Lesaka Technologies, Inc. (LSAK) Q2 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Net1 UEPS Second Quarter 2016 Earnings Conference Call. [Operator Instructions] Please also note that this call is being recorded. I would now like to turn the conference over to Dhruv Chopra. Please go ahead, sir.

Thank you, Chris. Welcome to our Second Quarter Fiscal 2016 Earnings Call. With me today are Dr. Serge Belamant, our Chairman and CEO; and Herman Kotzé, 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 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 impacted by currency fluctuations between the U.S. dollar and the South African rand. With that, let me turn the call over to Serge.

Thank you, Dhruv. Good morning to all of our shareholders. During our second quarter of 2016, our recurring and mature businesses continued to deliver according to plan, while our newer growth initiatives, like EasyPay Everywhere, Financial Services and ZAZOO, delivered results above or on expectation. I'll talk about the fundamental drivers of our business. Over the past few months, one of the key events that has had an impact on the company has been the rapid depreciation of the South African rand and political and macroeconomic factors affecting emerging markets in general and South Africa, in particular. Our strategic initiatives are already starting to contribute to our top line, with second quarter constant currency revenue growth accelerating to 23% from 19% in the first quarter. A number of these initiatives still require investment to scale, and therefore, the commensurate contribution to profitability will lag until each of those initiatives achieves critical mass. The good news is that some of our South African initiatives should achieve their starting point right now in the third quarter of fiscal year 2016 and into the remainder of the year, while some of our international activities will potentially follow suit during the second half of calendar year 2016. Our fundamental EPS in quarter 2 was USD 0.42, which was lower both in dollars and in constant currency terms. Excluding the impact of the repatriation of cash, which Herman will discuss in more detail, in quarter 2, 2016, we saw an opportunity to expand our branch network, ATMs in circulation and sales and support staff to capitalize on the demand of our products, particularly in advance of the festive season in December. These actions therefore resulted in additional cost, which we recognized during quarter 2. During the second quarter, we repurchased roughly 750,000 shares for approximately $11 million, given the value we see in our stock. Earlier this week, our board replenished our authorization back up to $100 million, and as always, we will continue to be opportunistic with our share repurchases. We have sustained the momentum in establishing our EasyPay Everywhere initiative, expanding our Financial Services businesses and further developing ZAZOO both in South Africa and internationally. We continue to scale all of our strategic businesses, as we expect these to deliver higher revenue streams with improving margins as we move through the remainder of fiscal 2016 and into fiscal 2017. I will now focus on the key strategic areas across our card and mobile-centric activities, including EasyPay Everywhere and, of course, ZAZOO. Let me start with 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 underbanked customers as possible, including rand beneficiaries, to our new EasyPay Everywhere account. By the end of this weekend, we should have opened around 900,000 EPE accounts. Keeping in mind we only started 7 months ago, we're incredibly proud of this achievement. The momentum we have with this product remains very strong as we have now moved from 350,000 accounts in October to 830,000 accounts by the end of January. January is seasonally slower after the festive season in December, but February has already started off with a renewed vigor. We now have in excess of 1,900 people across all 9 provinces of South Africa, focused on our financial inclusion product, handling sales, operations and management and on average are meeting our targets of opening around 150,000 new accounts a month. Securing alternative independent accounts allows all EPE customers, including beneficiaries to consume a broad and growing suite of products affordably and conveniently when, where and however they choose to do so. Additionally, our EPE customers enjoy reduced charges when using our EPE-branded ATMs. We now have 110 physical branches and in excess of 850 ATMs deployed at the end of January, which processed over 900,000 transactions with a value of ZAR 808 million. As we deploy more ATMs and sign up more EasyPay Everywhere account holders, we should continue to increase the transaction volumes on our ATMs, resulting in potentially up to a fourfold increase in the overall fees we generate even though our fees are less than those charged by other banks. Our loan book after 2 quarters have been stable as we took the conservative approach to implement a more stringent affordability criteria imposed by regulators in March 2015, returned to growth during the second quarter 2016 and, given a broader branch network and seasonability, resulted in a sharp increase in the book, particularly in December. For the quarter, as all, the net loan book increased 40% sequentially from the first quarter and at December 31, 2015, stood at around ZAR 687 million. Our loan book has continued to grow and, at the end of January, was ZAR 730 million. One point to note, our loan products are not your typical unsecured loans as offered by traditional macro finance companies, but more specific purpose-driven loan such as for emergencies, medical costs, school fees and the like. As a result, the profile and repayment characteristics on our products are materially different and gives us the confidence to expand our offering as long as they meet our stringent risk management criteria. In addition, we believe that the demand for our products is strong and gathering momentum because they are the cheapest and much easier to access when compared to any other alternatives, whether formal or informal. We have also deployed our sales force in some provinces to market and sell our new insurance products. The growth in this business is constrained by our ability to identify and recruit very specialized skills as required by the insurance regulator. At the end of January, we had over 34,000 policies. And although these numbers are not significant as yet, we believe that once we have deployed the required staff in all provinces, the contribution from insurance should become more meaningful as we had experienced with all of our other financial inclusion business products. Another benefit from having the life insurance asset [ph] is that we are also offering our EasyPay Everywhere customers free basic life insurance cover, which further differentiate us from our competitors and detractors. I will now spend a few minutes on our mobile-centric business named ZAZOO. ZAZOO, from its beginning in 2013, has combined various mobile-related businesses within the Net1 group, integrating them as one unit, driving a unified corporate and market strategy and building a cohesive mobile Fintech company with multiple products, customers and geographies. ZAZOO today includes over 5.4 million customers of its various Manje and other value-added services; Pasavute in Malawi, which for the first time exceeded 1 million active customers in Q1 2016 and has now crossed more than 1.4 million active users in Q2 2016. Over 2,000 employers, with close to 680,000 employees for payroll services through our company's first [ph] ZAZOO enterprise payment solutions business, which -- where transactions increased 6% sequentially from quarter 1 to quarter 2 in 2016. ZAZOO remains the largest virtual top-up service provider to MTN across 9 African countries, including Nigeria and South Africa. And the -- we are the largest suppliers of SIM card to SMART, the larger operator in the Philippines. What is even more exciting, however, is when we look at ZAZOO as it is and all its accomplishments I've just listed, exclude what is the future of the company, namely our patented technologies of Mobile Virtual Card and variable PIN. The majority of developments we have announced and talked about in the past 12 months relates to MVC or variable PIN and have either recently been launched or in the process of launching. These initiatives span the developing and developed worlds and solve the issues we have identified, namely, interoperability, accessibility, and of course, security, especially for card-not-present transactions. In South Africa, we remain focused on introducing and growing our B2C and B2B offering. During Q2 2016, we further expanded our U.K. ZAZOO office and have begun adding additional executives and staff in order to help us implement and deliver our current and future pipeline of projects. From a financial and metric perspective, ZAZOO revenue grew 55% year-over-year in constant currency while it processed more than 100 million transactions for the first time in Q2 2016, 9% higher than in Q1 of 2016. As discussed last quarter, we have been trying to identify the best solution that will allow us to use plastic or virtual cards ourselves without paying away a large portion of the acquiring and issuing fees to third parties. We have applied for a license in one of the EU countries and are awaiting a decision on the same. Since we do not have further control over their process, in the interim, through Transact24, we have identified an alternative issuer through whom we will be able to issue virtual cards in Europe -- in the EU. In addition, we have now been approved as a MasterCard-certified third-party processor in Europe and, therefore, are in a position to accelerate our business development efforts and commence product rollout across Europe in the next 3 months, including our own B2C and B2B2C offerings. Our Funifi project has now launched as a pilot in South Africa, and we expect to commence in Europe in the next few months. WorldRemit, which is a U.K.-based deal, is expected to commence activities with us over the next month, and we have already seen growing interest from other remittance companies to evaluate how we can replicate our offering for them. In India, we are thrilled to have launched our MVC product with Oxigen and Visa a little over 3 weeks ago. While the decision has not yet commenced aggressive marketing the solution [ph] as we are currently ironing out operational and technical issues, we are very pleased with the early response. Purely through in-app discovery, we are signing up in excess of 10,000 new customers a week and already have done transactions in excess of INR 3.5 million. These are small numbers in the grand scheme of things, but Oxigen already have 13 million and growing Wallet customers, and more than 200,000 retail distribution outlets gives us a very strong platform to kick-start our activities in India. Oxigen also publicly said in India that they intend to grow their Wallet customer base manyfold over in the next 2 years and believes that our Virtual Card product will be a key differentiator and driver for them to achieve these targets. Our pipeline in India is further strengthened since our launch and now includes other prepaid providers, loyalty aggregators, private and public sector banks and transaction processers, and we are at various stages of discussion with multiple players. We will need to continue to invest in our operations in India, not only to appropriately service our existing customer base but also to capitalize on the pipeline of activity. Meanwhile, our mobile value-added services in South Africa and elsewhere continue to grow from strength to strength. Umoya Manje posted 67% transaction growth over quarter 2, 2015 while Power Manje transaction grew 112%. Similarly, Pasavute in Malawi sustained its momentum with year-over-year transaction growth accelerating to 146% in quarter 2, 2016. To stress one point on our value-added services, the reason for our success with these projects is because we provide a solution that is convenient and easy accessible through the mobile phone and affordable, and it is by far the cheapest of any formal or informal alternatives. To reiterate on our mobile-centric business, we remain 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. In January, we acquired a 56% of Transact24 that we didn't previously own. Transact24, based in Hong Kong, offers debit, credit and prepaid processing and issuing services for Visa, MasterCard and China UnionPay in China and other territories across Asia Pacific, Europe and Africa and the United States. Outside of T24's core [ph] businesses, we will seek to incorporate MVC into the card programs, including with some of the large Chinese e-commerce companies. Built on the ACA's processing capabilities in the U.S. by integrating payments resulting from our XeoHealth healthcare claims processing business, extend card issuing activities across the Asia Pacific and leverage our tokenization expertise in these core operations. Regarding WFP, during quarter 1, 2016, we had submitted a joint bid with MasterCard for the World Food Program distribution business in 81 countries. WFP has not yet awarded this tender, and we are unable to predict when they will do so. For the 12 countries in SADC, we already -- that has been already awarded to us, we are close to finalizing our service level agreement and expect the implementation of the first country to commence within the next 3 months. The reason for the first -- why the first country has taken as long as it has is because this will form part of the blueprint of the model we will try to replicate across the other country and, hence, require a great -- it requires a great deal of diligence. Lastly, I want to provide a brief update on our SASSA contract. As you know, in October 2015, SASSA decided not to award its tender and, therefore, continue to operate under its 2012 award to us, which is currently in place until the end of March 2017. SASSA stated [ph] objective, whilst to eventually take the distribution of social grant in-house, and that was reiterated when they decided not to award a new tender last year. We remain in close contact with SASSA regarding their strategy, timing and phaseout plan beyond 2017. But so far, it appears that SASSA has not finalized any of their plans for the way forward. And therefore, for the foreseeable future, it remains business as usual with steady increases in net beneficiaries, an operationally sound distribution system and ongoing elimination of fraud. While this perceived uncertainty due to matters outside the company's control may not resonate well with some of our shareholders, let me try to offer some context. One, there are enormous complexities in operating a system like ours to ensure smooth distribution of the right grant to the right person anytime and anywhere, especially in the deep rural areas. Two, SASSA's recently canceled RFP indicated a phaseout period of 9 to 18 months, and the further delays in the formulation of their proposed plan will further delay any transition. And three, SASSA's proposed plan to the constitutional court also highlights that even with the in-house solution, they intend to continue outsourcing the cash payment component as well as distribution, among other things. So in short, our SASSA business continues to operate smoothly and any in-sourcing plan proposed by SASSA, in all practicality, is likely to extend well beyond the March 2017 contract expiry date, and we remain well-placed to continue to play an ongoing supporting role to SASSA through technology and distribution well after they eventually go in-house. To conclude, outside of the impact of repatriating our South African cash reserves, the company remains poised to deliver sustained growth over the years to come in many of its businesses. We will continue to strive to extend the longevity of our business contracts and to improve the quality of our earnings for the benefit of all of our shareholders. Thank you very much for your time, and over to you, Herman.

Thank you, Serge. I will start with key results and trends within our operating segments for the second quarter of 2016 compared to a year ago. For Q2 of 2016, our average rand-dollar exchange rate was ZAR 14.12 compared to ZAR 11.21 a year ago, which negatively impacted our U.S. dollar-based results by approximately 26%, and the South Korean won was 10% weaker compared to last year's won rate. We continue to face significant currency headwinds in our operating geographies. The South African rand circled around the ZAR 14 to the dollar mark for a few weeks and then plummeted to ZAR 15, briefly touching almost ZAR 18 to the dollar. It is currently in a holding pattern around the ZAR 16 to the dollar mark, and this will, of course, have an adverse reporting impact on our results. Consistent with the first quarter, we have experienced good growth in our functional currencies, and this momentum continues through to Q3 and indeed through to the rest of fiscal 2016. While we do not hedge currency per se due to the purely translational nature of its impact on our dollar-denominated results, we are well aware of the associated risks with a weaker rand. It is for this reason, on our last call that we highlighted that we had converted ZAR 500 million of our South African cash balances through a dividend to U.S. dollars at holding company level during October 2016 -- sorry, October 2015 to reduce currency volatility on our cash reserves. This resulted in withholding and other tax-related adjustments, as well as lower tax affected interest income due to the differential between rand and U.S. dollar deposit rates of approximately $0.06 to our earnings per share number. Revenue for Q2 2016 grew 23% in constant currency. However, fundamental earnings per share declined by 8%. On a consolidated basis for the second quarter of 2016, we reported revenue of $150.3 million and fundamental earnings per share of $0.42. Our fully diluted weighted share count for Q2 2016 was 47.4 million shares. Now to our segments. In our South African transaction processing segment, we reported revenue of $52.8 million in Q2 2016, down 10% compared with Q2 2015 in U.S. dollars and up 14% on a constant currency basis. In South African rand, the increase in segment revenue and operating income was due to higher EPE revenue and as a result of increased ATM transactions, more low-margin transaction fees generated from cardholders 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. Our operating income margin for Q2 2016 and 2015 were 23% and 22% respectively and was higher, primarily due to higher EPE revenue as a result of increased ATM transactions and increase in the number of beneficiaries paid in fiscal 2016 and a modest increase in the margin of transaction fees generated from cardholders using the South African national payment system. This was partially offset by annual salary increases granted to our South African employees. 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 in this quarter. International transaction processing generated revenue of $41 million in Q2 2016, up 27% compared to Q2 2015 on a constant currency basis, primarily due to higher-transaction volume at KSNET during Q2 2016. Operating income during Q2 2016 was lower due to an increase in depreciation expenses at KSNET and ongoing ZAZOO startup costs in the U.K. and India but was partially offset by increase in revenue contribution from KSNET and a positive contribution by XeoHealth in the U.S.A. Operating income margin for Q2 fiscal 2016 and 2015 were 10% and 14%, respectively. For Q2 2016, KSNET revenue grew 7% in Korean won to $39.7 million, while EBITDA margin increased to 25.4% compared to 24.8% last year. KSNET has sustained local currency growth of high single- to low double-digits for several quarters now despite a slowing economy. Korean regulators have recently introduced specific regulations governing the fees charged on card transactions, as has been the case in most other developed economies, that has a direct impact on card issuers in Korea. Consistent with global practices, we expect the card issuers to renegotiate their fees with VAN companies, including KSNET, and if successful, such actions may have an adverse impact on KSNET's financial performance. Transaction processors and acquirers in other international markets facing similar regulation have successfully navigated through the cycle, and we believe we are also well positioned over time to accommodate these changes and additionally implement initiatives that would further diversify KSNET's existing business model. Our financial inclusion and applied technology segment revenue was $66 million in Q2 2016, up 22% compared with Q2 2015 on a constant currency basis. Financial inclusion and applied technologies revenue and operating income increased, primarily due to 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, offset by lower lending service fees. Operating income for the second quarter of fiscal 2016 was adversely impacted by an increase in our allowance for doubtful finance loans receivable, resulting from a commensurate increase in our lending book in the last lending cycle of calendar 2015 and the establishment cost for Smart Life and expansion of our branch network. Driven by our expanded branch and ATM infrastructure, we experienced a significant increase in our lending book towards the end of Q2 2016. Our UEPS-based lending book at the end of Q2 2016 was approximately ZAR 687 million compared to ZAR 490 million at the end of Q1 2016. We expect this growth in our lending book to translate to higher revenue and operating income during the third quarter of fiscal 2016. I want to emphasize that we have not changed our risk management or credit policies, and we consider our book to be high quality. 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 collections will become more pronounced in segment revenue. Operating income margin for the financial inclusion and applied technology segment was 21% and 26%, respectively during Q2 2016 and 2015 and has decreased, primarily due to the increase in our allowance for doubtful finance loans receivable, the sale of more low margin prepaid airtime and establishment cost for Smart Life, expansion of our branch network and annual salary increases for our South African employees. 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 will continue to spend on marketing and establishment costs for these exciting products during Q3 of 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 U.S. dollar on goods and services produced in other currencies, primarily the South African rand, and lower amortization costs, partially offset by modest increases in U.S. dollar-denominated goods and services purchased from third parties and directors' fees. We expect our corporate expense to increase in Q3 2016 as a result of our new offices and related expenses in the United Kingdom. Our Q2 2016 net interest income increased to $2.6 million, driven primarily by lower average debt outstanding and higher average cash balances during the period, offset by lower interest rates due to the distribution of our South African reserves, on which we would have earned a higher return. Capital expenditures for Q2 2016 and 2015 were $9.9 million and $9.1 million, respectively, and have increased primarily due to the acquisition of more payment processing terminals in South Korea and ATMs in South Africa. At December 31, 2015, we had cash and cash equivalents of $101.4 million, down from $118 million at June 30, 2015. The decrease in our cash balances from June 30, 2015 was primarily due to the strengthening of the U.S. dollar against our primary functional currency, repurchase of shares of our common stock, growth in our lending book, provisional tax payments and capital expenditures, offset by the expansion of all our core businesses. During Q2 2016, we acquired 749,213 shares of Net1 common stock for approximately $11.2 million. We continue to fund the group's operations and capital investments utilizing our cash reserves and cash generated from our business activity. 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 fiscal 2016 was 38.7% and was higher than the South African statutory rate as a result of nondeductible expenses, including consulting and legal fees, and the tax impact, including withholding taxes, of approximately $2.4 million attributable to the distribution from our South African subsidiary, which we intended to help reduce the impact of a weakening South African rand on our reported cash balances. We expect our effective rate for 2016 to be in the mid-30% range and remind you that it may be impacted by further distributions from our foreign operations. Our share count for Q2 2016 was 46.6 million shares, net of the stock repurchase, but has now increased slightly to 47 million shares as a result of the 400,000 shares issued pursuant to the T24 acquisition. The fundamental drivers of our business activities remain strong and robust, and we continue to make tangible progress with diversifying our customer, currency and product base. We expect fundamental earnings per share of at least $2.45 for fiscal 2016, which includes a full year impact of $0.12 per share related to taxes and forgone interest income as a result of the distribution of our South African cash reserves to our U.S. parent. Our fiscal 2016 guidance once again also assumes a constant currency base of ZAR 11.43 to the dollar and a share count of 46.7 million shares. With that, we will gladly take your questions.

[Operator Instructions] Our first question is from Russell Anmuth from Gotham Holdings.

Can you explain the tremendous success you're having with EasyPay Everywhere? Not being in South Africa, we're not able really to understand the process and the marketing of the product.

Sure. I think -- yes, Russell, we obviously employ, and you would've seen also from the cost base that we put a big amount of effort into expanding the branch network and to really boost and increase our number of dedicated staff members that are out in the field and are dedicated specifically and only to the sale and marketing of our Financial Services products, including, obviously, EasyPay Everywhere as well as our loans and our insurance products. Now, there's a reason why the great success that we've seen for EasyPay Everywhere in the last quarter is also mirrored, obviously, by the increase that we've seen in our lending book activities, and that is simply because we've invested quite a bit of money to expand the branch network. We have 110 branches now, which, we believe, are very strategically placed. And on the other hand, of course, we believe that all of our products, whether it's EPE, whether it's insurance or whether it's our loans, are simply unique in the South African market in terms of their pricing and in terms of their ease of access. So for us, the key or the core to the reason why we've seen the significant ramp-up in the number of accounts and the number of loans is the combination of all of those: pricing, accessibility and distribution channel, which we believe is unrivaled in the market. And obviously, we also believe that we better understand our customers and the financial needs of our customers than most of our -- than all of our other competitors in the South African market. We have been involved in this segment for the last 15 years, and so we have a very deep understanding of the financial needs, and as a result, we are able to build and design and price better products that also, obviously, enable us to cross-sell those as we roll out the one -- from the one to the other. So that's as short a reason I can give you.

So it makes sense that you're expanding the size of the market given the range of services you offer. If you look out over 2, 3 or 4 years, do you have a target in mind in terms of how many accounts you think that you can ultimately bring on, scale to? Are you talking about 2 million, 5 million? How are you -- what kind of penetration do you think you can have over the next several years?

We think that the addressable market for these specific products is around the 5 million level, so that's our initial target for now. Obviously, we would revisit that and revise it as we go along. But in terms of what we've seen out there, we think 5 million EPE cardholders who then may or may not make use of our other financial products on a monthly basis or a semiannual basis would roughly be around the 5 million level.

Okay. And lastly [indiscernible] basically at roughly around $1 per month per account, revenue-wise?

Sorry. So -- it obviously depends on the product mix. That has a fairly major impact on what we would get out of our South African financial services offering. And of course, pricing it in dollars is very difficult as compared to doing it in rand. But, yes, the $1 a month metric is really related to our ZAZOO initiatives, more than it would be to our South African financial services offerings.

I lost that. $1 a month would be more related to...

To the ZAZOO initiatives, so the mobile-centric account.

Our next question is from Dave Koning from Baird.

And I guess my first question is it seems like there are so many good things going on. I'm just wondering, if you expect the 20% to 25% growth that you've seen in the financial inclusion business the last couple of quarters, and that number has been a little bit faster in the past, but is that ready to reaccelerate now already, maybe by the second half? Or -- I'm just wondering -- because it feels like, if anything, there's as many or more good opportunities today than there have ever been. That segment has been decelerating a little bit and if we're just ready to have that reaccelerate nicely.

It's Serge here. At this point in time, we believe that we are very much in the growth phase. In other words, we are certainly opening up our products across many different markets. And a lot of people said, well, we may be targeting the poorest of the poor, which is not really our final focus. We're doing that in sort of in waves. In other words, at the moment, we tackle certain parts of the country. We've expanded to the total country, and obviously, there's a little bit of a lag, because we haven't penetrated some of the provinces as well as others. But more importantly, our focus is really to go after not so much of the poorest of the poor population, which [indiscernible] as you know, represents 21 million, 22 million people. We're now going up the food chain a little bit where believe that very much fewer people can generate far more revenue for us. So we -- yes, to answer your question, I would be fairly disappointed if we did not see an acceleration in growth, not necessarily in the number of customers but certainly in terms of the profitability per customer, which is something that we rather focus on rather than simply the number of transactions or simply the number of customers that sign up with us. So yes, I think you're right. I think because of our cross-sections of products, and all of them, by the way, are priced in a way that are attractive to a huge range of South African people and not only, as I say, the poorest of the poor. We find that we are getting more and more people. In fact, some that we did not even plan for are entering the world of EasyPay Everywhere simply because they see something there that is better than what they currently have. Herman, for example, did not mention the fact that a lot of people simply are opening up an account because our ATM cash withdrawal fees are cheaper than anyone else, which is interesting. That, of course, allows us to put out more ATMs. But we put out more ATMs not only for them. We put it out for other South African people that, in fact, pay a higher fee because they belong -- they're customers of other banks. So the whole thing becomes almost a self-perpetuating growth cycle, where as soon as somebody enters the EasyPay Everywhere world, they continue to use another product or certainly another 2 or 3 products. And therefore, all that really does, as you can well imagine, is that because all the systems are in place, the sales teams are in place, the branches are in place, sooner or later, every next person that comes in, every new product that they then sign up for simply is something that falls back pretty much to the bottom line. So you're right, I think we are definitely believing there will be an acceleration in the profitability per customer and, by definition, also the number of customers. But I'm more aiming at the profit size per customer rather than simply pure [ph] numbers.

Okay. So basically, operating profit growth in some of those fast-growth segments should be really good coming up here after some of this investments phase. Like into next year, we should have pretty good profit growth there.

Absolutely. [indiscernible] the investment base, if you think about the amount of money we're investing, it's next to nothing, really, in the greater scheme of things.

Yes. Okay. Good. And then just, I guess, on the share count, it sounds -- well, I guess, is incremental buybacks factored into your current guidance? And is the tax rate, the higher tax rate than normal figuring in more repatriation taxes going forward?

So the share count doesn't factor in any further repurchases. We're keeping it at the level that we've done guidance at before. And as a result, we also haven't factored in any additional spike that may be the result of a further repatriation of dividend. So we're trying to compare apples with apples as much as possible, but obviously to the extent that there may be a further large dividend declared from South Africa specifically, that would have potentially an impact on our full year rate, depending on the utilization of our foreign tax credits, et cetera. And of course, the use of that proceeds may include further repurchase of the shares, but that has not been factored into the guidance that we provided.

And because you are aware that we are expanding aggressively outside of the South African territory, I think we've made the decision quite a while back that we have to protect our cash and our cash earnings, which today are in rand, and convert them as much as possible to a currency such as the dollar, to make sure that we don't get caught at a later stage by trying to make an acquisition or expanding in another territory and finding out that the number of rand that we need in order to do that has grown up by 20%. So we'll keep the cash flow we require for South Africa, which we can judge very well, and we will make sure that the rest will probably be repatriated into U.S. dollars. So in my view, there will be further losses or leakages because of distribution. And candidly, I think that's the correct -- that's the correct decision for the company to have made.

Yes, that makes sense. And one final, just quick one. Transact24, what does that do to your income statement now that you own the whole thing? Like maybe you could just say how much revenue now? I think it will become a revenue item instead of just an affiliate item.

Yes. So obviously now with respect from the 1st of January, we'll consolidate the results of T24. Before, I think we did an equity accounting of the investment for the last 3 months or so, so that will change from being equity accounted to fully consolidated.

And how much revenue?

We can't disclose that right now, Dave. We're still in the process of completing the sort of opening accounts for the acquisition, but we'll provide you with further details as soon as we've got the consolidation ready.

Our next question is from Porter Collins from Seawolf Capital.

I had a couple of random questions here. If I look at the EPE growth, what percentage of the customers are new to Net1, not -- they're not grant beneficiaries, but you're actually getting new customers in the door?

That's a very important question to ask because, like I said, we want to try to move away -- obviously, we can't move away and ignore the 21.3 million beneficiaries, but we obviously would like to have a big chunk of those which are not. Now, to give you an idea, when we first kicked off, it was 0. In other words, we had none of those, because we were focusing on the low-hanging fruit, in other words, our current customers. Now we're finding out that, in fact, through our marketing efforts or simply by word-of-mouth, quite a substantial number of people are starting to move into the EPE net. But right now, it's still a very low amount of people. I mean, on ATM, to give you an idea, the people that are using them started at 1% or 2%. That has grown now to 15% -- between 15% and 17% that are using our ATMs that are not, in fact, our customers at all. They're actually other banks' customers. And we're starting to see the same sort of move on EPE. Right now, as we speak, out of the 900,000 people, you'll probably find we have 30,000 or 40,000 people that are not the beneficiaries, who are not part of our current customer base. But I would [ph] be disappointed. I'm trying to build that up. And of course, it's going to build up a lot slower simply because the pace of potential customers are much lower compared to the 21 million people. But I believe that when things start stabilizing, we're hoping that at least 20% or 30% of the total EPE base will not be current customers of CPS, in other words, current social welfare recipients.

Okay. The other question, just to clarify, of the roughly $100 million in cash, of U.S. dollar cash -- equivalent to U.S. dollar cash, what percentage of that is actually in actual dollars now versus rand equivalent?

Approximately, I would say 35% or so.

35% is in dollars?

Yes.

And do you have any hedges on top of that? Or is there any currency hedging going on, on top of that?

No. So it's very difficult for us to do long-term, large scale outward hedges due to our unique exchange controls in South Africa. So the easiest way for us is to do a natural hedge by declaring dividends out. Obviously, insofar as we procure any foreign goods or services into South Africa that we pay for with rand, we obviously do that in terms of our hedging policies, and most of those transactions, especially for the acquisition of ATMs, we take out forward [ph] cover.

Okay. And last question, in terms of new RFPs out there, I mean, we've talked about the World Food Program before. Anything -- any other -- the whole world's been worried about what happens to SASSA when it rolls off, and as you say, it probably never will. But in terms of the new RFPs, what are you seeing out there?

It's actually quite interesting because there are quite a view. Obviously, there a number in South Africa that come out all the time. But as you probably have found out from the history of the social welfare tender, these tenders take a long, long time before they actually go out, they get evaluated and they actually get awarded. We have the belief that because of what we've done for SASSA and with SASSA, we think that SASSA will become a much larger animal in the world of government whereby they will probably have far more distribution products, for example, like unemployment insurance, which today is done separately, and that will move under the SASSA umbrella. And hopefully, if we continue, of course, to be the partners of SASSA, indirectly, we would be getting that particular tender, although that really is not a tender at all, it's simply a government initiative. So I think some of those things are happening. We've also bid on a couple of other things that we are waiting to see what will happen, specifically using EasyPay in our electricity payment solutions, which is quite large, and we believe that, that can be quite a -- could have quite a big impact on Net1 if that particular tender ever gets awarded.

What kind of scale would that be in terms of -- if the electricity was won? Is it 1/4 of SASSA in terms of size...

I don't think it will be as much as 1/4, but it's pretty -- I would say pretty close to 20%. I think there's no doubt about that. And it depends, of course, what would be our role. I think it could be the 20% if the only thing we do is the payment piece of it. If we take a little bit more than that, for example, the token generation, which is something we are capable of doing and have very good systems to do that, it could be 1.5x that. It could be 30%. So they're not insignificant tenders. And perhaps one thing that I must say, I suppose it's the normal thing, if you're a very small company or a medium-sized company, sometimes you can't pick and choose the stuff you want. You just take what's on the table. Right now, we've decided to focus on some very large initiatives, simply because otherwise we will not have the management bandwidth to actually do them properly and to give it a fair chance of success. So we would rather -- so the funny thing is sometimes it takes as much time to tender for a small tender as it is for a big tender. In fact, sometimes it's even more difficult to get the small one than the big one. So we have really sharpened a little bit our pencils here and, to be quite honest, canceled a number of projects that we were working on and simply are now working, not only from a South African point of view -- and I must stress this, right. We would rather now, to some extent, even give up on some of our South African initiatives in order to ensure that the company becomes more of a worldwide company and that our business is better distributed across different geographies and in different currencies. So you will see a little bit of change, a little bit more focus on some -- what I would call a much bigger or larger deal. Of course, we have to get them. But I think -- I feel quite comfortable that now that we have a great track record, and we are becoming well known by many different governments around the world in terms of what we've achieved, that I think we have a better chance than many other competitors to hit 1 or 2 of those quite successfully and rather quickly.

And do you expect the outcome of some of these tenders to occur this calendar year?

Well, they are definitely meant to occur in the next few months, but are certainly -- don't hold your breath, because any of these things, as you know, they can be canceled. But if we are to follow the timetable, yes, there will be some outcomes I would think in the next 2 to 3 months.

Our next question is from Hymowitz Jordan from Philadelphia Financial.

So first I want to follow up on Mr. Collins' question. You mentioned the electricity contract in South Africa. It seems to me that we've gone from the South African SASSA contract that's going away story. So you've done such a good job that they're thinking about awarding you other contracts because you saved them so much money. My question is a little corollary to that, is are other governments in the area seeing what a success you've been with the South African social security government and saying, gee, maybe we can use someone to manage our program better?

Well, I'm pleased you mentioned that, because I didn't mention it. But I can assure you that SASSA continuously gets approached by other governments in developing economies. They spent a lot of time in South Africa looking at what SASSA has actually achieved vis-à-vis social welfare. And there's no doubt that normally, SASSA will also make sure that when they come to get -- when they get a visit from elsewhere, they normally send them to us as well for us to be able to explain the technological solution in greater detail. So there is no doubt in my mind, and we are -- I'm not going to mention any specific countries, but I can assure you that there are a number of them that have already approached us to actually say, well, look, we don't really want to do exactly what SASSA is doing. Remember, South Africa is very much advanced when it comes to social distribution that does not really exist in many other African country. But one thing that does is that they have other programs, for example, in the medical aid or medical insurance state-driven initiatives whereby a solution works equivalently as well. And there's 1 or 2 of those that have been very, very keen in seeing what we're doing. In fact, we have filed a couple of proposals. But because they are government initiatives, and we do understand government perhaps better than a lot of people, we don't want to talk about those things until we know that the people are, in fact, have signed a contract with us and say, "Hey, we want you to commence this." If they do, of course, then immediately, that will give us the same ties as SASSA has given us to deploy an infrastructure on which we can start cross-selling other products. So you are right, it's very fundamental to the plan is to use what we've done in order to get as much carry from it as possible. You will know that MasterCard has become -- last time I saw a very interesting article, which I actually smiled to myself, because MasterCard was the 10th, what they call, disruptive technology in the world. And believe it or not, the whole article was about what MasterCard had done in South Africa with SASSA. Well, the answer is MasterCard did absolutely nothing with SASSA. They had nothing to do with it. We did it. Now funnily enough, it might go down well whereby -- and we don't really care if they get a lot of the limelight. I'm delighted to hear it. But the people, when they do a bit of due diligence, they know who did it, and they know they had nothing to do with it. So we tend to get these referrals back to us on a regular basis. And we think that, that will lead to some substantial government contracts from other regions in Africa at least and actually outside of Africa.

Okay. My second question is, as we're on this conference call, there's a new story scrolling across the screen that Finbank [ph], which you own 25% of in South Africa, is entering the U.S. business consumer finance more aggressively. Can you comment briefly? You have 25% ownership of Finbank [ph] Are you thinking about increasing that stake and will that be a bigger channel to help you grow in South Africa or abroad?

No. In South Africa, we don't need the Finbond to grow, but certainly -- we will certainly continue to be a -- we hope to keep our shareholding in Finbond. And they're not expanding in the United States without having fairly detailed discussions with us. And remember that we've T24, we already have a bit of business in United States, specifically in the card issuance and salary payment systems in different states, and the idea is to start looking at that. Although [ph] that our role might be passive. We're obviously looking all the time at different synergies. Otherwise, what would be the point of getting an investment where we do not believe somehow that, that technology could be used. So once again, Finbond, I think, like many South African companies, are trying to diversify their earnings, in other words, trying to get them in dollars or in any other currency. I think their model work has worked very well in South Africa. They believe that they've got a very low-risk model to actually penetrate or at least enter the U.S. and Canada. And they also believe that our technology would be able, and what we've already got in place in the States could be a very, very good element of them being successful, so we're going to see as this continues to go. But we see that as something that's not taking a huge amount of our time because they're capable of doing it on their own, but something, certainly, that we want to preserve our investment because we believe that investment is going to grow.

And of course, we -- the reason why you see us mentioned in the press release is because we have decided to follow our rights. So Finbond's expansion into the U.S. and North American markets will be financed through a rights issue in South Africa. And we've undertaken that we will follow our full allocated rights, which means that our shareholding in Finbond will obviously not dilute.

And does that mean you're marking Finbond at almost 30 -- or almost -- more than 50% less than what it would indicate by what it's trading? Would you be marking up Finbond on a mark-to-market basis after this rights offer?

We're evaluating the accounting treatment. At the moment, we're showing Finbond at net asset value, which, you are right, is far below the current market value as reflected by its share price. But with this rights issue and some of the activities that may follow, we are reevaluating what the most appropriate accounting treatment will be going forward.

A final question is a follow-up question from Russell Anmuth.

Could you update us, 2 things, one on the progress of the European bank that you had contemplated establishing? And then two, are you able to work with your friend, [indiscernible] for example, on the new Pay You initiative that they expanded, that they just initiated in Europe, which sounds very complementary and synergistic with some of the technologies and the methods that you have at ZAZOO?

Well, just on the application process, that -- it's underway. We believe that we've submitted all of the documentation that's been required, which is clearly extensive. We are not, obviously, in control of how long the regulators will take to review and approve our application. But in the meantime, of course, we do have alternative methods and suppliers that assist us specifically with the issuance side on VCpay. It just cost us a little bit more, obviously, to pay it away. T24, by the way, also brings to us the ability to issue virtual cards in the European space. So work in progress, and we hope to have it finalized, certainly by the time we have our next earnings call.

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