Lesaka Technologies, Inc. (LSAK) Q3 2016 Earnings Report, Transcript and Summary

Ladies and gentlemen, good day, and welcome to the Net1 Q3 2016 Results Conference Call. [Operator Instructions] Please note that this call is being recorded. At this time, I'd like to turn the call over to Dhruv Chopra, Head Of Investor Relations. Please go ahead.

Thank you, Ari. Welcome to our third quarter fiscal 2016 earnings call. With me today are Serge Belamant, Chairman and CEO; and Herman Kotze, our CFO. Our press release is available on our website, www.net1.com. And our Form 10-Q should be available shortly. 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. And 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. So with that, let me turn the call over to Serge.

Thank you very much, Dhruv. Good morning to all of our shareholders. During our third quarter of 2016, we continued to make meaningful strides in safeguarding the long-term strategic but sustainable growth of Net1. Through the ongoing execution of our mature and new businesses, the introduction of new products and services, our new partnership with the IFC and the acquisition of a number of small but focused acquisitions. The weaker rand had its most significant impact on our year-over-year dollar-based results so far, creating a 55% headwind this quarter. Fortunately, the rand has recovered to some extent from its loss, but still remains a material headwind for the next few quarters. As the rand remains unpredictable, it is key for the company to accelerate its plan to achieve internationalization. Quarter 3 2016 revenues of $135 million grew 20% in constant currency and was driven by a combination of our stable recurring businesses aided by further expansion of our new initiatives. A number of these initiatives still require investment to scale and, therefore, the expected contribution to profitability will lag until each of those initiatives achieves critical mass. The good news is that some of our South African initiatives started scaling during the third quarter of fiscal 2016 and should continue into the remainder of the year, while some of our international activities should follow suit during the second half of calendar 2016. Our fundamental EPS in Q3 was USD 0.43, which was meaningfully lower in dollar terms and 1% higher on a constant-currency basis. During the third quarter, we continued the investment we began in quarter 2, given an opportunity to expand our branch networks, ATMs' installation and sales and support staff to capitalize on the demand for our products. These actions, therefore, resulted in a additional costs which we recognized during quarter 3, through -- though these costs were sequentially less than those incurred in quarter 2. During the third quarter, we also repurchased roughly 1.3 million shares or approximately $13 million; and for the year, have repurchased 2.1 million shares for roughly $24 million. The company has sufficient authorization remaining and will, thus, when possible and at the board's discretion, continue to effect buybacks when these are deemed to be in the best interest of the group. EasyPay Everywhere has begun to achieve meaningful scale as we see increased transaction volume growth and expansion of our Financial Services offerings. EPE has now registered 1.2 million clients who, in totality, performed more than 6 million transactions a month, with a value of approximately 2 billion [ph]. On average, each of our clients make use of our ATMs, point-of-sale and USSD portal as well as both our microfinance and insurance products. I'm pleased that we are now reaching the stage where customers look to us as a service provider to whom they can access any financial product or services, which are easily accessible and at costs which are the lowest in the market. When combined with our biometric authorization solution, our clients can enjoy the highest level of security that protects them against any attempts to perform unauthorized or illegal transactions. Security has become a key factor, as many of our clients who were previously excluded from accessing financial products and services are often targeted by individuals and companies with intentions that are not always honorable. Biometric verification leaves an audit trail of both the client as well as the service provider that cannot be by replicated by either party, thus, eliminating illegal transactions and creating an ecosystem that is transparent and auditable. I'm excited that we can now enter into Phase 2 of our EPE expansion strategy by activating our mobile units. These units will provide us with the footprint we require to access the many millions who do not reside in close proximity of our branch network. We expect a new acceleration in EPE registration, as we can now tackle the population that we do not currently access. We estimate that we should be able to triple our customer base over time using our mobile network. As our branch network becomes saturated, it must be mentioned that our mobile teams have been trained to not only register EPE clients but also to offer our Financial Services, including our microfinance and insurance products. By definition, we expect accelerated growth in these 2 areas as well. Next week, we will close our transaction with the IFC, and I look forward to our association going forward. We both certainly believe that the combination of IFC's footprint and expertise together with our proven technology will truly allow us to address the needs of the global unbanked population in a far more aggressive manner. Far too much time has been wasted due to many organizations protecting data and thus dwarfing innovation and, as a result, preventing financial inclusion for all. We believe that our mission to continue to disrupt existing business models and technological platform will be easier to accomplish simply because of the IFC's reputation and commercial investment. To leverage our relationship as much as possible, we are creating an Advisory Committee comprising of senior individuals from both entities to identify and evaluate organic and inorganic opportunities in emerging countries around the world. Herman will give you the numbers, but let me spend a few minutes on our cloud and mobile-centric activities, including EasyPay Everywhere and ZAZOO as well as highlight some of our new products and what they mean for the company. This quarter, we developed certain new products which will continue to supplement our core offering to all of our clients. These products have been incubated over a period of time and are ready to roll out, and have been tested in a live environment. The 4 I want to highlight for now are: a, medical insurance; b, mobile educational services; and c, our cloud-based world-class STS 6 [ph]-certified solutions for electricity; and d, transportation. A, our medical insurance product is designed to provide the most vulnerable access to the first level of medical care in close proximity of where they reside. Our sophisticated solution will interoperate with a client's mobile device, allowing them to be alerted of close proximity visits, times and locations. This medical insurance will allow for clients to consult medical staff who will ascertain the nature of the possible health problem with experience and provide the way forward for the client. In many cases, the medical care can be provided immediately. If further care is required, our staff will make the necessary appointments and, if required, provide the means, including the funds, for clients to be examined in the most humanely dignified manner possible. The system will assist hospital, clinics and pharmacies with scheduling, staff management, medicine distribution and other fundamental factors of medical service. We believe that we have the ability and infrastructure to provide such a service; and have identified numerous partners that wish to assist with this ambitious but socially responsible and life-enhancing solution. We are currently investigating the latitude of [indiscernible] medical [indiscernible] that govern the health insurance as well as medical [indiscernible] in South Africa. This initiative is an over extension of our vision to provide a complete service to our clients throughout South Africa. B, our educational product is based on leveraging our USSD mobile platform, which services in excess of 5 million clients monthly. Educational content is readily available in South Africa and includes both informative as well as educational content. For example, HIV/AIDS information, recognizing malaria symptoms, filling in bank application forms and the like will be provided as well as basic skills programs such as the literacy and numeracy. The system will allow our clients to subscribe for a range of specific programs, affording them the ability to acquire basic skills or improve the understanding of many day-to-day functions and processes. The system allows for sponsors to provide content or educational institutions to sell their courses via our distribution channel. Once courses or modules are completed, the result as well as the candidate's basic contact information will be shared with micro-jobbing and recruitment companies to assist our customer base in finding employment. C, STS, which is a secure standard that allows information exchange between point-of-sale devices and electricity or water meters. Such a standard has been approved and implemented widely in countries such as South Africa, Nigeria and the Philippines. There are in excess of 60 million electricity prepaid meters that have incorporated the STS standard. We are the sole provider worldwide of STS hardware security modules used by utilities, retail manufacturers as well as vending platform providers across all of these territories, who choose our technology to securely manage the sale, distribution and payment for electricity, gas and water. The latest modification to the STS standard was initiated [ph] by the fact that all existing meters would need to be updated before November of 2023, after which, existing tokens would not be accepted. To solve this massive potential problem, we have developed a new standard for our security module called the STS 6 [ph] as well as offering a cloud-based interface solution for all solution providers, including token generators, providers of -- and payment of system operators. This solution is sold on a transaction-fee basis when compared to existing ones, which is based on a one-fee model. And thus, such a new solution could directly or indirectly generate substantial revenue for us over time. Our security solutions have become the Windows or Android operating system in the field of STS-based solutions for all participating countries. D, South Africa is largely serviced by taxi; not like the New York cabs or Uber, but 15 to 20-seater mini buses which provide the primary mode of transportation across most of the country. Our solutions will help bridge the gap between taxi owners and drivers, eliminate fraud and revenue shrinkage, all the while starting to access electronic payments, including contactless cards. Our new SASSA and EPE cards will be contactless and these potentially allow more than 10 million people to pay for their primary mode of transportation electronically across 100,000 different taxis. Shifting to EasyPay Everywhere. Our strategy is to convert as many unbanked and under-banked customers as possible, including grant beneficiaries to our new EasyPay Everywhere account. We have now in excess of 1.2 million EPE accounts, just 10 short months since we introduced the product. We also have approximately 2,000 people across all 9 provinces of South Africa focused on our financial inclusion products, handling sales, operations and management. The value proposition for an EPE customer is summarized as follows: one, access your fully transactional and functional banking account at no cost; two, access to a wide array of products that they require but at a fraction of the cost and in a significantly more convenient manner; three, the ability to build a formal credit history, thereby, enabling them to be included in the formal financial services sector with anyone and anywhere in the country; and four, increasing their savings and having the knowledge that the bank will continue to find ways to introduce products that will make their lives simpler, cheaper and safer. Our EPE customers also enjoy reduced charges when using our EPE valid ATM network. We now have 118 physical branches and 827 ATMs deployed. At the end of April, we've processed 900,000 transactions with a value of over ZAR 800 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 four-fold increase in the overall fees we generate, even through our fee -- even though our fees are less than those charged by other banks. Moving on to our Financial Solutions offering. You might recall that in March 2015, new regulation was passed to introduce more stringent affordability assessments criteria, which we welcome and introduced immediately. This did, however, resulted in the strong reduction in -- of our loan book during -- at the end of quarter 3 2015 due to a larger number of declined applications, as they did not reach the new standard. The book remained at about ZAR 490 million to ZAR 495 million in Q4 2015 and Q1 2016. However, with an expanded branch network, a larger EPE customer base and favorable seasonal trends in December, we saw a sharp increase sequentially in the loan book during quarter 2 2016 and ended the quarter with a loan book of approximately ZAR 687 million. Despite the lack of any festive season in Q3 2016 and a more challenging macroeconomic environment driven by drought-induced food inflation, our loan book remained healthily at around ZAR 662 million. Starting with our current June quarter, we will anniversary the regulatory change and our lending business should return to demonstrating strong year-over-year growth. In addition, our sales force in some provinces are actively marketing and selling our new insurance products. The growth in this business remain constrained by our ability to identify and recruit very specialized skills as required by the insurance regulator. At the end of April, we had over 85,000 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 have experienced with all of our other financial inclusion business products. Another benefit from having a life insurance license is that we were able to differentiate EPE by providing customers free basic life insurance cover. I will now spend a few minutes on our mobile-centric business, ZAZOO. ZAZOO has made demonstrable strides, particularly internationally, during the last quarter. We have become a certified third-party processor in the EU with MasterCard, which, combined with our recent deal with Masterpayment and strategic partnership with Bank Frick, will provide the foundation required to own the entire value chain and to control and operate a customer-centric and enterprise payment product end-to-end in the EU. As a result, we look forward to launching into this market with these offering in the next few months. The quiet launch of our seamless mobile-based remittance solution has shown great results today, with folks at WorldRemit in the U.K. being our first client. We commenced our WorldRemit project, initiating international remittances into South Africa during February 2016, and the initial beta programs update has been very encouraging. In 3 short months, we have seen $8 million move through the platform. We will continue to build this product road map and focus heavily in the coming months on customer acquisition, formally expanding into the SADC region. What is also important to note about this product is that the revenue we earn on this project is largely through fees paid by the sender which, in our case, means hard currency revenues. Our Uber relationship continues to strengthen. So much so that we are now the only virtual card program operating with a taxi service. In South Africa, we have enabled drivers cumulatively to take the equivalent of 2 trips around the world on Uber, all of whom would never have been able to use the services without our Virtual Card offering. Our programs in India continues, as our Oxigen Wallet partnership gains momentum. We launched our MVC technology in India with Oxigen in January 2016. We started with a beta version of the solution a little over 3 months ago, and we were very pleased to have gained 180,000 [ph] users clearly through self discovery or word-of-mouth. Oxigen Wallet has over 15 million users, and has now only just begun advertising the product. We are excited to see the takeup rate in India over the next 6 to 12 months. All of our mobile initiatives span the developing and developed world, and solve the issues we have identified: mainly interoperability, accessibility and security, especially for card-not-present transactions. Our international operations, barring Korea of course, are still in development stage and will continue to require some investment for the foreseeable future. In South Africa, we remain focused on introducing and growing our B2C and B2B offering and expanding our value-added services. From a financial and metric perspective, ZAZOO's revenue grew 31% year-over-year in constant currency, and for the second consecutive quarter: processed more than 100 million transactions in Q3 of 2016. Meanwhile, our mobile value-added services in South Africa and elsewhere continued to grow. Umoya Manje posted 55% to 56% transaction growth over quarter 3 of 2015, while Power Manje transaction grew 82%. We now light up more than 800,000 households on a monthly basis. Similarly, Pasavute in Malawi sustained its momentum, with year-over-year transaction growth of 67% in Q3 2016. To stress again, on our value-added services, the reason for our success with this project is because we provide a solution that is convenient, easily accessible and affordable and is, by far, the cheapest of any formal or informal alternative. 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 the current and rapidly growing pipeline, we continue to hold ZAZOO to an extremely high standard of delivery. In April, we acquired 60% of Masterpayment in Germany and entered a long-term strategic relationship with Bank Frick. Masterpayment provides payment and acquiring services for all major European debit and credit cards, involving invoicing for online retail, digital goods and content; and through Bank Frick, flexible working capital, financing through its Finetrading solution. Masterpayment has a client portfolio approximately 5,000 registered merchants. We recently concluded a workshop with the Masterpayment team and look forward to rolling out an aggressive customer acquisition plan as well as the integration of our core technology to bolster the market positions through our world-leading technical offering. I'm pleased to announce that we have finally received the first order for our smart cards from the WFP. The first country in which our technology will be deployed is Zimbabwe. It's exciting that after almost 14 months of negotiating and waiting, we are finally being tested on the ground, where we know we will perform successfully, as this project will no doubt open the door for other countries to follow suit in the very near future. Lastly, I would like to update you on SASSA. We have had one meeting with SASSA regarding their plan which sought to take the payment system over in-house, as directed by the constitutional codes of South Africa. The task of taking the system in-house is complicated and complex. For example, if the system actually remains open, as defined by the SARB, or the South African Reserve Bank, a bank will then -- would have to be used to issue the SASSA-operated card, resulting in the same situation at SASSA in calendar '15. That is, they would be subject to the South African Reserve Bank and by the rules -- by Payments Association of South African rules, and with us not being involved, in any way, in providing the solution. The system will, thus, not be deemed to be in-house but simply outsourced. This would require a new tender and, possibly, combination by the constitutional court. Implementing a closed system is technically possible due to our morphing solution but possibly not desirable from the South African Reserve Bank or Payments Association of South Africa's point of view. Of course, a closed system solution would offer SASSA a real in-house-based solution, which they could operate and control in all ways possible. This issue, and many related others, make this transition extremely difficult for SASSA, as the priority remains, as per the constitutional court's directive, to be in the best interest of the beneficiaries. We will keep all of our shareholders updated as this process unfolds over time. 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 these businesses, including internationally. We will continue to strive to extend the longevity of our business contract 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 discuss the key results and trends within our operating segments for the third quarter of 2016 compared to a year ago. For Q3 of 2016, our average rand-dollar exchange rate was ZAR 15.82 compared to ZAR 11.74 a year ago, which negatively impacted our U.S. dollar-based results by approximately 35%. And the South Korean won was 9% weaker compared to last year's won rate. We continue to face significant currency headwinds in our operating geographies. True to form, the rand has maintained its status as one of the world's most volatile currencies. And after trading well below ZAR 15 for a few weeks, the ongoing volatile macroeconomic news has resulted in current trading at the ZAR 15 level again, which will obviously influence our Q4 results. Consistent with the first 3 quarters of this year, we have experience good growth in our functional currencies, and this momentum continues through to Q4. As I mentioned previously, while we do not specifically hedge currency due to the clearly translational nature of its impact on our dollar-denominated results, we are well aware of the associated risks of the weaker rand. We, therefore, decided to convert a further ZAR 500 million of our South African cash balances through a dividend to U.S. dollars at holding company level during February 2016 to reduce currency volatility on our cash reserves. Predictably, this has again resulted in withholding and other tax-related adjustments as well as lower tax-affected interest income due to the differential between South African rand and U.S. dollar deposit rates, which impacted us by approximately USD 0.05 of EPS this quarter. For the full year, we expect a total impact of approximately $0.18 on EPS, including the prior distributions and assuming no further distributions through to June 2016. Revenue for Q3 2016 grew 20% in constant currency, while fundamental earnings per share increased by 1%. On a consolidated basis, for Q3 2016, we reported revenue of $134.8 million and fundamental earnings per share of USD 0.43. Our fully diluted weighted share count for Q3 2016 was 46.4 million shares, which was positively impacted by share buybacks in February 2016. For clarity, there was no impact on our Q3 2016 share count as a result of the IFC transaction, as this transaction will only close next week. Now to our segments. In our South African transaction processing segment, we reported revenue of $50.6 million in Q3 2016, down 13% compared with Q3 2015 in U.S. dollars, but an increase of 18% on a constant-currency basis. In South African rand, the increase in segment revenue and operating income was primarily due to higher EPE transaction revenues as a result of increased usage of our ATMs, more low-margin transaction fees generated from cardholders using the South African National Payment System, increased intersegment transaction processing activities and a modest increase in the number of social welfare grants distributed. Our operating income margin for Q3 2016 and 2015 were 26% and 23%, respectively, and was higher primarily due to higher EPE revenue as result of increased ATM transactions, an increase in intersegment transaction processing activities, an increase in the number of beneficiaries paid in Q3 2016 and a modest increase in the margin of transaction fees generated from cardholders using the South African National Payment System. And this was partially offset by annual salary increases granted to our South African employee base. We continue to expect our South African processing segment margins to be in the low to mid-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 had a meaningful contribution to this segment during this quarter. International transaction processing generated revenue of $40.6 million in Q3 2016, up 43% compared with Q3 2015 on a constant-currency basis. Revenue increased in constant currency, primarily due to higher transaction volume at KSNET during Q3 2016 and a contribution of approximately $2 million from T24 from January 2016. Operating income during Q3 2016 was lower due to an increase in depreciation expense of KSNET and ongoing ZAZOO start-up costs in the U.K. and India, but was partially offset by an increase in revenue contribution from KSNET and positive contributions from T24 and XeoHealth. Operating income margin for Q3 2016 and 2015 were 12% and 17%, respectively. The result of our newly acquired 60% interest in Masterpayment will be included mainly in this segment in the fourth quarter of fiscal 2016. These results are expected to be modest initially, but we hope to scale these operations through collaborations with our business units, primarily ZAZOO and T24. Operating income and operating income margin for last year's Q3 result was positively impacted by a refund of approximately $1.7 million that had been paid several years ago in connection with industry-wide litigation in Korea. For Q3 2016, KSNET revenue grew 8% in Korean won to $36 million, while EBITDA margin was 29% compared to 30% [ph] last year, which included the settlement received in Q3 2015. Excluding such settlement, EBITDA margin improved from 26% in Q3 2015. KSNET has sustained local currency growth of high single to low double digits for several quarters now despite a slowing economy. Our financial inclusion and applied technologies segment revenue was $54.3 million in Q3 2016, up 9% compared with Q3 2015 on a constant-currency basis. In South African rand, financial inclusion and applied technologies revenue and operating income increased primarily due to higher prepaid airtime and other value-added services sales; and in rand, an increase in intersegment revenues, offset by fewer ad hoc terminal and card sales and lower lending service fees. Although lending fees were lower year-over-year, as Serge alluded to, we did experience sequential growth due to the significant expansion of our book in Q2 2016. Operating income for Q3 2016 was also adversely impacted by establishment costs for Smart Life and expansion of our branch network as well as an increase in intersegment charges. Our UEPS-based lending book at the end of Q3 2016 was approximately ZAR 662 million compared to ZAR 687 million at the end of Q2 2016 and has decreased moderately due to the seasonal nature of this book. We believe that our lending book can be grown through further expansion of our Financial Services branch and ATM networks. As expected, the rollout of our Smart Life insurance policies continues to gather momentum, and we look to it to contribute more meaningfully 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 technologies segment were 21% and 27%, respectively, during Q3 2016 and 2015 and has decreased primarily due to establishment costs for Smart Life , expansion of our branch network, annual salary increases for our South African employees and an increase in intersegment charges. 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 Q4 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 fair value adjustment gain of $1.9 million related to the acquisition of T24; the impact of the stronger U.S. dollar on goods and services procured in other currencies, primarily the rand; and lower amortization costs, partially offset by modest increases in U.S. dollar-denominated goods and services purchased from third parties; directors' fees; and M&A transaction costs. We expect our corporate expense to increase in Q4 2016 as a result of our new offices and related expenses in the United Kingdom. Our Q3 2016 net interest income increased to $2.5 million, driven primarily by higher average daily South African cash balances and South African rand interest rates and lower interest rates on our Korean debt, partially offset by the lower interest earned on the U.S. dollar cash reserves that we converted from rand through distributions from our South African subsidiary. Capital expenditures for Q3 2016 and 2015 were $8.1 million and $6.3 million, respectively, and have increased primarily due to the acquisition of more payment processing terminals in South Korea and ATMs in South Africa. At March 31, 2016, we had cash and cash equivalents of $123.2 million, up from $118 million at June 30, 2015. The increase in our cash balances from June 30, 2015, was primarily due to the expansion of all our core businesses, partially offset by the strengthening of the U.S. dollar against our primary functional currencies, repurchases of our shares of common stock, provisional tax payments, acquisitions and capital expenditures. During Q3 2016, we acquired 1,328,699 shares of our common stock for approximately $12.7 million, which brings our total repurchases for fiscal 2016 to approximately 2.1 million shares at an average price per share of approximately $11.51.

We continue to fund the group's operations and capital investments utilizing our cash reserves and cash generated from our business activities. We also expect to receive approximately $107.7 million related to the IFC transaction next week and expect to use the proceeds primarily for the expansion of our business and technological solutions deployed in emerging markets across the globe. In addition, during the next 12 months, we also to -- expect to use our existing surplus cash reserves and additional cash generated to fund 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 34.6% 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 $2.1 million attributable to a further distribution from our South African subsidiary, which were intended to further help reduce the impact of a weakening 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 any further distributions from our foreign operations. Our weighted share count for Q3 2016 was 46.4 million shares. Our share count as of March 31, 2016, was 45.6 million shares, net of the stock repurchase, but the increase to 55.6 million shares as a result of the issuance of 9.98 million shares to the IFC next week. We, therefore, anticipate that our Q4 2016 weighted average share count to be approximately 51.1 million shares, and our fiscal 2016 weighted share count to be approximately 47.9 million shares. 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. On a like-for-like basis, we expect fundamental earnings per share of at least $2.40 for fiscal 2016, which includes a full year impact of $0.18 per share related to taxes and forgone interest income as a result of our distribution of cash in South Africa 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 57.6 million shares. With that, we will gladly take your questions.

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

My first question, I guess, the EasyPay accounts. We're really starting to see the impact, really for the first time the last couple of quarters on the South African transection segment of the 18% growth. That had been growing kind of in the 10% range. Is that now expected to just continue to accelerate as EasyPay Everywhere accounts keep coming on? And is 18% the starting point? Like, should that be a 20% grower the next several quarters?

Well, Dave, I think, yes, the impact of the EasyPay Everywhere account is obviously, a function also of the rate of the rollout. And I think in Q3, obviously, it's the first time that it's really become visible simply because of the exponential growth that we saw during Q1 and Q2 of the fiscal year. So yes, if you look at the take-up rate, it's not a continued a exponential growth as we obviously saw from the launch date, but it is still a pretty impressive curve going forward. And obviously, as the cards are issued and people start using them and getting used to them, I think we should see continued growth in our South African transaction processing segment as a result of the use of those cards. But also bear in mind that some of the revenues that you see in that segment is a -- the result of the intersegment sort of reallocations. But to conclude, we expect the take-up rate of EasyPay Everywhere to continue, and we expect the impact of it on the segment revenues and incomes to be evident going forward. Until the end of at least this calendar year, I think we'll see a pretty good growth rate.

David, it's Serge here. Just to add on, on what Herman was saying, I think it's quite important, you said when we kicked off EasyPay Everywhere, we were expecting around the registration of about 120,000 people a month with the infrastructure that we were using at the time. Now obviously, we've been maintaining that number. But we can see that, that's probably [ph] we can see it dropping to maybe like 100 and then 90 and then 80. And the reason for that is because the moment we have pushed EPE through our physical branches, and by doing that, it's quite obvious that the people that have access to these branches do not live 150 kilometers away from the branch, so we can see that, that number is now becoming -- is reduced because we pretty much are getting to the end of that registration. The exciting thing, like I mentioned, is that we are now activating our mobile systems. In other words, that we are now going to start going away from the mortar -- brick-and-mortar branches and we're going to go far more -- far much further then what the brick-and-mortar branch can actually give you. And we believe that, that is going to rejuvenate the entire update of EPE and getting back to the numbers of 120,000, 140,000 people a month. Now, that will ensure that we get way over the 2 million customers that we had mentioned before by April of next year or probably we'll be 2.3 million, 2.4 million, maybe a little bit higher than. But more importantly, these customers are starting to transact, and they're starting to transact more and more in our own infrastructures. In other words, with our own ATMs, with our own point-of-sales, through our own USSD portal. We think they are generating more and more profitable transactions for us as we are taking these transactions from the opposition. So we see EPE to be very much a driving force economically for the company in the near term.

Okay, that's great. I guess, and secondly, you mentioned in the press release, you used the words, a watershed year for fiscal '17. We just saw the financial inclusion business, a high-growth business actually decelerate to about 10% growth, it had been 20%-plus for several quarters. But yet, you're talking about next year's a watershed year. I mean, are we going to reaccelerate back to 20%-plus? Or maybe even -- does watershed mean better than what it's been? Like so, I mean, should we get even better growth next year than the last couple of years in the financial inclusion?

Okay. So David, again, that's a very, very good question, and there are 2 parts to the answer to the question. Part A is that because we are activating now what we call our non-branch infrastructure, we believe that we are going to see new acceleration in all of our financial products, simply because of the fact that we are now targeting a much larger segment of the population. Even if you look at today at the 10 million people or 11 million people that we actually service. At the moment, we basically have around, well, 5 million people use our USSD portals, but around 1-point-something -- 1.3 million people use our loans, only 1.2 million people have got EPE cards. Now there is no reason for that limitation except for one thing, is that we have to be able to get to those people. And we believe that our mobile solutions now are going to give us the ability to access many more people that today simply can't get to us, but we want to get to them. So that's part 1 of what I think the watershed, in other words, a new impetus in our ability to be able to access more customers and therefore, to be able to sell more financial products and other services like the one that I've just mentioned. Things like, for example, our medical insurance, certainly, our educational portal, all of those have got a -- could have a fundamental change to our earnings over the next year or 2 years, 3 years, without a shadow of a doubt. The second part of the answer is that within a watershed is that we have been looking for a while for a partner like the IFC to give us the opportunity to accelerate our extension into the rest of the world. In other words, we know, and I had mentioned this before, that before we were rebuilding, MasterCard is the driver to implement our UEPS technology. In other words, where MasterCard went and could not provide a solution that was really differentiating themselves from Visa, as an example, they would rather bring in UEPS and the so-called next factor to be able to say yes, you should have a MasterCard logo, not because the logo meant too much, but because UEPS functionality was present. We now, with the IFC, can achieve the same thing, without having to have somebody ask, like MasterCard or Visa, actually promoting us in any way. And already we are seeing over the [indiscernible] not received $107 million yet, and we have not issued the shares. The IFC, in good faith, have already opened up a couple of doors for us in a number of areas, and we believe because of that, that we will be able to accelerate the implementation of UEPS technology in many other developing economies, which we have not been able to do at the speed that we were hoping to be able to achieve. I think that is over. I think there is a very good chance that we are going to be able to do this right now.

Okay. No, that's helpful. And I guess finally, just my last question. Just because next quarter we're going to walk in and we're going to see guidance for next year for the first time, but there's nothing that you would say should decelerate growth next year. If the last 2 years in total have been about 20% constant currency growth, you see no reason, based on all the opportunities, for next year not to be at least that good, if you think of it as a watershed year. Is that fair to say?

I think that you stated, David, is that if we ignore, and I know it's not -- it's difficult to ignore it. But if we ignore things like exchange rate, the range, for example, which certainly impacts [ph] in many, many different ways. But if you look at the expansion program and what we're starting to do, specifically with ZAZOO as well, which is yet to really create a huge amount of impact on our bottom line, we still believe that without a shadow of a doubt, there is no reason to believe that we cannot continue to grow at the 20% mark next year because we're seeing it as the new -- as almost a new fresh start for our technology and our systems, simply because we are more ready now to be able to attack the markets with our European enterprise that allows us to do things like issuance of cards, applying of merchants that we could not do last year. So we really believe that 20% is, without a shadow of a doubt, achievable, and I would be disappointed if that standard did not grow over the next 2 years or so.

[Operator Instructions] We have a question from Jordan Hymowitz from Philadelphia Financial.

Can you guys update us on the status of any other contracts being bid on in South Africa? There's a water contract, there's an electricity contract, there's a contract with small business vendors. Can you just update us on the status of any of the tenders? Are you guys in the finals? Are you working on towards that? Or what's the status there, please?

[Technical Difficulty]

We were doing -- we were going to the question-and-answer session.

That's correct. We did have a question from Mr. Jordan Hymowitz of Philadelphia Financial.

Could you be kind enough to update us on the status of existing tenders in South Africa? There's a water tender, there's an electricity tender, there's a small business tender. Do you know when any of those decisions will be made and how we're looking?

Yes, I can answer the question. There are a number of tenders mainly around the electricity infrastructure in South Africa. Expect there is at least 2 of them that I'm aware of. We've obviously tendered for both. But the first one which went out a little while back, for lack of a better word, we are still awaiting -- my understanding is that there's not too many people left in the tender. And we are waiting for the province to actually make a decision. The second tender, which is very, very similar to the first one, is relatively new, and we've obviously tendered for that as well, and we are waiting for the next step. I did mention during this -- sorry, Jordan?

The first tender's in which the province you said, I'm sorry?

The 2 tenders are electricity-based and both of them, the first one was [indiscernible], in other words, everybody replied. And we are waiting the outcome. In other words, it has been delayed in terms of the outcome, which is not surprising with tenders. And the second one, which is a similar size, we've tendered as well, and we're also waiting for that tender to close. So as I mentioned in my...

The question was the province instead of...

Yes, they're both massive projects.

Are they with a specific province or with the whole country?

No, no, no. This not for the whole country. We're talking about -- normally, municipalities. In other words, you could be looking around the -- for each of them, anything between of 500,000 to sometimes 600,000 meters that has got to be installed and obviously, managed in for that term and for the payment system to be implemented in order to service or to generate the [indiscernible]. So it's -- they're both very, very, very large tenders. But as I mentioned before, Jordan, the important thing here is that we are now the provider of security modules, which are the only one used that are useful going forward to prevent the meltdown of the token generation in South Africa because by 2023, which is I know, it sounds like a long way away, but it's actually not that far away, when you have to update millions and millions of meters. We believe that we are now well placed, in a better place than before to play a major role, if not to win a number of those tenders.

And -- I know. Serge, is these tenders with the whole country or with just a region?

No, it's only for the region of the country. So it could be even a region within a province.

And can you say what regions the tenders are for now?

No. At this point in time, I think if Menda [ph] is around, he will know the exact region. [indiscernible] why it cannot be mentioned. Let me see if I can see here in the corner of my screen, so maybe he will know what the regions are. Menda [ph], are you around?

I am, Serge. It's in Hargen [ph]. And the second one is also Hargen [ph], which is the western are of Hargen [ph], which is the [indiscernible] of the environment.

Perfect. My second question, you guys have been very good on buying back the stock, and I know there's been some restrictions because of the IFC. What Dhruv has done in the stock, it's such an attractive price. Could we hope that management will join our shareholders in buying some stock personally?

Hi, Jordan, this is Dhruv. Obviously, we have to be aware of the company's blackout periods and other periods where we are precluded from buying the stock, but it's something that we obviously consider whenever the opportunity presents itself. That opportunity hasn't presented itself for quite some time now, unfortunately. But it is something that we take under ongoing consideration.

We have a question from Dave Koning of Baird.

My question, I guess, on the SASSA commentary that you made, that you had a meeting with -- it sounds like they want to take it in-house. I was a little unclear, did you make it sound like they want to take the entire process in-house? I know you made it that, that was very difficult to do. Or does it sound like they might still need to outsource a good chunk to you guys?

David, again, that's a very, very good point. As you know, it's -- something that was discussed during the constitutional court action was in fact, what does that mean SASSA takes in the process in-house, the payment process in-house? And at the moment, we are the ones doing the payment process in totality, from A to Z. So the question is, if SASSA wanted to take the payment process in-house, which piece of the payment process would they actually take? Now we know that right now SASSA is not a bank. So SASSA could not act as a bank. And SASSA is not an insurance company, so they would not be able to act as an insurance company. SASSA is not a micro lending entity, they don't have a [indiscernible] license so they would not be able to act as a -- under the credit regulation. So at the end of the day, if SASSA decided to want the system to remain open -- and what do we mean by open? It means that it would work as if it were part of the banking network, the national payment system. The problem with that is that, that means cards under the South Africa Reserve Bank and the Payment Association of South Africa Regulation. Cards must be issued by a bank, which means if cards are issued by a bank, the account that is associated with a card belongs to the bank. Which means that by definition, SASSA would be, as far as the banking feature is concerned, SASSA would be in exactly the same position as they are today, working with us and having the accounts provided by the retail banks. There will be no difference. In other words, they will not be able to take any of this in-house. Once you remove those 2 elements, what is left? Well, what is left is obviously the payment infrastructure in rural areas, which is the pay-point. Now there is no doubt that SASSA could decide to take that in-house. But at this point in time, we know how complex that is to visit 10,000 pay-points with 600 tracts [ph] and 2,000 ATMs built on top of those tracts [ph]. So we're not sure that SASSA would have necessary the appetite to actually go ahead and to say, we're going to be buying [indiscernible] either directly for 2 years or trying to build their own simply because it would be actually probably more expensive for them to actually run it than to outsource it. So assuming that they stick to outsourcing it, then what would be left over for SASSA to take in-house? And that's the question that they are facing at the moment. If, of course, SASSA decided to say, we want the system to be closed the way that it used to be a number of years ago, closed but interoperable. In other words, we do not require a bank to issue a card. You do not have to worry about interoperability because our morphing technology, our UEPS/EMV card would be able to be accepted by bank ATMs and point of sales, but it does not have to be branded Visa or MasterCard in order for it to be a white label card. That would allow SASSA to either outsource technology in terms of providing the backhand banking system, but they would not have to outsource anything out. In other words, they in fact, could actually run it almost like a [indiscernible] or what they call the build operate -- build, sell and operate and then would be able to operate the system in a way that they see fit without falling under the jurisdiction of the Banks Act or the Payment Association of South African Act. So it's a very, very difficult decision for them because the Constitution, of course, as we all know, said either you're going to award the tender or you're going to take it in-house. But no one has yet explained to either party what taking it in-house would actually mean. So I think there's quite a lot of water to go under the bridge before SASSA actually decides. Strategically, what is it that they want to do; and two, to make sure that what is that they want to do would be in line with the constitutional court ruling, number one, otherwise they would have go back and get some combination. And number two, that what they want to do is in fact possible and would result in them being able to say, we are now governing or controlling the payment system, rather than to say well, we're now outsourcing it but we simply are sourcing it to a different party. So it's extremely complex and complicated. And I'll be honest with you, I wish I could tell you right now, what is going through SASSA's mind, except to generate -- we want to take it in house. But I'm not too sure what it actually means at this point in time.

Our final question comes from Porter Collins of Seawolf Capital.

Do you mind just talking a bit about the strategic investment by IFC? Prior to this, the company had $125 million, $140 million of cash in the balance sheet, generates roughly $80 million in cash flow a year. And now we have an extra $107 million. So this is a company sitting on a lot of cash and a lot of free cash flow. So can you just talk about your thought process of how you're going to -- because you have obviously a lot of organic stuff going on, but just can you talk about how you're going to use all this cash, and how you're thinking about things more strategically?

Yes, it's -- again, it's a very good question. Number one would be interim to negotiations with the IFC. We actually discussed the issue of the fact that are we really interested in $107 million? And the answer was well no, we're not. The money was not the reason why we did the deal with the IFC. It could have been somebody else that could have come forward and say, we'll give you $107 million instead of $1 million at a 20% premium. Would we have taken the money? And the answer is no. Okay. Why? Because we didn't need the money, right? The other big thing is we wanted the IFC because of the fact that number one, they recognize what we had achieved in South Africa and elsewhere, number one; number two, they recognize that our technology is some of the most advanced technology in the world; and number three, there may be something that they can assist us to rent in many other countries, developing economies in the world, where people are attempted to do what we have done and failed miserably. This is what was exciting about the IFC, not the money. Now, of course, is that to come with the money as well because of the fact that they would not invest in our company simply for the sake of assisting us, although they might have done so. So now the question is, what are we going to do with the cash? Well, there is no doubt that with the amount of project that the IFC believes that we can get involved in, there might be a different business model that we can put together that gives us much longer contracts. But longer contracts means we might have to have much larger investments of [indiscernible]. For example, if we are to move into a country like Nigeria and we decided to say now what we want to have a 20-year concession on implementing electricity meters in households but also to be able to control the distribution that they need to open any generation of tokens to those business. There is no doubt that, that would probably cost billions to actually get into, and therefore to have that extra $100 million would assist there to look at certain projects very differently. In other words to trade, how much money do we invest upfront but for a much longer, not a 3-year tender or 5-year tender like a SASSA contract, but let's -- want to go for a 10-, 15- or 20-year concession. So that's one of the fundamentals about able to use this -- or being able to use this cash. And they are numbered, by the way, these opportunities that we have not taken in the past simply because we were not in a position to be able to say, well, we have got an extra $100 million and therefore, we can actually take the chance in putting in a $20 million or $30 million investment in any infrastructure in any secondary or tertiary country. So that's really what we intend to do with this money. And because we are quite large, we do generate a lot of cash flow, which means if we're to do nothing, we'll end up with $300 million in cash in a very, very short term. And that, of course, fits very well with Jordan's point, and which was to say is the company likely to do share buybacks? While there's absolutely no doubt that at the rate or at the level that we are still trading for whatever the reason may be. It would be silly for our board that they've approved a few months back $100 million of share buybacks, and I think, we've still got about $75 million that we can utilize. I feel that there is a good chance that once we are able to buy back, they don't have to believe that we're not into the market, and do a much more greater buyback strategy to make sure that the investment that [indiscernible] actually have the chance to do so.

I appreciate the answers. And I agree, I mean, given the -- I'm not a huge fan of stock buybacks, given the -- a lot of runway, but the stock is very cheap at 5x, 6x earnings. It's a great use of shareholder money, given the fact that your payout ratio on existing cash flow is just still so low. So either increase the dividend and increase share buyback is probably a great shareholder-friendly approach at this point.

Ladies and gentlemen, that concludes the question-and-answer session. Our call is also finished for today. On behalf of Net1, thank you for joining us. You may now disconnect your lines.

Thank you, gentlemen.