Lesaka Technologies, Inc. (LSAK) Q1 2016 Earnings Report, Transcript and Summary

Ladies and gentlemen, good day, and welcome to the Net1 UEPS Technologies Q1 2016 Earnings Call. [Operator Instructions] Please note that this call is being recorded. At this time, I'd like to turn the conference over to Dhruv Chopra, Head of Investor Relations. Please go ahead.

Thank you, Ari. Welcome to our First Quarter Fiscal 2016 Earnings Call. With me on the call 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 forward-looking statements, and I ask you to look at the cautionary language contained in our press release and Form 10-Q regarding the risks and uncertainties associated with forward-looking statements. In addition, during this call, we will be using certain non-GAAP financial measures, and we have provided a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures. We will discuss our results in South African rand, which is a non-GAAP measure. We analyze our results of operations in our 10-Q and our press release in rand to assist investors in understanding the underlying trends of our business. As you know, the company's results can be significantly affected by currency fluctuations between the U.S. dollar and the South African rand. So with that, let me turn the call over to Serge.

Thank you very much, Dhruv. Good morning to all of our shareholders, and good afternoon to others. Our first quarter of 2016 marks a milestone in our company's ability to innovate, but more importantly, to deliver. I have mentioned a number of times that our strategy is based on both attack and defense. Some of you may know or heard of [indiscernible] Chess World Champion during the '60s, who was known for defensive play before he would launch an unstoppable making combination. We have for many years attempted to ensure that we construct fullback plans before we spearhead any new business development. We have been successful in implementing this strategy and our business has been able to morph when we require to counter direct threats and to continue growing at an healthy rate. This quarter is a testament to this strategic plan. We achieved USD 154.5 million in revenue and USD 0.56 in fundamental earnings per share, which in rand terms translate into a 19% and 16% increase when compared to our first quarter 2015. We have been successful in scaling up our EasyPay Everywhere business, expanding our financial services businesses and further developing our ZAZOO business, in both South Africa and elsewhere in the world. We continue to scale all of our strategic businesses as we expect these to deliver higher revenue streams with improving margins. Herman will provide the details of our financial performance, but I want to focus on some key strategic areas such as EasyPay Everywhere, ZAZOO and our card-centric activities. I will also provide an update on the latest SASSA development. Perhaps, let me start by updating you on the SASSA contract. We have already informed you that last month, SASSA decided not to award the RFP and that therefore, our contract would remain in place until 31st of March, 2017, as per the 2012 standard award and service reward agreement with the company in accordance with the Constitutional Court's ruling. SASSA filed this decision with the Constitutional Court of South Africa and at the same time advised the Court that they would submit the plan regarding the in-sourcing of the payment system after the conclusion of the contract. SASSA submitted the in-sourcing plan to the Constitutional Court yesterday and we have posted the SASSA Constitutional Court filing on our website for your convenience. Although we cannot comment on the timing, feasibility or complexity involved in any of the milestone stipulated in the proposed plan, as many of the steps to be performed are conditional. Our negotiation and approval by a number of institutions and organs [ph] of state, such as the South African Reserve Bank, the Payments Association of South Africa, the CSL, The Scientific and Industrial Research, National Treasury, and many others. We would, however, like to offer our interpretation of the plan based on our understanding of the business in general. SASSA since 2012 reiterated that they intended to in-source the payment function of grants at the end of the 2012 tender contract period. To this end, SASSA included in our contract a clause that allowed them to test their payment system 6 months or so prior to the end of our contract period. Our contract also mandate us to provide a phase-out plan, which, if in line with the timing specified in the recently canceled RFP, would range between 9 and 18 months after the end of the contract period. We, thus, believe that the SASSA proposed plan is in line with SASSA's original intention. SASSA indicates, however, that some delays may be experienced in the finalization of some of the steps required in their proposed plan, as there [indiscernible] beyond in some aspects due to the preparation issuing an evaluation of the latest RFP, as was ordered by the Constitutional Court. SASSA is also clear that their intention is to continue with the outsourcing of the cash payment portion of the business, which step, in our opinion, may require a fresh tender to be issued in due course. They also state that retaining biometric proof of life is critical to the future solution. In addition, SASSA indicates that they need to consult with various stakeholders regarding the opening of special bank accounts, which we assume would be the same [indiscernible] restricted accounts mentioned in the now [ph] canceled tender. SASSA also mentions the fact that they would like to issue new cards to the 10 million beneficiaries over the 6 months period, but very scarce detail is provided on how they would achieve this mammoth task. The SASSA decision not to award the RFP and to thus utilize our system until March 31, 2017, should allow the company to realize its anticipated 5-year profit margin of between 17% and 20% over the duration of the contract. Our South African Social Security Agency contract has operated by a subsidiary cash payment services continues to represent approximately 20% of our total income. We will keep you abreast of developments regarding SASSA's plan and what change, if any, such plans could have on the company after March 31, 2017. We will, however, continue to provide unwavering support to SASSA in any way possible to achieve their objectives without jeopardizing or disrupting the payment to grant beneficiaries. Let me now focus our attention to our EasyPay Everywhere initiative. Our strategy, which partly resulted from our decision not to participate directly in the new SASSA RFP was to convert as many unbanked or under banked customers as possible, including grant beneficiaries to our new EasyPay Everywhere account offering. The rationale for this approach was simple enough. The new RFP in many ways impaired the functionality that could be offered to grant beneficiaries by the winning bidder, their partners or [ph] the consortium members and SASSA's filing yesterday still references special bank accounts for future payments, which we assume, means, restricted bank accounts. It appears that Sassa's intention is for beneficiaries to receive their grant in these restricted accounts and then to be able to either withdraw the grant in cash or to transfer such grant into another bank account of their choice, such as for example, an account at EasyPay Everywhere. All beneficiaries currently enjoy full unrestricted functionality under the solution we currently provide and now therefore already familiar with the feature of the EasyPay Everywhere product. Such functionality is for example [indiscernible] Easy now is used [ph] fundamental in providing the means to achieve financial inclusion in a most comprehensive manner. This research belief [ph] and strategic objective has not wavered and as a result, we have opened 450,000 new accounts as of today since we commenced this program just a quarter ago. I want to highlight that we have now deployed our sales team in all 9 provinces of South Africa and are now achieving registration rates in excess of 17,000 new accounts per working day on our busiest days, which occurred at the beginning of each month. What does this mean for our business? Well firstly, we have continued to receive the monthly fees as per the SASSA contract for a minimum of 18 months, plus in phase-out period. Secondly, securing alternative independent accounts rather than SASSA accounts will result in beneficiaries enable to use their EasyPay Everywhere account, irrespective of our contract with SASSA. The bank accounts that we provide are therefore permanent and not affected by the duration of the SASSA contract. We believe that the bank accounts are also the best value and functionality available in the market and that our account holders have no reason to go through the tedious process of changing the EasyPay Everywhere account ever again. Thirdly, our new EasyPay Everywhere customers enjoy reduced charges when using the EasyPay Everywhere [indiscernible] ATM network. We had 750 ATMs deployed by the end of October, which processed approximately 774,000 transactions with a value of $672 million. After the first week of November, we now have 800 operational ATMs that have already processed 600,000 transactions with a value just in excess of $600 million. As we deploy more ATMs and sign up more EasyPay Everywhere account holders, we should increase the transaction volumes in our ATMs resulting in a fourfold increase in overall fees we generate. Even though our fees are less than those charged by any of the other banks. Our loan book is currently established -- is currently stabilize at round $490 million due to our conservative approach to microfinance, specifically, affordability criteria. As we continue to deploy new products, such as for example, in our focused loans or emergency cash advances. We maintained a tight reign of our risk, but estimate that our book should grow at double-digit rates in rand terms this financial year. In addition, we have now deployed our sales force in some provinces to market and sell our new insurance products. We have, to-date, sold over 17,000 policies, which represent an annual premium income of around $10.5 million. Although these numbers are not significant at this point in time, we believe that once we have deployed and trained our sales staff in all provinces, the contribution from insurance should accelerate and become more meaningful just as we are experienced with all of our other financial inclusion business products. Another benefit from having a life insurance license is that we are also offering our EasyPay Everywhere customers basic free insurance -- life insurance cover, which should differentiates us from our competitors and detractors. I will now spend a few minutes on our mobile-centric business, ZAZOO. ZAZOO, as you know, was born effectively in 2013 by combining various mobile-related businesses within Net1 group, integrated them as 1 unit, driving a unified corporate and market strategy and building a cohesive mobile fintech company with multiple products, customers and geographies. Today, ZAZOO's business includes over 5 million customers in its various Manje [ph] services. Pasavute in Malawi, which for the first time exceeded 1 million active customers in Q1 of 2015. Over 1,700 employers with more than 660,000 employees for payroll services for ZAZOO enterprise payment solution, named first. ZAZOO remains the largest virtual top up service provider to MTN across 9 African countries, including Nigeria and South Africa, and the largest supplier of sim cards to SMART, the largest mobile operator in the Philippines. What is more exciting for us when we look at ZAZOO is that all of these accomplishments I've just listed, exclude what is the future of the company namely our patented technologies like mobile virtual card and variable pin. The majority of the developments we have announced and talked about in the past 12 months relate to MVC or VPIN [ph] only and others recently been launched or in the process of launching. These initiatives aimed at developing and developed world and some of the issues we've identified, namely interoperability, accessibility and security. VCpay, our B2C brand in South Africa has enjoyed good tracks in a rollout 6 months, seeing transaction volume grow by over 200%. Partnership with the likes of Uber, MasterCard and Microsoft, which started this product in South Africa are in the process of expanding into other territories. We are working feverishly to get the new projects with the likes of BitX, Funifi and Oxigen live as quickly as possible. Meanwhile in Canada 2016, we are also going to introduce VCpay Corporate, which is a state-of-the-art corporate solution based on MVC that enables businesses to control spend by employee, merchant, currency and the like and streamline the entire corporate spend and expense reimbursement stake this quarter through a simple to use virtual card platform. We have already signed agreements with 4 early adopter corporates, which together should add around ZAR 100 million upon loans to our transaction volumes. Initially, we will target the 1,700 employers we had a relationship with first allowing us to build this new offering in South Africa and Europe through the multinationals we serve. During Q1 2016, we will also begin staffing up our UK office for ZAZOO in order to help us implement and deliver our current and future pipeline of projects. From the financial and metric perspective, ZAZOO's revenue grew 57% year-over-year in constant currency while it processed approximately 93 million transaction in Q1 2016, which is 68% higher than 2015. ZAZOO is now the group's third largest revenue contributor. We are also in the process of identifying the best solution that will allow us to issue plastic or Virtual Card ourselves without paying away a large portion of acquiring and issuing fees to third parties. We are focusing our initial efforts on the European economic zone and we'll keep you updated on our progress. In India, we're hoping to announce the launch of our project with Oxigen by the end of September, but we are running 6 to 7 weeks behind schedule, driven largely by external and local processes. Nevertheless, the good news is that we are now in the final stage of user acceptance testing and are targeting to be live in the next 2 weeks or so. Oxigen is one of the oldest and largest prepaid service provider in India with 200,000 retail distribution touch points and following a national branding campaign, now in excess of 10 million digital wallet customers, we will all pursue [ph]. They have access to MVC with Visa. Our opportunity pipeline in India is far more encouraging today and we will need to ensure we allocate sufficient resources in order to capitalize on these exciting opportunities. Meanwhile, our mobile value-added services in South Africa and elsewhere continued to go from strength to strength. Umoya Manje posted 67% transaction growth over Q1 2015. while Power Manje transactions grew 108%. Similarly, Pasavute in Malawi sustained its momentum with year-over-year transaction growth of 111% in Q1 2016. One final thought on our value-added services, the reason for our success with these projects is because we provide the solution that is convenient and easily accessible through the mobile phone and affordable. And it is by far the cheapest of any formal or informal alternative. Depending on the territory and infrastructure, we can work equally successfully with any funding or repayment mechanism. So in South Africa, naturally, the consumers of these services have an account with Grindrod Bank, but take Malawi as another example, who have no relationship with in bank all account and therefore, we will allow the network operators traditional agent network for repayment. Given the value we provide and the robustness of our technology and strength of our risk management solutions, even though the agent's [ph] in Malawi, our default rate is below 1%. To reiterate, on our mobile-centric business, we're intent on building ZAZOO into one of the leading mobile fintech companies globally. We already have built sufficient scale in this business both in terms of revenue and more importantly, profitability. And with its current and rapidly growing pipeline, we continue to hold ZAZOO to an extremely high standard of delivery. Lastly, on our World Food Programme. Our association with MasterCard is starting to bear fruit. We have now signed a contract with MasterCard for the express purpose of tendering for the World Food Programme distribution business in 81 countries. And we have now submitted our joint tender and await the WFP's decision. Number of beneficiaries targeted in these countries exceeds 90 million. As I had stated previously, our WFP initiatives may not generate massive profits for our company, as these programs are socially motivated and are meant to assist the poorest of the poor in many developing economies. However, for every country in which we deploy our technological platform, we will generate the opportunity to build the business similar to the one we have created in South Africa. It is from these businesses that we will be able to grow our revenue as well as our profitability. We are close to implementing the first WFP country in static [ph] area as a result of our previous tender award by the [indiscernible] region. I will continue to report on this activity as well as other card-centric activities in the region and elsewhere where we are experiencing ever increasing momentum. To conclude, the company is poised for sustained growth over the years to come in many of these businesses. We'll continue to strive to extend the longevity of our business contract and to improve the quality of our earnings for the benefit of all our shareholders. 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 in our operating segments for the first quarter of 2016 compared to a year ago. For Q1 of 2016, our average rand dollar exchange rate was ZAR 12.96 compared to ZAR 10.76 a year ago, which negatively impacted our U.S. dollar-based results by approximately 21% and the South Korean won was 13% weaker compared to last year's won rate. We continue to face significant currency headwinds in our operating geographies. The U.S. dollar, our reporting currency, remains strong against the emerging market currencies and the South African rand is currently trading at around ZAR 13.94 to the dollar, while the won has strengthened slightly over last the few months and is currently trading at KRW 1,144 to the dollar. The stronger dollar has again had an adverse impact on our results. Fortunately, we have experienced good growth in our functional currencies and therefore due to the fluctuations caused by the volatile exchange rates in our operating currencies, we provide constant-currency comparatives in order to analyze the core operating trends in our businesses. We have again started the year with a very strong foundation in constant currencies with revenue and fundamental earnings per share growth of 19% and 16%, respectively. On a consolidated basis, for the first quarter of 2016, we reported revenue of $154.5 million and fundamental earnings per share of USD 0.56. Our fully diluted weighted share count for Q1 2016 was 47.1 million shares. Let me now turn to a discussion of our segments and their financial performance during Q1 2016. In our South African transaction processing segment, we reported revenue of $55.6 million in Q1 2016, down 8% compared with Q1 2015 in U.S. dollars, and up 11% on a constant-currency basis. In South African rand, the increase in segment revenue was primarily due to more low-margin transaction fees generated from card holders using the South African National Payment System and an increase in the number of social welfare grants distributed offset by fewer intersegment transaction processing activities. Segment operating income margins for Q1 2016 and 2015 were 24% and 23%, respectively, and have increased primarily due to an increase in the number of beneficiaries paid in Q1 2016 and a modest increase in the margin of transaction fees generated from cardholders using the South African National Payment System. EasyPay continues to track well and volumes increased mid-teens year-over-year benefiting from increased transactions from our EPE account holders and the addition of new retail bill collectors as well as bill issuers, including prepaid electricity and traffic payments for local authorities. We continue to expect our South African processing segment margins to be in the low 20% range for the remainder of fiscal 2016. The margin will be affected by continued rollout of our ATMs during 2016 and inflationary pressures on our cost base in South Africa. Intersegment transaction processing activities are eliminated on consolidation, but have a meaningful contribution to the segment this quarter. International transaction processing generated revenue of $41 million in Q1 2016, up 15% compared with Q1 2015 on a constant-currency basis, primarily due to higher transaction volume at KSNET during Q1 of 2016. Operating income during the first fiscal quarter of 2016 was higher due to increase in revenue contribution from KSNET and a positive contrition by XeoHealth in the U.S., but was partially offset by higher ZAZOO's start-up costs in the U.K. and India as we scale up those operations. Operating income margin for Q1 2016 and 2015 were 16% and 17%, respectively. For Q1 2016, KSNET revenue grew 8% in Korean won to $40 million, while EBITDA margin increased to 29% compared to 28% last year. KSNET has sustained local currency growth of high single to low double digits for several quarters now, despite the slowing economy. Industry forecasters expect transaction growth to slow modestly in South Korea as a result of macroeconomic factors and reforms in the VAN and related industries going forward, including the introduction of a new tracking scheme for core transactions. KSNET is well placed to adapt to any industry changes given its competitive position and value proposition. Our financial inclusion and applied technologies segment revenue was $67 million in Q1 2016, up 3% compared with Q1 2015 in U.S. dollar and 24% up on a constant-currency basis. In South African rand, financial inclusion and applied technologies revenue and operating income increased primarily due to the introduction of our EasyPay Everywhere and Smart Life offerings, higher prepaid airtime and other value-added services sales, more ad hoc terminal and card sales, and in South African rand, an increase in intersegment revenues. The South African National Credit Act made certain industry-wide amendments, which became effective on March 15, 2015. These amendments were introduced primarily to address all indebtedness of South African consumers and requires lenders to perform a strict affordability assessment. Our UEPS-based lending book at the end of Q1 2016 was approximately ZAR 490 million compared to ZAR 607 million in Q1 2015 and ZAR 496 million in Q4 2015. The decrease in the lending book is primarily due to compliance with the industry-wide amendments to the South African National Credit Act. Compliance with the amendment legislation continued to have a modest impact on our UEPS-based lending business in early fiscal 2016, but has started to normalize now and should return to growth into the second quarter. We do fully agree that prudent and responsible lending is paramount to the success and growth of the industry and ultimately will result in a stronger and more sustainable book for us. The rollout of our Smart Life insurance policies will gather momentum during the remainder of fiscal 2016, as we scale our operations and employ the appropriately qualified staff members as required by the regulator. As our insurance business grows, we will build the appropriate reserves on our balance sheet while the impact of policy convictions will become more pronounced in segment revenue. Segment operating income margin was 25% and 27%, respectively and has decreased primarily due to the sale of more low-margin prepaid airtime and higher costs related to the launch of EPE and Smart Life products. The operating margin of this segment will continue to be affected by the relative contributions of the various businesses in this operating segment and the introduction of our EasyPay Everywhere and Smart Life products. We expect significant expenditure on marketing and establishment costs for these exciting products during Q2 fiscal 2016. Corporate and eliminations includes amortization of intangibles, stock-based compensation, U.S. legal expenses and general corporate and overhead costs. In U.S. dollars, our corporate expenses have decreased primarily due to the impact of the stronger dollar on goods and services procured in other currencies, primarily the South African rand and lower amortization costs partially offset by modest increases in dollar-denominated goods and services purchased from third parties and directors fees. Our Q1 2016 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 Q1 2016 and 2015 were $10.7 million and $9.4 million, respectively, and have increased primarily due to the acquisition of more payment processing terminals in South Korea and of course, ATMs in South Africa. At September 30, 2015, we had cash and cash equivalents of $126 million, up from $118 million at June 30, 2015. The increase in our cash balances on June 30, 2015, was primarily due to the expansion of all our core businesses, offset by provisional tax payments, capital expenditures and the strengthening of the U.S. dollar against our primary functional currencies. The strong U.S. dollar has impacted our cash reserves maintained in foreign currencies, primarily South African rand, and therefore, in order to mitigate the wild and often unpredictable fluctuations in the rand against the dollar, we converted approximately ZAR 500 million to U.S. dollars after the quarter end. As a result of this transition, we expect our net interest income to decline during the remainder of fiscal 2016 as the U -- the [ph] U.S. dollar deposits will significantly lower than the returns earned on rand deposits. 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 EasyPay Everywhere, Smart Life, ATMs and international expansion, the servicing of our debt, share repurchases and strategic acquisitions. Our effective tax rate for Q1 2016 was 32% and was higher than the South African statutory rate of 28%, as a result of nondeductible expenses including legal and consulting fees. our tax rate will fluctuate depending on our intention regarding undistributed South African earnings and the timing of any payments, such as the ZAR 500 million distribution we made from South Africa to the USA during Q2. We continue to expect our effective rates for 2016 to be in the 30% to 35% range. Our share count in Q1 2016 was 47.3 million shares. We are very optimistic about the future contributions from our new product range and the organic growth of our business in general. But despite the [indiscernible] presented by outside factors such as currency fluctuations and global macroeconomic conditions. For fiscal 2016, we therefore continue to expect fundamental earnings per share of at least $2.57 achieving a constant currency base of ZAR 11.43 to the dollar and a share count of 36.7 million shares. With that, we will gladly take your questions.

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

Yes, my first question, I think you said there are 90 countries now that are participating in the World Food Program and that you want to basically get your same level of services, your same type of services into those countries as you enter. If you look out 3 to 5 years, and just had to guess, how many countries you think you could put systems in pretty similar to what you have in South Africa, and that could become decent revenue contributors of those 90 countries, how many countries might that happen at?

David, that's a difficult one. Typically, the first thing we have to ensure is that when we enter a particular country and that's always difficult thing, the WFP gives us the chance to actually come into a particular country, sort out using them, using MasterCard, any of the so-called issuers that are local to any country, namely Central Bank, finding a baking partner, making sure the system is certified to be used in those particular environments. And that's what the WFP is going to give us at the end of the day. Even we will make some form of profit, of course, through making WFP payments, but we're not focusing on how profitable is this going to be. Once that is happened, the beauty is that the rest of the exercise, because now the infrastructure has been paid for, the rest of the exercise is to now where do you find the right teams of people in order to do the marketing and to be able to sign up the similar sort of business partners that we have here in South Africa. So it could be merchant stores, it could be banks, it could be M&As or that sort of thing. So the bottom line is that if -- look it's unlikely we go into 82 countries or 90 countries in the next 3 years. We're hoping, but with a little bit of luck, once this thing starts ramping up, I'm hoping that we should be able to implement 2 to 3 countries per annum. How long in each from the time that we actually commence operations, I'm not talking about WFP. I'm not talking about rediversification of WFP. I think that normally would take anything between 12 and 18 months. So if you look at 2 or 3 countries over the period of 3 to 5 years from now, we should be with WFP in at least 10 countries. That's what we will be aiming at doing. And then, you better give yourself a lag of about 12 months to 18 months for each of these countries to start creating, operating and making some money. And after that, as you know, all that happens after that deal flows down straight to the bottom line. At the moment, that's about all I can tell you, David. I know it sounds a little bit unclear for us, but that is, to me, a wonderful opportunity simply because we are able with WFP to put the foot in the door.

Okay, great. And my second question just with SASSA, with the contract coming up March 31 of '17, do you still have a high level of confidence that you can more than offset any lost revenue there and that you can keep the license contract? And I guess basically the whole thing here is 2 years from now and we look at profits, do you have continued kind of confidence that there will be up from where we are today and that the loss of that won't make profits be down in a couple of years?

So David, we have tried in many ways to explain the strategy and sometimes, it's difficult to do it over the phone and just with a document. But the bottom line is we now know that until March 31, 2017, nothing is going to change right? We also know that after March 2017, there's no doubt that there will be if possibly would be a phase in and phase out that according to the previous or the last RFP could range between another 9 and 18 months, so even if call it another 12 months to make it easy, which means that it's 18 plus 12. It's 30 months from now. That's assuming that SASSA has spent quite an enormous amount of time on this last attempt at trying to get a tender out and trying to award this tender. They said so themselves they're running behind on plan. So there is a chance that in fact, we are not even be leaving [ph] by March of 2017. It might take another 6 months before they can even begin to phase out. So we could be looking at anything between 30 months and 36 months, before in theory, we are no longer the operator of SASSA accounts. Now when I say that, we've always stated that just because we don't want to directly be the operator, doesn't mean that indirectly, for example, SASSA is also saying they want to go basically into tender again in order to provide the cash payment. That cash payment applies to around 3 million people at the moment, and today, we're probably the only people with an infrastructure to go after the rural areas to pay these 3 million people. So that's probably not going to go away even if what SASSA has just stated. On top of that growth, there is a technology play, which is what we've been focusing on and saying to SASSA, guys, if you want to do that yourselves, you're going to need the technology, why don't you use the technology that you know and technology that works, which means that's not likely to go away. So if you really look at what might go away in 24 to 30 months, well up to then, it might be nothing. And after that, it might not be a lot that will actually goes away. And of course, during that period, we'd implemented and we are continuing to focus on implementing our EasyPay Everywhere. As you can see, it's ramping up at the huge rate. We now as of today, 450,000 customers, we believe that, that number is still increasing in terms of velocity or acceleration, for a lack of better word. So at the end of the day, we still think that within the next year or so, we should have added another 2 million or 2.5 million people comfortably. In other words, we should hit the 3 million mark. And as I mentioned before, if we hit the 2 million mark or 2.5 million mark, that would offset any possibility of losing the entire SASSA contract. Not 30% of it or 20% of it or none of it. So that way we also -- we feel very comfortable right now that we do not see that there will be any real dip in our earnings, if anything, and that's assuming, of course, that there will be absolutely nothing outside of the SASSA territory, which today, as you know, only represents about I think it's around 20% of our revenue line, and probably less than 20% in terms of our profitability. So rest of the business being it mobile or being it loans or being if insurance, lots of other people are today in that market like we are and are targeting the same people as we are targeting. So the chance that, that will go away, in my view, is less than 5%. But of course, because we have now this extra incentive of being able to provide a banking account, which has got all functionality that we know people require, but at the lowest, lowest cost in South Africa that would give us in fact a further advantage why in fact we're not likely to lose our ancillary businesses that we're currently running using, for a lack of a better word, or introducing grant recipients as customers. So at the moment, I'll be honest with you, we believe our strategy is correct. We believe our strategy is sound. We have the proof that it's working according to plan. And right now, we're also pursuing on internationalization of the business rather than to keep them worrying about what may or may not happen in the business that we've had for the last almost 20 years. So I think we feel that comfortable with that, David.

Our next question is from John Rolfe of Argand Capital.

Just a clarification, the press release indicated that there were 350,000 EasyPay Everywhere customers signed up, I believe, but it sounds, Serge, like you've said a couple of times in your comments that there were 450,000. Which is the right number?

I think the reason is, is because the number 350,000 was at the end of October.

End of the quarter.

End of the quarter. While now, I'm talking numbers as of -- I guess get the information is up-to-date.

So to be the clear, over the last 5 days, the subscription rate has been approximately 17,000 of new accounts per day and that accounts for the extra 100,000.

That's the difference.

And I think initially, you had commented that you thought the EasyPay Everywhere customers you are signing up might come in at just a modestly sort of higher tier on, I don't know what the right word is, but on a sort of socioeconomic spectrum than your typical grant recipients. Is that sort of still what you're seeing in terms that you have that data?

Yes, we're starting to see a little bit of what we were hoping mainly that now that we've deployed and you probably saw it through our ATM transactions. And to give you a typical example, when we started, there were no ATMs whatsoever, the bottom line is that the people that were making the money were the banks that actually owned the ATMs. They are the guys that we are getting the interchange fee, which is set by the South African Reserve Bank, which is around, call it, ZAR 10 to ZAR 1,000 that is withdrawn. As we implement more ATMs ourselves, we are now starting to get these ZAR 10. And then of course, we put out more of our EasyPay Everywhere customers, those customers tend to come rather to our ATMs because they're biometrically enabled, #1 and #2, because our transaction fees are cheaper. So we currently converting the amount of money we used to make after another bank's transaction, which is no more than about 15% of the value, call it ZAR 1.50 per ZAR 10 and we're converting that to about 4x that amount which is ZAR 6 to ZAR 10. So the more customers we continue to have on EasyPay Everywhere then the more places that can start drawing cash or performing transactions, which belong to us, we quadruple basically the amount of money that we're currently making and that's where the real economics of this thing comes in. On top of the course of the fact that we have been in a good position to offer them Manje services as well as our loans as well as out insurance as well as a number of other products. So we're getting very excited. That's why they would come out with a number to say divide 10 million by 4 and if we can get 2.5 million people, we basically would be the same as you see at 10 million. Of course, we're not aiming at 2.5 million people, we're aiming at 4 -- 4.5 million people. So that's where we believe we can continue to grow and grow quite exponentially. If all of the numbers I've talked about actually come to realization and it appears that what we have seen to date that in fact the numbers are actually pretty much correct.

And the last thing I have is just a comment. You indicated that there's a number of very attractive alternatives for cash deployment and it sounds as if certainly from an organic growth perspective, new products, that sort of thing, there's some potentially very high return projects in there. I would encourage you just to, to continue to be balanced on the cash deployment and continue to allocate at least a portion of that to share repurchases given where the stock's trading. It's obviously a high return use of cash. And I think, in addition, it has the ancillary benefit of sort of lifting some of the concerns against the company that have been lodged in the past. So again, I'm not looking for anything extreme. I will just encourage you to be balanced if you continue to put some of the cash towards share repurchases going forward.

That's noted and I can assure you this is an issue that gets debated every quarter, couple of meeting on numerous occasions. And I think, sooner or later we will do a split so the board in terms of what we should do, we should issue a dividend should it be a share buyback, what should we rather keep a little bit of war chest in order to make sure that if we want to make a few acquisitions in order to enter certain territories, should we rather keep the money while we can. But I think, we are as you know, very cash generative. And I think that is something because of that, that is the cash stock accumulating, we will have to start looking at seeing how we can utilize this cash a little bit better than what we've done in the past.

Yes. Well look, you guys are in the enviable position like you said of generating a lot of cash, having a very strong balance sheet, so that gives you a lot of flexibility and an ability to do more than one thing at once in terms of cash deployment. So I look forward to see the decisions you make and keep up the good work.

Thank you very, very much, and we will. Certainly your comments have been noted.

Our next question is from Russell Anmuth of Gotham Holdings.

How much of the expense, the CapEx is behind you in terms of the EasyPay and ATM-related in Smart Life investments, as it seems probably was in corresponding revenue in the quarter to that and seems like there is significant leverage ahead and may be profitability was a bit understated in the quarter.

From a CapEx perspective, I think we have now incurred most of what we had to do to build out the infrastructure, specifically on the EasyPay Everywhere side. We think there may still be a little bit to go on the Smart Life side as we expand our office presence across the country. From an ATM perspective, as we've indicated we got about 800 ATMs out there and I think the initial high-growth rollout is behind us and obviously, we will now strategically locate the remainder of our ATMs. So you're still going to see some CapEx spend on the ATM side and we think that we could probably end up over the next year to 2 years at roughly 2,000 ATMs. But in terms of total quantum, the CapEx that we will spend on that per quarter is not going to be very significant. As far as the operational expenditure is concerned, specifically on the EasyPay Everywhere and Smart Life rollouts, those were obviously quite high during the last quarter and will probably continue to be the same in Q2. We obviously have quite a bit of expense in terms of recruiting staff members, getting them out into the field, so the related expenses in terms of vehicles and fuel and maintenance and accommodation. We're also running some marketing campaigns at the same time to create the awareness that we feel is necessary. But after Q2 and going into the latter part of the year, I would expect those expenses to reduce and for the margins that we will see specifically from EasyPay Everywhere and from the Smart Life side to improve, and then of course, there's also the CapEx and OpEx expenses that we anticipate to incur as we build out ZAZOO internationally. So at the moment, we have our operations in India and in the UK. Those 2 specific points we think we need to sort of bulk up a little bit more as we get more projects underway and we need more staff members to assist us, specifically from a development point of view so that obviously will also require little bit of CapEx and some investment in operational expenditure over the next 3 quarters or so, specifically as it relates to ZAZOO. But in the greater context of things, again, it's not going to have a material impact on the overall margin of the group.

Okay. So it seems like at least, on the South African investments that we should see better and even better and the next -- in the current quarter, in the December quarter?

Yes, I hope so.

The follow-up. So 2 things, 1, can you offer any outlook on Hawks [ph] the and talking about the MVC and ZAZOO, do you see more interesting opportunities like Uber in the pipeline or within Uber, let's say, expansion into different countries?

Well, there's 2 things and I don't know it must be frustrating for you guys and it's probably even more frustrating for us because we were told that we would have the summer report from the Hawks [ph] already to be, as almost 5 months ago. We now have found out that in fact there were 2 concurrent cases, which one of them we had filed. And that report is apparently finalized and we are being told again because we asked that the second report will also come out within the next week. Okay, so we are hoping and as far as I know, neither one of the reports are going to say that we were guilty of anything that. That we're going to be guilty of something we haven't done. So we're hoping that, that is going to be, once and for all, beyond us. But I also don't want to be called a liar because I tell you what I've been told and fortunately until now, I've got it on my hand. We're not going to commit to anything. But we hope that we have been promised again that it will be very, very soon. So that's the Hawks [ph]. On MVC, you'll be pleased to know at least I'm very excited to know that people already [indiscernible] have already made a commitment that because of the success of our systems in South Africa, but as soon as we are able to issue VC, MVCs in Europe that they would extend the service to the European market as well and to any other market in the world, where we are able, of course, to convert local products into a virtual card, into a virtual credit card. So that's one example of the business that in fact people are willing and wanting to expand MVC. There is no doubt that there are a number of other alternatives. Our ZAZOO people are certainly not idle. And we are already negotiating a number of other deals, which to me, would be the biggest deals rather than let's say the one-offs or small diplomats [ph] and other we would like -- we like the macros -- [ph], we like the Microsoft, we like the type of companies that have got worldwide reach, simply because if we can prove that what we do work in 1 place, the chances are is that 6 month later, 12 months later, they like it and they spend somewhere else. So we think at the moment, we're getting a fantastic ramp-up. But as we mentioned, to issue cards in the Europe, you need to have an issuer license, and to have an issuer license, you need to have a relationship with the bank in which they take the money or you get your own banking license. So I'm not going to put any words in anybody's mouth, but we are putting in a lot of effort to make sure that by the time that we finally launch these products, we are not going to be leaving most of the money on the table for somebody else to take.

What does that mean? Does that mean that if you're not going to leave the money, you're going to capture your fair share plus? Does that mean -- how does that work with establishing a banking relationship?

Well, I'm not going to -- I can't give you anything, but I think you are probably have looked up -- you have probably worked up the answer yourself.

So you're talking about a banking relations a potentially with one of the large European multi-country banks?

No. I'm not interested in any relationship with any bank because they are going to want to milk most of the money. We're not that good at sharing revenue or profits with anyone.

So if you don't go with the bank, what kind of financial intermediary do you bring into this picture?

You're going to force me to give you an answer, but let me give you an example. We could be a bank. So if we were a bank, we could issue and if we could issue, I don't need anyone else.

So that means you have to apply for licenses country by country [indiscernible]?

No, because as you know, all you need is a certain type of license in which case you can access 31 different countries. Let me not say any more than that.

[Operator Instructions] Our next question comes from Jordan Hymowitz of the Philadelphia Financial.

First of all, should I get a specific dollar amount of expenses on the World Food Programme and the life insurance programs last quarter that obviously did not generate any revenues last quarter?

Yes, the answer is very simple. Everything we offer right now is cloud-based platform. A number of people were basically engaged either with MasterCard or with WFP and a certain amount of legal fees we wanted to make sure that the contracts are in place. I would say that we're talking about a few hundred thousand dollars and that's about it.

Okay. Second question is, when you get brought in '17 when the South African government begins to internalize some of these things, I don't think it's in the government's interest to allow 10 million people to have a disruption in benefits although politics makes strange things. So given that, once you internalize that, you're likely to get paid some technology fee and I would argue that the technology fee is a much higher multiple business even if it's a lower revenue business. So I guess my question is, if the government elects to pursue your technology, will you break out the technology revenue as a separate line item, which I would argue is worth a much higher multiple?

Once again, I think you made 2 comments, which are very valid. One, politics. One thing we know and we've known for many, many, many years, that has led to the cancellation of the latest RFP is the government will not take any chances in terms of jeopardizing the payment grants to 10 million people that represent anything between 10 and 17 million voters. So that point of your view is more than valid. So the second point is you are 100% right. Let's say that a lot of our business that we do in CPS today, which is really not a rational [ph] entity, is not the most pleasant, attractive affinity [ph] business. There is absolutely no doubt that that's the one that costs the most and thus, the margins are very low. In order [ph] to renegotiate in such a way whereby that could be internalized by SASSA, we would remove, to be quite honest, a fairly large chunk of cost and candidly we would not lose a huge amount of profit. On the other hand, of course, if we had to then try [ph] that technology, we could then assume that those technology margins would be certainly in the 50% to 60%. Rather than to be in the CPS margins, at the moment, whereby at the moment, we're probably not even at 20%. We're probably down at the moment on 14% or 15% because we're aiming at 17% to 20% towards the end of the 5-year period as an average. So I think it answers both of your questions. And I think you're right in your assessment. That's certainly something that we would do because we would no longer be, strictly speaking, rational from the point of view of issuing cash to beneficiaries through a pay front or at the pay-point that we would simply restrict ourselves to providing the glue, namely, the technology core solution that makes that happen.

Ladies and gentlemen, we have come to the end of today's conference. On behalf of Net 1 UEPS Technologies, that concludes today's call. Thank you for joining us. You may now disconnect your lines.