we hope to generate through these specific ATMs. Clearly, the depreciation charges on those machines will have an impact on the operating margin. But as far as the EBITDA margin's concerned, we certainly hope to improve on the margin as it currently stands.

Okay, great. And then the tax rate. The first 2 quarters were kind of below kind of normal rate. I think you're averaging 31% year-to-date. Is that sustainable, that kind of 31%, 32% going forward?

I wish I could say yes, but unfortunately, a big determining factor on the final tax rate for the year is obviously going to be the extent to which we declare or may declare dividends up from the South African company into the U.S. company to pay for expenses or international expansion. And those, in turn, would obviously trigger some utilizations of foreign tax credits, et cetera. That calculation gets done at the year-end stage, and the result of that could have an adverse impact on the tax rate. So for our own perspective right now, we don't think that it will tick up too significantly, but it could go up as much as to the 38% range. But that it will only happen in Q4, right at the end when the final tax comps are finalized.

Our final question comes from Russell Anmuth of Gotham Holdings.

In South Africa, when do you expect to be able to offer life insurance services again, given how important that can be to cash flow?

Yes. As you know, our life insurance company with -- was -- we were issued with a Section 12, which means we haven't been able to sell any insurance for the last, what, 2 years. We've kept it going, and I think we've done everything that the Financial Services Board has asked us to do in order to, for lack of a better word, meet all of their current and future requirements. To be quite honest, I think the DOJ investigation did not do us any favor in this particular aspect because they've been, I think, far more thorough at looking at us and our business plan and what we're doing and how we do it rather than perhaps at other people. We, again, are of the view that we've done everything in our power now as of the last, I think, couple of weeks and we've been dogged by our Managing Director as well as the gentleman that was appointed by the FSB to oversee what we were doing as part of -- who's also in our board and as management. When I'm talking the board, I'm talking the board of the company. And we are hoping to get clearance from them very, very, very shortly now. If that happens, then to be quite honest, we've been ready for a while to actually launch a real attack on the South African market with the product that we've designed. And when we do put our minds to launching a massive attack, we're normally pretty good at it, which means we'd like to get 50,000, 100,000, 150,000 new customers very, very quickly from the date of launch, which means with a bit of luck, by the end of this financial year, end of June, we could already have 50,000 more, 80,000 people in our books, if everything goes according to plan.

Big number.

Yes. Well, you've got to go for big numbers, because we're growing -- in order to grow at the sort of rate that we're growing, we can't do it anymore with small numbers.

The beauty of scale, finally. So just to follow-up to that. So where does -- with all the damage that AllPay has caused the company in all kinds of different arenas, from business in South Africa to the U.S. stock market capitalization and on and on, where do you stand at this point with AllPay, with Barclays, with addressing the situation?

So yes, I didn't catch the last piece of the sentence.

What is your thought process on addressing the damages that AllPay has caused the company across the board, from the U.S. stock market capitalization to business in South Africa?

I understand the question now. And obviously, there's a couple of things. We have mentioned the fact that we have commenced legal action, number one, because we believe that they were fundamental in leaking that information to the press first and then to the DOJ anyway without any substantial evidence of anything, which would've been difficult considering there isn't anything to find. And certainly, we have -- our attorneys have decided that it was better to wait for the Hawks' investigation to conclude because when -- rather than to use the word if, when they actually decide that, in fact, we didn't do anything wrong and that none of our companies were ever involved in any of these particular events of corruption or alleged corruption, then to be quite honest, we're going to be I think on the front foot and we'll be able to go back and start adding everything together and decide how much money have we lost, and have our shareholders lost because of this and, of course, which jurisdiction should we commence a new lawsuit in. Because depending on the legal system, South Africa is not very good at -- as far as collecting damages. Obviously, we'd prefer the U.S. because it sounds like it's in the U.S., you can basically ask for anything from anybody at any time. So there might be an opportunity and we are reviewing that at the moment, knowing that we're hoping to get clearance very, very soon. We will then decide in which jurisdiction we go after Absa, which is really AllPay, which is really Barclays, simply to make sure that this does not happen again, specifically for the wrong reasons.

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