Lesaka Technologies, Inc. (LSAK) Q3 2015 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to the Net 1 UEPS Third Quarter 2015 Earnings. All participants are now in listen-only mode. And there will be an opportunity for you to ask questions after today’s presentation. [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 third 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 www.net1.com. As a reminder, during this call, we will be making certain forward-looking statements and I ask you to look at the cautionary language contained in our press release and Form 10-Q regarding the risks and uncertainties associated with forward-looking statements. In addition, during this call we will be using certain non-GAAP financial measures, and we have provided a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures. We will discuss our results in South African rand, which is a non-GAAP measure. We analyze our results of operations in our 10-Q and in our press release in rand to assist investors in understanding the underlying trends of our business. As you know, that company’s results can be significantly affected by currency fluctuations between the U.S. dollar and the South African rand. So with that, let me turn the call over to Serge.

Thank you, Dhruv. I must admit that the sound is not great on our side. I don’t know if it’s the same everywhere else. Good morning to all of our shareholders. Our fourth quarter results continued to demonstrate the quality and strength of our earnings. We achieved $151.1million in revenue and $0.57 in fundamental earnings per share, which translates into 9% and 21% growth in dollars respectively, and 18% and 50% growth in rand terms, when compared to the third quarter of 2014. Our businesses continue to perform and grew at par or above our expectations, and our new and focused initiatives are showing better signs of adoption and scale compared to what we had originally anticipated. Today Herman will provide the details of our financial performance. We’ll also spend some time discussing our group’s strategic direction, its associated performance, and critical timeframes. Our business units continue to diversify their activities by introducing our products and services to new jurisdictions, market segments, and customer groups that offer us, due to the nature and the size of their populations and GDP, the potential for higher revenues. The first leg of our strategic plan, which required the development, certification, stabilization, and commercialization of our technology platforms and products, is complete and, as a result, not only opened a myriad of new business opportunities, but more importantly allowed us to consider alternative business models both in South Africa and other countries in the world. At this point, let me spend some time on our CPS government business, the status of the RFP issued by SASSA on April 17, 2015, and the different options and alternatives we are currently evaluating to ensure that the best possible outcome for the Company going forward. I’m sure that you are all aware of the sustained efforts we have made through the Constitutional Court of South Africa to ensure that the request for proposal that was to be issued by SASSA will not result in the same or similar legal battles as those we have experienced since we were awarded the previous SASSA tender in January of 2012. As a result of these efforts, the latest RFP issued by SASSA on April 17, 2015, is far more comprehensive and less ambiguous than it was in its original form, although it is our belief that certain areas could still result in legal challenges in the future. We cannot, however, continue to put forward new objections, as our behavior could otherwise be deemed by the court and our competitors to be obstructive rather than a genuine attempt to avoid future embarrassment to SASSA and the winning bidder, and too focused on the best interests of beneficiaries. It is unfortunate that of every incumbent we seem to be the only party that has a full and comprehensive understanding and appreciation of the complexities that are intrinsic to this critical government project, including the technological, security, functional, operational, logistical, administrative, regulatory, infrastructural, and financial parameters which are required to deliver a solution that is efficient, sustainable, socially responsible, and which provides the highest standard in service delivery, a fundamental goal of our government specifically when the poorest of the poor are involved. As a result of the restrictive requirements contained in the April 17 RFP, the latest news releases regarding the aspirations of the South African Post Office to be the national paymaster on behalf of the government, the latest changes to the South African BEE codes and regulatory environment as released by the Department of Credit Industry, and the fact that further questions have yet to be submitted to SASSA, that other bidders will need further clarifications in certain aspects of the RFP. We have designed a number of business models that will allow us to continue to participate in this business activity in a form that allows the Company to focus on its core strengths, continue to add customers without impediment, continue to grow its value-added and financial services but, more importantly, remove areas of uncertainty to provide shareholders with a clear business model that is sustainable in the future. Although I cannot currently disclose the details of some of the alternative business models we have developed so as not to assist or inform our competitors and due to restrictions placed upon us by the RFP itself, it is important for our shareholders to understand some of the various business cases we are evaluating. One, we can tender directly and offer our services as required by the RFP. Two, we can empower within BEE groups by providing them with technological solutions. Three, we can empower within BEE groups by providing them with a comprehensive and operational banking platform. Four, we can empower BEE groups by providing them access to our rural payment infrastructure. Five, we can incorporate our entire payment infrastructure into the national payment system. Six, we can directly provide a combination of the above or seven; we can indirectly provide a combination of the above. To conclude on our CPS plan, we await finality of the SASSA RFP, after which we will be in a position to provide our Board with alternatives and management analysis and recommendations. We expect that the final decision will be made towards the end of next week, as the RFP response is due for submission on May 19, 2015. Starting on the South African front, we have now completed, tested, and piloted our EasyPay retail banking account product, which we have named EasyPay Everywhere. This product is designed to address the banking and transactional needs of more South Africans, and focuses on citizens who are not only grant recipients but who are under-banked or who have remained under-banked due to the costs associated with existing banking products and financial services. We have conducted a pilot to test the adoption rate of our new product, and are pleased to report that a very high percentage of the people we approached - We believe that the reason for this success rate is not only because of our competitive pricing, but also because of the complete set of products and distribution channels we provide our customers. In addition to standard account facilitation, we also provide a suite of value-added services and financial services, all of which play a massive part in improving the way of life of many South Africans. Many of our delivery platforms are mobile-based, which allow customers to transact securely across the Internet and perform over the phone purchases even if the customer does not currently have or qualify for a credit card. This feature alone has created a huge demand for our product set, as many services in South Africa, including mobile applications such as Puda, smartphone application installs, and most e-commerce websites operate only if a credit card is used as the payment instrument. Our ability to fund our MVC instantaneously and transparently through multiple sources of funds such as a transactional accounted any bank with an Internet portal, a debit card, loyalty scheme, virtual currencies and the like, allows customers to transact where they are currently not able to do so. The official launch of our EasyPay Everywhere products will take place at the end of May 2015, and will be marketed firstly through our fixed branches, secondly through our mobile workstations, and concurrently through our mobile value-added service and portal. We aim to reach in excess of five million potential customers in the first 12 months, and are optimistic that our conversion rate will remain in line with our expectations. As part and parcel of this initiative, we have now rolled out more than 400 biometrically enabled ATMs that are fully compliant with the South African national payment system and can therefore accept any bank card. In April, our ATMs processed 408,000 transactions with a value of ZAR340 million, 60,000 of these transactions were affected by customers of other banks to the value of ZAR18 million. The fees we have earned from these ATMs are already making positive contributions to our operating income. We intend to continue to deploy a significant number of ATMs over the next 12 months. We are currently able to manufacture and install 60 ATMs per month depending on the location in which these are installed. Our ATMs are unique in that they can be used to conduct proof of life verification, can be used to effect cash withdrawal transactions using biometric verification, and offer our value-added services such as airtime and electricity vending, money transfers, and many other useful services. Internationally we continue to develop and strengthen our relationship with MasterCard. We are completing our new Mchip4 U E.P.S. EMV compliant mask, which will now incorporate the MasterCard PayPal product, allowing all of our customers to use a single card for all of their transactional needs, including that required in transportation. We continue to identify and work on new opportunities with MasterCard in Africa and other territories where the combination of MasterCard’s brand together with our advanced functionality and our end-to-end systems, are just unbeatable Although these projects are still to finalize, I believe that we will see some greater strides in numbered of countries in the short to medium term. Our contract with the World Food Programme for the development of our payment solutions in 12 African countries is being finalized between the WFP auditing department in Rome, the WFP African office in South Africa, and us. Although understandably slow, we are making good and positive progress. And once the contracts have been concluded, I expect the implementation plan to gain momentum, as we would be the ones driving them. As mentioned before, I do not expect these implementations by themselves to generate significant revenue streams in the short to medium term. The credibility that this contract affords us, however, has brought us a number of potential clients that should drive accelerating growth going forward. Let me now spend some time on our Zazoo initiative both locally and internationally. Locally, a Yuma Yumanji business has now broken ZAR200 million per month in sales for airtime, electricity, and other services. We are seeing similar trends in our advanced airtime sales in Malawi and other African countries. We are excited about the imminent launch of our VTU, which is virtual top-up integrated utility vending platform in Nigeria, which will allow for both the generation and immediate distribution of prepaid electricity tokens through our current vending footprint. Our Microsoft project continues to scale. Microsoft has now agreed to preload our VCpay application on all selected Lumia smartphones not only through the wireless operator, Cell C, but going forward, also through both Vodacom and MTN, the two largest operators in the country. This development is a testament once again that our mobile payment application has been well received by Microsoft customers and by Microsoft themselves. Activities in India are gathering momentum. We now have two clients in India and potentially another two that are willing to and able to integrate our mobile application into their on-mobile platform as soon as possible. In addition, one of the larger public sector banks has requested a financial proposal for the possible integration of our MVC application into their own service offering. Since the appointment of our managing director in India and the commencement of operations in the territory, we are pleased to report that the pace and support for our mobile products is accelerated. Through our local partners, we will have an addressable customer base that exceeds more than 25 million potential users, although we will be dependent initially on the partners themselves and their own priorities to drive awareness and adoption. It must be noted, however, that in India the three key themes we are observing are around e-commerce, mobile, and digital banking and financial inclusion. Mobile services are a priority at every bank and financial services provider in India who is vying for leadership in this space and is trying to build a competitive offering. Ours is by far the most innovative and advanced product specifically when integrated with our proprietary variable point technology, which provides additional security to transacting clients not only for Internet-based payments but also at point of sale and ATMs. The fact that our mobile solutions are fully interoperable with existing architecture and easy to integrate has also been critical to the reception we have received. This creates an exciting value proposition for banks, as it allows them to target their entire card base rather than just those who want to transact online. We are also exploring opportunities to rapidly enter markets in the Asia-Pacific region, including China. We feel that our products are well suited to the general Chinese markets that do not currently utilize or intend to utilize the EMV standard, but still require at least the same level of security or better than the EMV standard is meant to provide. Available PIN product that completely eliminates the risk associated with the cloning of any payment card, including bank stripe cards, could play a major role in entering this massive market, as no change to existing payment infrastructure is required. We are also exploring opportunities with a highly reputable company in Nigeria that could provide us the opportunity to build a solution similar to EasyPay Everywhere in Nigeria. The company has access to the required licenses, but currently lacks the technology and systems to rapidly scale its product offering in Africa’s most populous country. Zazoo is rapidly making its marks and has close to a dozen new business opportunities identified, some of which already in a contractual phase. Zazoo’s main focus is to acquire a massive customer base through which it will be able to facilitate the sale of ancillary products and services but, most importantly, be able to effect payments using its own VIN number to ensure that it can, on the one hand, keep the full interchange fees and, on the other, determine itself the fees to be charged to its own customers. This model is very different to that of Net1 in the past and will require a fundamentally different funding model, marketing plan, company structure, and an international distributed sales force. This is part of our ongoing endeavors to find the optimal solution and structure to unlock further shareholder value. I see no reason why the company should not conclude this fiscal year on a high note, and strongly believe that we are now even better placed than before to grow our South African businesses in market segments that are more lucrative than the wide in which we currently operate but, more excitingly, to accelerate the scaling of our mobile products and services in many countries in both the developed and developing worlds. I’d like to thank you much for your time. And I would like to 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 third quarter of 2015 compared to a year ago. For Q3 of 2015 our average rand/dollar exchange rate was ZAR11.74 compared to ZAR10.87 a year ago, which negatively impacted our U.S. dollar basis results by approximately 8%. 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 ZAR12.06 to the dollar and as predicted the stronger dollar has progressively, adversely impacted our fiscal 2015 results thus far. Notwithstanding the ongoing reporting currency headwinds discussed above, we have continued to sustain our top and bottom-line growth through Q3, 2015. On a consolidated basis for the third quarter of 2015 we reported revenues of $151 million and increase of 18% in constant currency. We reported fundamental earnings per share of $0.57 which grew by 50% in rand compared to a year ago. Our fully diluted weighted share count for Q3 2015 was $46.7 million shares. Let me now turned to a discussion of the segments and the financial performance during Q3, 2015. South African processing recorded revenue of $58 million during Q3 2015, 9% higher in local currency, driven primarily by increased low margin transaction fees 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 third quarter, 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 loss making business also contributed towards the improvement in the South African processing segment, operating margin to 23% in Q3, 2015 compared to 16% 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 alternate 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. We begin to see some growth through our newly installed biometric and EMV ATMs across South Africa. The inflationary increases over timing our cost 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 speak opportunities to increase efficiencies such as our ATM rollout and continued 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 that should increase the EBITDA margin of this segment. Intersegment transaction processing activities are eliminated on consolidation, but had a meaningful contribution to the segments during this quarter. International transaction processing generated revenues of $58 million in Q3, 2015 up 17% compared with Q3, 2014 on a constant currency basis. Revenue increased primarily due to higher transaction volume at KSNET during the third quarter of fiscal 2015. Operating income for Q3, 2015 was higher due to an increase in revenue contributions on KSNET, but partially offset by Zazoo startup cost in the U.K. and India. Operating income and margin for the third quarter of fiscal 2015 will also positively impacted by our refund of approximately $1.7 million at KSNET that had been paid several years ago in connection with industry-wide litigation that has now been finalized. Operating income margin for the third quarter of fiscal 2015 and 2014 was 17% and 15% respectively and were higher in fiscal 2015 primarily due to the refund received about. KSNET’s strong performance during Q3, 2015 is reflected by revenue growth of 13% in Korean won to $37 million while EBITDA margin ignoring the refund received, was 26% compared to 25% 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 sectors and reforms in the VAN and related industries going forward. We are optimistic that KSNET can outpace industry growth, given its competitive position and value proposition. Financial inclusion in the applied technologies represents our initiatives that provide various services and products to customers that result in their inclusion in the formal sector as well as the position of our technology both hardly and softly across our broad product portfolio. This segment encompasses smartcard accounts, Zazoo’s prepaid solutions and technologies sales, financial services including lending and insurance, and our hardware and software businesses. Our financial inclusion in the applied technology segment delivered revenue of $67 million in Q3, 2015 up 28% compared to Q3, 2014 on a constant currency basis. Financial inclusion in the applied technologies revenue and operating income increased primarily due to higher prepaid airtime sales, an increase in the number of U.E.P.S based loans, more ad hoc terminal and parts sales and, in rand, an increase in intersegment revenues. Smart Life did not contribute to operating income in fiscal 2015 and 2014 due to the FSB suspension of its license. We believe that this suspension will be lifted during the next three months. Our U.E.P.S based lending book at the end of Q3, 2015 was approximately ZAR543 million compared to ZAR700 million in Q2, 2015 and ZAR450 in Q3, 2014. Operating income margin for the financial inclusion in the applied technology segment decreased to 27% from 29% 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 board and market. The operating margin of this segment will continue to be effected 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 Q3, 2015 net interest income increased to $3.3 million driven primarily by lower average debt outstanding and higher average cash balances during the period. Capital expenditures for Q2, 2015 and 2014 was $6.3 million and $4.9 million respectively, and relate primarily to the acquisition of payment processing terminals to both expand and replace our retail processing footprint in Korea and the rollout of ATMs in South Africa. At March 31, 2015 we had cash and cash equivalents of a $111 million up from $59 million at June 30, 2014. The increase in our cash balances from June 30, 2014 was primarily due to the expansion of all our core businesses and, to a lesser extent, due to the cash conservation resulting from the sale of loss incurring businesses offset by provisional tax payments and the scheduled Korean debt repayment in October 2014. 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. I am happy to report that the group is once again in a comfortable net cash positive position. 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 such as ATMs and international expansion, the servicing of our debt, share repurchases and strategic acquisitions. Our second provisional tax payment in South Africa in June 2015 will adversely impact our cash reserves during Q4, 2015. Our effective tax rate for Q3, 2015 was 29.2% and was higher than the South African statutory rate of 28%. As a result of non-deductable expenses including legal and consulting fees and interest expense related to our long term Korean borrowings. While we have just under two months until our fiscal 2015year-end, we may still decide to distribute dividends from our non-U.S. subsidiaries which will have a negative impact on our fiscal 2015 effective tax rate. Our tax rate therefore fluctuates depending on our intention regarding undistributed foreign earnings and the timing of any payments, and it may result in a much higher effective rate in Q4, 2015. Our share count remains remained largely constant at approximately $46.6 million shares. We are increasing our expected fundamental earnings per share for fiscal 2015 to at least $2.48 assuming a constant currency base of ZAR10.40 to the dollar and by share count of $46.5 million shares. With that, we will gladly take your questions. Question-and-Answer Session

Thank you very much sir. [Operator Instructions] Our first question comes from Dave Koning of Baird. Please go ahead.

Yes. Good morning, guys, and nice job again.

Hi, thank you.

Yes. And I guess first of all, just on the SASSA contract, you mentioned the potential to not even bid on it. You wouldn’t just walk away from that contract and not bid unless you had pretty good insight into a good alternative where you would still play some sort of part or generate some economics, right? You’re not just going to walk away and say we’re willing to just give up a big revenue stream, right?

It’s a very good question, but I think you gave yourself the answer. We have spent too much time, effort, and money with this contract to ever decide to simply walk away if we did not believe that the alternative, if any, that we would have put together – that we would put together would not be better for the company and our shareholders.

Yes, okay. In those, you basically laid out the alternative. Maybe you could kind of talk through, maybe with a little more detail, what could you envision -- if you didn’t bid on this contract, do you envision that you would still play a technology part for one of the bidders? Or maybe you can just say what potentially could be an outcome.

I think -- number one, I think it’s too early to assume that we would not bid for the contract it is number one. Number two, I try to list a number of alternatives. And perhaps there are others which I did not actually talk about, because obviously at this point in time, a week away from tender response and submission to be due, we obviously do not want to give any sort of clear ideas to any our competitors what we intend to do or not to do. But, there is no doubt that at the end of the day I think we all know -- we’re all aware of the fact that the infrastructure today that we have deployed across South Africa to service the 10 million beneficiaries is a massive one. And it will always be playing a role in paying beneficiaries in one form or the other. The fact that we may make some part of the infrastructure available to maybe a different group of people is really irrelevant at the end of the day considering that we would still be the people that we will be making some sort of revenue and by -- for lack of a better word, rather than to be directly rendering the service, we would be the people to whom the service would be outsourced. And therefore, we would be picking up other sort of transaction fees or royalty fee. So and that does not apply to the entire solution. That only applies to parts and parcels of it. The technology, for example, is one which could be completely unleashed today - isolated from the operational -- specifically the rural area operational infrastructure that we have put together, which is again very different to the operational infrastructure that we have in urban areas e.g., with the ATMs. We have now the 500 ATMs that we have rolled out, which are soon going to be close to perhaps 600, 700. And by the end of the year, we’ll be closer to a 1,000. So, we’ve got to look at the different pieces in isolation, and this is what we’ve been doing. And we’ve been looking at saying how do we go about, by ensuring that we can continue to diversify our business more and more away from purely beneficiaries -- that’s obviously where the growth in terms of people and the growth in terms of money is limited -- and rather to ensure that the infrastructure can be used in an optimal fashion not only to service them but also to service people that are in slightly higher income groups? And that is something that was always part of the plan. But, as you’re well aware, two years ago or since the beginning of this contract, our solutions were very much part of a closed loop system and did not into operate with the South African national payment system. They now do, which means that the entire infrastructure we have can be utilized purely or completely in banking per se, and can basically service any customer in South Africa, not only ours but customers of other banks. And that service loop is a completely different sort of a facet to our technology, infrastructures in how to optimize, of course, the return for our shareholders. And we’re going to be very careful with whatever decision we make. We do not go to something that maybe short term, let’s call it, appear to be more attractive, but long term could actually stifle the growth that we’ve actually positioned ourselves to be able to achieve. So, it’s quite a complicated model, which obviously Herman and the financial people have been working on numerous results and modeling techniques of what we’re trying to, what we want to do. And there are some of them that are extremely exciting, more exciting than the current model we have right now when we purely are, for lack of a better word, a supplier to SASSA. So, nobody is going to say, well, we’re going to dump something that we’ve been doing for the long time. Nobody is saying that at all. But, we might be able sacrifice a portion of it and to replace it by something that’s far more lucrative, where we fully believe the sum of the parts might actually be greater than the individual parts themselves.

Yes, okay. That makes sense. And just as a follow up, and separately really from the SASSA business, it’s historically pretty easy or reasonably easy to model that the South Africa business and the international. But, the financial inclusion business is really where growth has been massive, and it’s almost difficult to model because growth is so big. And it sounds like there’s a lot of new things in the pipeline that you’re developing as well. I mean, is it fair to expect that that business continues to grow well above 10% next year, or is the law of large numbers getting to a point where we’re starting to see more normalized growth, back down to 10%?

I think it would be unfair to say that we’ve reached the cap in any form whatsoever. I think you are quite right. To try to model it accurately is right now almost impossible. The only thing we know is that the more products we put out there and the more we deploy our infrastructure, the more customers we get. And we are quite astonished at the take up rate of these particular customers. There is obviously, and there’s always been obviously, a huge demand for certain products and certain services that we somehow, either because we were quite right about it or simply by luck, but that we’ve managed to plug into the sort of the platinum mine to actually show us that in fact we can continue to grow, and I think grow exponentially for a while longer, specifically in any form of financial service. When everybody talks about banking, well, when you talk to the people we are speaking to, banking for them is a cost. It doesn’t really serve any purpose. As soon as you say, well, banking is there purely in order to facilitate financial service inclusion, then suddenly people open their eyes and are saying, well, you know what? If I can get the -- and I need a bank account in order to be able to get A, B and C and D, then I’m quite happy to have the bank account. In our model, the bank account is offered for free, which means there is no barrier to entry for people to sign up. And after that, it’s a question for them to simply start paying for whatever it is that they do, be it transacting or be it applying and being awarded or buying a particular financial service. Airtime and electricity are two of those. But, we do not believe that, in terms of margin, they will ever be the ones that are going to give us the biggest amount of revenue. There are many other products that are far more lucrative that in fact we didn’t even though existed. And these products we are starting to tap into in quite a big way, and this is why we are confident that we believe that, by targeting the five million people in the next 12 months. We should have a pretty high success rate of actually signing up a big proportion of them, which makes this business hugely more profitable than what it is at the moment.

Okay. Great. Well, thank you.

Thanks.

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

Hey, guys, another outstanding quarter of cash generation and margins. Two questions; one, any follow up to your thoughts for a potential restructuring of the company which you spoke a bit about two quarters ago on the call? And then secondly, could you flesh out a little bit further the opportunities that you’re looking at with MasterCard?

It’s very simple. On the first one, I think we are pretty much ready as management, or we will be -- by the end of the second week in June. We’ll be ready to discuss with management, with our Board, what we believe the form of restructuring should be in order to really optimize, what we would call the company in general, both from a South African point of view and an internationalization point of view. So, obviously we will inform all of you as soon as we are ready with that. But, the first thing is to formalize it through our Board, for our Board to actually tell us that, yes, they want to go ahead, and then candidly whatever it is we’re going to. But, chances are is that we are going to go out to our shareholders and actually sit and ask them for their views and to get their permission for it, even if we do not need to do so. So, that’s point number one. Point number two on MasterCard, I know that it can be a little bit frustrating because MasterCard is such a big tanker that for them to be able to slow down and to make a one degree turn to the right or to the left takes a huge amount of time. But, we’re starting to see more and more activities between ourselves and MasterCard, not only locally whereby things are getting very exciting. I did mention the fact that we are introducing PayPal into one of our -- into our card, which is a mask, which candidly would be one of the first cards worldwide to have thus multiple functionality. That also would allow our own customers to be able to use the one card to be able to go into shops, at ATMs, at pay points, or candidly use the card for transportation. And it will be the same card. Now, that is something that would be very innovative and very new. And this does not only apply to the South African environment. Now, that is something that we could not really do as quickly as we possibly can if we did not have the full -- the complete support of actually MasterCard, and we have that. Now, there are a number of other initiatives not only -- and I’m not only talking about South Africa, I’m taking about Africa and elsewhere in the world that work hand in hand with MasterCard. I don’t think there’s a week where we do not have two or three conference calls or meetings, local or international, with MasterCard people. So I believe strongly that we are picking up momentum. There’s a number of things MasterCard are doing in which we are involved. And we believe that that sooner or later this is going to be realizing some big wins for us that for us that will definitely be very useful for our bottom line. So, I think we’ve just got to be a little patient to know that we are dealing with a large corporation with lots of internal politics, with lots of internal people that must say yes in different parts of the world. And as soon as we have the yes -- a little bit like the World Food Programme, as soon as things are being put into our hands and we can continue to run then we will start running at the speed that we can run at rather than at the speed that someone like MasterCard or the World Food Programme can run it.

When you talk about potentially big wins with MasterCard, geographically are those going to be further centered around the continent of Africa or more spread out geographically?

Africa is obviously a big thing for us, and we love Africa. But, I can assure you that Africa is not our focus.

Okay. On the Hawks for a second, where do you stand -- where do the Hawks stand, do you think? I understand it might be difficult to calibrate, but if you could give us any color.

If it were a South African litigation, I would be able to give you my own views, which I think may be probably more correct. On the side of the DOJ, just let’s start there, at this point in time we can’t really comment too much because we haven’t really heard or seen anything or spoken with them, or our attorneys haven’t spoken to them for quite a long time now. And I mean by a long time, it’s probably more than a year. On the South African side, we obviously are a little bit more in touch with what’s going on. And it’s the second or third time now that it has been promised to us that the investigation would conclude and should have been concluded, funnily enough, by the end of April. And we are still awaiting further reports, and now we are being told the reports or the finalization of this report might come out during the month of May or at the beginning -- if not the beginning, towards the end of May. Now, I wish I could be more precise on that, but I think we’re dealing here with again big organizations that have got lots of people they’ve got to report to. They’ve got to be very careful what they write and how they write it. Lots of people are going to scrutinize it. And candidly, we would rather they go out and do the best possible job they can to make sure that, once this thing comes out -- which I have no doubt it’s going to clear us entirely. The last thing I need is somebody to go and challenge the report or something to actually say, oh, well, they got cleared but they shouldn’t have been. So, I think lets all be a little patient. At this point in time I’m pretty confident that things are going to happen in the very near term and are going to be -- from a South African point of view, are going to be positive for us.

Okay, that’s great. Lastly, on the MVC program that’s geared towards the First World, are you making progress educating potential customers?

That’s again a very good question. I tried to give some information. You probably saw that Zazoo has already entered into at least a pretty detailed discussion with more than 10 different organizations -- three months. So, the demand for MVC in this product and the excitement that it’s created is actually massive. And none of these, by the way, are in – at this point in time, apart from the one we’ve had in South Africa for a while, no new ones are actually in South Africa. Most of these are outside of Africa. They are either in Europe, India, or the Asia-Pacific rim. And as you saw, we also very much have identified an entry point into that space, which Herman tells me we should finalize very, very shortly, which we believe is going to give us a very, very, very good footprint for us to start expanding or introducing MVC to other organizations that before we were a little bit fearful to tread, e.g., a place like China. We believe that you have to do it with the right organization, people that understand the market and the people and how things operate. We believe we might have actually found that and already those people who were discussing this too believe that MVC in general, plus a few more of other products with the absolutely ideal for this market. So, I think the ramping up or the excitement this thing has created with very few resources put in and candidly a very, very small amount of time but focused time is starting to show some great result. And the intention of the Board – in fact, the Board has made a commitment to spend quite a bit more money to grow the people infrastructure and the support infrastructure we need to be able to accelerate and really capitalize on the momentum that this product is picking up.

When you talk about an entry point just generically, are you talking -- in China or whatever country you’re thinking about, is that with a strategic, a corporate, or is that from a government perspective?

Russell, unfortunately we didn’t hear you very well. But, if you’re saying is this a government – if this is government driven, the answer is no, it isn’t.

Okay. Okay, much more exciting then. Thank you. And then just lastly, with PayPal being integrated into the MasterCard combination in Africa isn’t that worthy of potentially announcing to explain on a broader scale how that works?

When we come a bit closer to finality. What I’m really – I mean at the moment, we know technology works that’s easy to explain. At the moment, we’re finalizing the important part of all of this, which is what do we get. And candidly, we believe that we have enough initiatives in many places in the world to make sure that we are not going to compromise simply because of anybody’s name or size if we are not getting what we believe is our pound worth of flesh. So, as soon as we closer to the finality of the financial negotiations we’ll certainly let everybody know what’s -- how it’s working.

Okay. Thank you for answering all these questions and for all your incredible work.

Thank you very much.

[Operator Instructions] We have a question from Bob Napoli of William Blair. Please go ahead.

Good morning. Thank you for taking my question, just a question on the long term growth of your business and your thoughts on the growth. This SASSA contract has been a very big part of your business and obviously it’s gone through a lot of turbulence and it’s had a lot of -- added a lot of volatility to your valuation. If you do walk away from that in some way, shape, or form and don’t bid on this business, what is -- how would you look at earnings growth or the earnings outlook? Would you be able to maintain earnings as you transition to the growth of these other businesses before you grow again, or would you expect earnings to initially decline as you’re investing? And then, what do you view as kind of the long term growth potential, top and bottom line, for your business?

Well, that’s obviously part of the modeling that we have been playing with. Obviously, we all want to know what we believe. Now, it’s very simple. What you have you have. What you don’t have, you think you’re going to get. At least initially, it’s a little bit more riskier because you have to attach a probability to it, okay? So, the way we’re looking at it, we’re saying if you look over the last couple of contracts with SASSA, we know that one thing is for certain. It’s that the pressure on price has been massive. There was a time we used to get ZAR27 a transaction and it went down to ZAR16.50 And now the new tender is actually asking for something even smaller than that. And more importantly, there have been a lot of overtures by SASSA; by the South African Post Office that all demonstrate that almost certainly after this contract period that they might decide to take this in-house, okay, which by the way does not necessarily exclude us. But, they might want to take it in-house. So, one has got to look at do you wait until that event has occurred before you make a call in terms of, for lack of a better word, starting to put in some time, effort and money into capitalizing on alternative business models that do not rely on SASSA? And certainly we would like to be able to do both at the same if we can. That would imply that certainly over the next year or probably by June next year, I don’t think anything would have changed. And therefore, our earnings would probably continue to grow, and they will grow for two reasons One, because SASSA will still delay in some form or other but, more importantly, the alternative models would have actually clicked in and will start actually generating higher revenues, okay, with higher profitability as well. What will then happen is that, if the SASSA contract disappears, not in totality but in some form, you must have that some of those earnings go down. But, by that stage, our view is that the alternative businesses will certainly be around to be able to bridge that gap But, more importantly, the limitation of growth would have disappeared, because rather than them to be playing the game whereby economically it’s going to become a smaller and smaller game, we now will would have migrated one game and changed to another where in fact the top -- the sort of the limitation of the new games are certainly unknown, but we know are certainly going to be fundamentally higher than that purely of a government contract. So, we’re seeing -- we’re obviously looking at saying how can we -- to protect our company and our shareholders, how can we automatically use a transition method to capitalize on what we’ve built and continue that momentum and convert that momentum into a new business venture which we know we have been building over the year and we know can actually work. And that point of transition. There may be some fluctuation at that point in time in earnings whereby you might find earnings for a couple of quarters that go flat. But, in my view, they’ll start going up again, rather than to stick to what we’ve got where the earnings could go flat but then they’ve only got one way to go in, and that’s to go down. I don’t know it that makes any sense.

Yes. Yes, that’s very helpful. Thank you very much.

Okay, Bob.

Ladies and Gentlemen as we have no further questions that concludes this conference. On behalf of Net1 UEPS thank you for joining us. You may now disconnect your lines.