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…

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…

[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…

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.