Lesaka Technologies, Inc. (LSAK) Q4 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Net 1 UEPS Technologies, Inc. Fourth Quarter and Year-End 2016 Earnings Call. All participants are currently in listen-only mode. There will be an opportunity for you to ask questions later during the conference. [Operator Instructions]. Please also note that this call is being recorded. I would now like to turn the conference over to Mr. Dhruv Chopra. Please go ahead.

Thank you, Chris. Welcome to our fourth quarter fiscal 2016 earnings call. With me today are Serge Belamant, our Chairman and CEO; and Herman Kotze, our CFO. Our press release and Form 10-K is available on our website at 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-K 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-K and in our press release in rand to assist investors in understanding the underlying trends of our business. As you know, the company’s results can be significantly affected by currency fluctuations between the U.S. dollar and the South African rand. So, with that, let me turn the call over to Serge.

Thank you very much, Dhruv. Good morning, good afternoon, and good evening to all of our shareholders. During our fourth quarter of 2016, we continue to make meaningful strides in safeguarding the long-term strategic, but sustainable growth of Net1 through the provision of technology-based solutions to facilitate financial inclusion. We have built the business model that is defensible, differentiated, and socially responsible, capable of delivering top and bottom line constant currency growth, despite ongoing political and regulatory interference in South Africa, and macroeconomic events globally. Being disruptive is not easy, as challenging the establishment, norms and cartels can result in [people] [ph] and reputational damage, usually obstructing progress at the cost of those who need it the most. This is the environment in which Net1 has always strived. While the weaker end has strengthened meaningfully of its lows, it still is a significant impact on our year-over-year dollar-based results so far, creating a 25% headwind this quarter alone. The rand continues to be volatile and hence the company’s effort to globalize our activities over the course of fiscal 2017 will become even more critical. Quarter four 2016 revenue of $151 million, grew 15% in constant currency and was driven by solid growth in our South African and international transaction processing businesses. While a number of South African Financial inclusion products, such as loans and insurance showed strong growth. Some of the early and sizable offerings like prepaid airtime are starting to reach more normalized levels. And we expect each new value-added product or service will continue to drive waves of growth, as they penetrate the customer base and as the customer base itself grows. Our fundamental EPS in Q4 was $0.51, 10% higher on a constant currency basis, including the impact of the higher share count due to our IFC transaction in taxes related to the distribution of South African cash reserves. We continue to invest in our Financial inclusion infrastructure during the fourth quarter, but lower sequentially from Q3. In fiscal 2016, we repurchased 2.4 million shares for approximately $27 million. And under the $15 million mark, 10B5-1 plan adopted on June 29, 2016 and purchased a further 1.2 million shares for approximately $12 million. Our repurchases have only been constrained due to the limited trading volumes over the last – over the past two months. I want to spend a few minutes first on outlining our strategic plans, efforts and opportunities and we’ll then touch on the performance of some of our current operations followed by my thoughts on our government contract and related topics. I have no doubt that Net1 could continue to generate reasonable top and bottom line growth by focusing on our key initiatives in South Africa. But those efforts would unlikely ever be divorced from a regulatory, reputational and other challenges we face in this market, not to mention, the overall size of the market itself. As we have seen, we continued to grow earnings, and on multiple, continues to contract creating no value for our shareholders, or the company, or its employees. With Net1’s focus now squarely on the expansion of activities across developing economies worldwide and as a developed market, namely Europe. We now have many of the right partners, such as IFC, WFP, and MasterCard. We have the cash and cash flow. And most importantly, the products that are relevant in each of these territories. What we need and now in the process of creating is infrastructure and management debts required to address each of these opportunities in a focused and aggressive manner. And the corresponding benchmarks and targets to hold ourselves accountable. Until now, our international strategy was always dependent on third parties in countries, which can lengthen sales cycles and reduce economics. We will now sell direct to markets, as we have done successfully in South Africa. To provide additional context around that strategy, our focus will be on six core products across geographies, namely our UEPS/EMV product, our Virtual Card product, our financial services products, our working capital finance product, our corporate payment solutions, as well as our prepaid electricity metering solutions. Any other offerings we currently add will be complementary to these six, as applicable, which we believe are all scalable on a worldwide basis. To support this strategy, we have to deepen our management bench, build direct sales and support staff and when necessary establish a presence in country. This strategy will further be supplemented by targeted acquisitions and investments. Why do we believe this is the right strategy for the company, and what gives us the conviction to follow this path? First, we want to build Net1 into a global player with a much larger addressable market in turn driving higher and sustainable revenue and earnings, which we believe will attract far more reasonable valuation that our South African business is. Second, this strategy is completely in sync with a rationale based on which the IFC invested in our company. And we expect them to play a significant role in assisting us through this expansion with expertise, relationship, and portfolio investments. And third, we have already made meaningful progress with a number of products in several territories. To give you some examples for UEPS, we’re now live in Zimbabwe with our WFP and we will have additional countries to follow. And in various stages of advanced discussions in country like Uganda and Mozambique; for Virtual Card, we’re almost completely setting up the infrastructure required to introduce our offering in Europe, including various licenses, issuing and processing capabilities, and [indiscernible] a specific product development, while expanding further in India with Oxigen and now with today’s announcement MobiKwik as well. For working capital finance, we have already taken step to introduce the product into a handful of European countries outside of Germany over the next six months. For corporate payments, we have obtained issuing licenses in UK, Mauritius, and up pretty soon in Malta, as well as certifications for third-party processing. For financial services, we’re not guarantee offering these products in, for example, Botswana and other territories, such as Nigeria. And for electricity meters, we have 65 million installed meters in the number of countries, and going forward, we intend to migrate these to a transaction model from a one-off sales model. Let me highlight some of the acquisition and investments in support our strategy. Starting with our announcement this morning, Net1 is making a strategic investment in MobiKwik, one of the leading digital payment companies in India. What is more important, however, is the ability to partner with them and introduce a number of our products and services on this sizable platform in India. It must be noted that our investment in MobiKwik is based on being able to convert the entire customer base to a banking platform and to then offer these customers not only portals through which they can purchase goods or services, but also the financial products they seek. SASSA in South Africa has given us the base of customers to do just this. MobiKwik would assist us to do the same on a much larger scale. This as we all know solved the customer acquisition dilemma. Master Payment business model revolves around acquiring online merchants and to provide these with a transacting needs. More importantly, these merchants seek finance to grow their businesses, which Master Payment is able to provide at competitive price – pricing due to the close relationship with Bank Frick. These merchant stores are also year marked to accept, but also to promote. The issuance of our VCC solution to safeguard online transaction and does eliminate chargeback’s and allow the businesses to grow without increasing the collection risk. Masterpayment does not, however, carry the financial risk. Masterpayment can scale across Europe, and as already commented, activities in countries, such as Italy, Spain, Germany, France, and the United Kingdom. T24 is being transforming to be a processor on a worldwide basis, allowing us to issue cards and apply merchants, perform many transfers and access international supplementing clearing. T24 will also become the gateway for us to enter Chinese markets and become the technology partner to some of our financial partners, such as Finbond to provide local banking and transacting services to their clients. Coming back to the performance of some of our key businesses, we are pleased, but not really surprised with the adoption of our ATM roll out and the associated usage of the same. We currently have 904 ATMs deployed, doing approximately 1.3 million transactions a month, with a value of ZAR 1.1 billion South African rand, being processed on a monthly basis. EasyPay Everywhere continues to gain traction and we’re now in excess of 1.45 million customers compared to 1.1 million three months ago. We began using our mobile infrastructure to expand our reach beyond the physical branches we have established over the past 12 months. These clients perform more than 1.8 million transactions, with a value of ZAR 1.3 billion per month. On average, each of our client makes use of ATM, points-of-sale, and USSD portal, as well as both our macro finance and insurance products. Our customers seek our solutions in products because of the cost structure and the value they deliver on the one end and the simplicity, security, and ubiquity of the access. Moving on to our financial services offering, our lending business returns to year-over-year growth following the regulatory changes, making affordability assessment more stringent in March of 2015. While we still decline more loans than we approved, the book, which we have – which has – had returned to growth in quarter four 2016, and was approximately ZAR 547 million compared to ZAR 496 million last year. We expect the demand for our loans, which are the cheapest and most transparent will continue to remain strong in fiscal 2017. Our efforts in insurance with Smart Life gain further momentum in quarter four of 2016, and the number of policy issued doubled to over 160,000 in about three months alone. While insurance is already standing to be a meaningful contributor to our financial services revenue, specifically, ongoing momentums through fiscal 2017 will make it a more meaningful contributor to our broader Financial Inclusion segment. Briefly, on our value-added services in South Africa, growth in Financial Inclusion segment was somewhat constrained by one of our first products, namely prepaid airtime, starting to reach maturity level within the existing customer base. While the products grow over time, particularly as the number of users increase, one can also have more airtime than the individual needs. Having said that, a number of products introduced subsequently, i.e., in earlier stages of their product lifecycles, and we continue to drive healthy growth in our financial inclusion business. Lastly, I would like to give the best update on our SASSA contract in various regulatory developments. We have commenced to work with some SASSA teams to assist them with building a plan that would result in SASSA performing the payments function themselves as a result of the Constitutional Court’s ruling. To achieve this, where we collaboration between SA and SASSA to solve the many and complex issues associated with a payment solution, including technology, security, biometric, infrastructure, product definition, and of course, the challenges posed by regulation and other or SAX [ph]. It is too soon to discuss the many possible alternatives or the timeframes. We remained committed to assist SASSA and beneficiaries in any way we possibly can going forward to insure that there’s little disruption to the payment system results from the changing of the guard. To conclude, we are now ready enable to drive our business with more impetus, which will result in value growth for all of our investors, more importantly each win we make outside of South Africa will reduce our country risk and allow our PE return to a level that is commensurate with our financial performance, our IT excellence, and our unique solutions. Thank you very much for your time. And let me hand over to Herman. Herman, over to you?

Thank, you, Serge. I will discuss the key results and trends within our operating segments for the fourth quarter of 2016 compared to a year ago. For Q4 of 2016, our average rand dollar exchange rate was ZAR 15.02 compared to ZAR 12.04 a year ago, which negatively impacted our U.S. dollar base results by approximately 25% and the South Korean won was 6% weaker compared to last year’s won rate. We continued to face significant currency headwinds in our operating geographies. While the rand has strengthened in July and early August hitting ZAR 13/$1 at 1 point. This weakened the game to over ZAR 14/$1. Currency side, we have continued to experience good growth in our functional currencies during Q4 and this momentum is expected to continue into fiscal 2017. Over the course of fiscal 2016 to protect our cash reserves, we distributed over ZAR 1.2 billion of our South African cash reserves and continue to do so during Q1 of 2017. As previously stated, this results in reporting another tax-related adjustments, as well as lower tax effected interest income due to the differential between South African rand and U.S. dollar deposit rates, which impacted Q4 2016 EPS by $0.04. Revenue for Q4 2016 grew 15% in constant currency, while our fundamental earnings per share increased by 10%. On a consolidated basis for Q4 of 2016, we reported revenue of $151.3 million and fundamental earnings per share of $51. Our fully diluted weighted share count for Q4 2016 was 51.2 million shares, largely as a result of the issuance of 10 million shares to the IFC in May 2016. Now, on to our segments. In our South African Transaction Processing segment, we reported revenue of $53.6 million in Q4 2016, down 10% compared with Q4 2015 in U.S. dollars, but an increase of 12% on a constant currency basis. In South African rand, the increase in segment revenue and operating income was primarily due to higher EPE transaction revenue 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 inter-segment transaction processing activities, and a modest increase in the number of social welfare grants distributed. Our operating income margin for Q4 2016 and 2015 were 24% and 19%, respectively, and was higher primarily due to higher EasyPay Everywhere revenue as a result of increased ATM transactions, an increase in inter-segment transaction processing activities, an increase in the number of beneficiaries paid in Q4 2016, and a modest increase in the margin of transaction fees generated from cardholders using the South African National Payment System. We continue to expect our South African processing segment margins to be in the low to mid-20% range during fiscal 2017. The margin will be affected by continued roll out of our ATMs during 2017 and inflationary pressures on our cost base in South Africa. Inter-segment transaction processing activities are eliminated on consolidation, but had a meaningful contribution to this segment during this quarter. International transaction processing generated revenue of $47.2 million in Q4 2016, up 58% compared with Q4 2015 on a constant currency basis. Revenue increased in constant currency, primarily due to higher transaction volumes at KSNET during Q4 2016, and a contribution of approximately $4 million from T24 and Masterpayment. Operating income during Q4 2016 increased due to growth at KSNET and ZAZOO and contribution from our acquired businesses, offset by an increase in depreciation expenses at KSNET and ongoing ZAZOO start-up costs in the UK and India. Operating income margin for Q4 2016 and 2015 was approximately 17%. T24 and Master Payments have performed well and both achieved the anticipated profitability. We have decided to accelerate the roll out of Master Payments working capital finance product across Europe during fiscal 2017, which will likely result in operating losses for this business during the next year, as we scare up our organization platform and infrastructure. We believe that our investment will result in a profitable contribution from this business in fiscal 2018 with exponential growth expected in 2019 and beyond. T24 was recently awarded an electronic money license in the United Kingdom, which has been pass ported across the EU and will further enhance the card issuing, inquiring and purchasing opportunities available to T24. For Q4 2016, KSNET’s revenue grew 6% in Korean won to $41.6 million, while EBITDA margin grew to 32% from 27.9% last year. KSNET has sustained local currency growth of high single to low double-digits for several quarters now, despite a slowing economy. We expect some headwinds in the fiscal 2017 year for this business. As a result of recently inactive legislation that impact on all card issuers and Korean value-added networks. We have plans to mitigate the impact of these changes. However, for fiscal 2017, we expect a lower between 5% t 10% revenue and operating income contribution from this business. Our financial inclusion and applied technologies segment revenue was $62.1 million in Q4 2016, up 6% compared with Q4 2015 on a constant currency basis. In South African rand, financial inclusion and applied technologies revenue and operating income increased primarily due to higher lending service fees and an ad hoc terminal sales and improved contribution from Smart Life and offset by lower prepaid airtime sales. Having anniversaried the more stringent affordability assessment legislation in March, our lending business once again has returned to a health year-over-year growth. Operating income for Q4 2016 was also adversely impacted by the expansion of our branch network, as well as an increase in inter-segment charges. Our UEPS-based lending book at the end of Q4 2016 was approximately ZAR 547 million, compared to ZAR 496 million a year ago. We believe that our lending book has matured and can be grown through the further expansion of our financial services branch and ATM networks. The roll out of our Smart Life insurance policies continues to gather momentum and the business is already profitable. Smart Life’s contribution will become more meaningful as we continue to scale our operations and employee the appropriately qualified the staff as required by the regulator. As our insurance business grows, we are building the appropriate reserves on our balance sheet, while the impact of policy collections will become more pronounced in statement revenue. Operating income margin for the Financial inclusion and applied technologies segment was 22% and 27%, respectively, during Q4 2016 and 2015, and has decreased primarily due to the significant expansion of our branch network and employee count and an increase in inter-segment charges, partially offset by higher lending insurance and ad hoc terminal revenues. Operating margin of this segment will continue to be affected by the relative contributions of the various businesses in this segment and the adoption rate of our various financial services products. We expect our cost base to stabilize during fiscal 2017. 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 $2.2 million related to the change in accounting methodology for Finbond, lower executive bonuses and the impact of the stronger U.S. dollar on goods and services procured in other currencies, primarily the South African rand, partially offset by modest increases in U.S. dollar denominated goods and services procured from third parties, director’s fees, and M&A transaction costs. Excluding the impact of the fair value adjustment mentioned above, we expect our corporate expense to increase moderately in fiscal 2017, as a result of increased intangible asset amortization and the expected inflationary and currency pressures on our corporate expense base. Our Q4 2016 net interest income increased to $3.5 million, driven primarily by higher average daily South African rand cash balances and South African interest rates and lower average debt balance in Korea, partially offset by the lower interest rates earned on the U.S. dollar cash reserves that we converted from South Africa rand through distributions from our South African subsidiary. While we expect our interest earned to reduce during fiscal 2017 due to higher balances held in U.S. dollar. We expect our interest expense to reduce substantially in fiscal 2017, as a result of the prepayments of approximately 50% of our June 2016 Korean debt outstanding, while KRW 50 billion in July 2016. Capital expenditures for Q4 2016 and 2015 was $7.1 million and the $11.6 million, respectively, and have decreased primarily due to the acquisition of fewer payment processing terminals in South Korea and ATMs in South Africa. We do not expect our quarterly 2017 capital expenditures to be significantly higher. At June 30, 2016, we had cash and cash equivalents of $223.6 million, up from $118 million at June 30, 2015. The increase in our cash balances from June 30, 2015 was primarily due to the cash received from the IFC state issuance and the expansion of all of our core businesses, partially offset by the strengthening of the U.S. dollar against our primary functional currencies, repurchase of our shares of common stock, debt repayments, provisional tax payments, acquisitions and capital expenditures. During Q4 2016, we acquired approximately 350,000 shares of our common stock for approximately $3.2 million, which brings our total repurchases for fiscal 2016 to approximately 2.4 million shares, both for approximately $27 million. Our repurchases during Q1 2017 totaled approximately 1.2 million shares so far under our 10b5-1 program. This program expires at the end of August 2016. We continue to fund the Group’s operations and capital investments using our cash reserves and cash generated from our business activities. We will continue to utilize our substantial and growing cash reserves to invest in sizable and sustainable growth opportunities in South Africa and internationally, strategic acquisitions and ventures in terms of our agreement with IFC, debt repayments, and share repurchases. Our effective tax rate for fiscal 2016 was 53.3% and for Q4 50.2% and was higher than the South African statutory rate, as a result of non-deductable expenses, including consulting and legal fees and the tax impact, including withholding taxes of approximately $2 million for Q4 and $6.2 million for the fiscal year attributable to a further distribution from our South African subsidiary, which we intended to further help reduce the impact of the weakening South African rand on our reported cash balances. We expect our effective rate for 2017 to be in the 53% to 55% range. Our weighted share count for Q4 2016 was 51.2 million shares. Our share count as of June 30, 2016 was 55.3 million shares and our fixed issuance of 9.98 million shares to the IFC in May 2016. 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. During fiscal 2017, we expect to implement our strategic plan by investing between $15 and $20 million on building out our direct international sales force, management teams and infrastructure, establishing a presence in new countries and further developing our product across Europe and many emerging countries in Africa, Asia, and Latin America. These investments will be a drag on our reported results, but the results in top line benefits should start to accrue in the second-half of fiscal 2017 and more meaningfully in fiscal 2018 and beyond. In South Africa, we expect our CPS business to remain flat, while our financial inclusion businesses should continue to grow in excess of 15%. As a result of these factors, and taking into consideration the approximately 10 million shares issued to the IFC in May 2016, for fiscal 2017, we anticipate our fundamental earnings per share to be at least $1.65. Our guidance assumes that our existing contract with SASSA remains in effect for the full-year on the existing terms and conditions, an updated constant currency base of ZAR 14.38/$1, a share count of 54.1 million shares, and a tax rate of between 33% and 35%. With that, we will gladly take your questions.

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

Yes, hey guys, thanks for taking my call. I guess first – yes, I guess first of all on KSNET, the new regulations, what part of – I guess a couple of things, what part of the regulation causes your EBIT to be negatively affected. And then when did it start exactly so that we can just understand when that will lap, I guess on a year-over-year basis?

David still a bit fluid at this point in time, but effectively the interchange rates in South Korea have been lowered, as we’ve seen in many other places around the world. And the primary target of this obviously of the court issue is in Korea, but as a result of those fees been lowered of course the entire value chain is affected including obviously the VAN companies and the VAN companies in turn has to negotiate how the reduction is going to be shared with agents that are used to distribute the point of sale devices to the retailers. So there are multiple renegotiation happening at the moment between the various VAN companies and over card issuers on the one hand. And the VAN companies and the agents on the other hand, and so the full impact of this will become evident when all of those negotiations have been completed. We expect that to probably be during the second quarter. So October, November of fiscal 2017 for us, which means that I think the full impact will be evident in Q3 and Q4 for us. And then obviously we’ll anniversary the year after that.

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Yes, I think all of the VAN companies in Korea will be equally affected by this. One of the other legislative changes is that all transactions below KRW50,000, which is approximately $45 or so are now no CBM transactions. So – or maybe no CBM transactions and that has an impact obviously also on the smaller agents were the majority of the smaller value transactions take place, the netting effect of this is that the fee that is paid by the smaller merchant for a no CBM transaction is a lot lower when it was before for signature based transactions, because before you had to collect the slips and you had to store them. So the no CBM up to KRW50,000 change in rules has obviously impacted the smaller merchants, which is really a focus area for KSNET as well.

Okay. Thank you.

Our next question is from Jordan Hymowitz of Philadelphia Financial. Please go ahead.

Hey guys, you have the tremendous amount of cash even with these acquisitions and if you believe your stock is undervalued as you say or we see the accelerations both company buybacks and will management finally step in and buy stock as well?

Well, yes, Jordan I think the company’s share buyback strategy will obviously be determined by a number of factors. We have a 10b5-1 plan in place, which expires at the end of August in a couple of days time obviously when we move into our open period again. And going forward, we will obviously have to evaluate the opportunities, as well as specific large investments or corporate activities that we’ve contemplated. So, obviously it would make sense and when the cycle is optimal we will look at continuing our buybacks I think over the last year we’ve demonstrated in a very meaningful way that we believe our stock is undervalued and we’ve spent quite a bit of money so far, on doing the repurchases, we would obviously also have certain volume restrictions that we have to keep in mind. But for us right now the core focus is on expanding the company’s business activities and really focusing on the key structural changes that need to take place going forward.

And how about personally, we you finally be putting your money where the talk is and buy some stock yourself?

Yes, that’s obviously a function of the knowledge that we have. It’s quite difficult for management to be in the market in the company like ours, where most of the time, we are unfortunately busy with certain transactions or we have certain inside information that clearly prohibits us from acquiring those shares. We are meaningful contributors, I think already through our stock incentive plans, those are designed to keep management incentivized, not only for the short-term, but in the long-term and the medium-term. I think the targets that are set are quite strict. They are clearly difficult to achieve. So from that perspective, I think the management team is fully committed and we have high vested interest in the company’s success going forward.

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

Thank you. Just a question on the MobiKwik investment and their use of your technology is, when does that take place and what is – do you have any – can you give any metrics on MobiKwik and like what their revenue is and what you think it means for your revenue. Thank you.

We…

What is your ownership percentage? What is that – what were the $40 million, what percentage ownership would you have?

The 40% or - the $40 million, sorry investment will obviously take place over the period of roughly two years. We have not disclosed the ultimate ownership percentages that will obviously also determined on other corporate events from MobiKwik perspective over the next two years. But from our perspective, we anticipate being in a meaningful minority position following the full investment. The agreement basically provides for us to finalize the commercial – the exact commercial terms and the rollout plans around our Virtual Card product over the next 90 days. And so we’ve given ourselves a fairly short term to bed down all of the legal and commercial terms and for full integration to then take place as soon as possible, so obviously we already have it in place by the end of the current calendar year. Just – yes, in terms of metrics, MobiKwik at the moment has roughly 52 million users. They have a 100,000 merchants signed up. We expect that number to grow to over 150 million users over the next three years, and clearly the introduction of the [VC] [ph] pay technology will open up the number of merchants where the wallets maybe used from a 100,000 merchants basically to all merchants in India that accept the standards card scheme cards.

Okay, thank you. You didn’t talk about new key management and what management are you looking to hire where and when we talk about explaining the sales force maybe some more color the number of headcount additions?

The new restructure of the company is based around the six products, which I actually defined. And at this point in time, we are looking for three of the verticals with regard to three people that are going to be running three out of the six. And each of these heads are going to have directly responsible to them a number of people in the sales team, as well as, if necessary, in the particular country on operational team. So we’re looking at investor. We are looking at acquiring another between 15 and 20 different people that are going to spend a number of geographies. One of course, being Africa, but not obviously South Africa, which is more center – central and West Africa. We’re also looking at number of people in Europe itself, as well as a number of new people in India and around the T24, which is around the Hong Kong area. We’re going to focus on those geographies first, because we believe that we’ve already got a substantial amount of business. We’re only looking at this point in time a very senior people, with people that are going to be responsible for their own P&L and responsible for the deployment to sell the marketing and the product development that is required in this particular territory. We will, of course, at this point in time, we’re not doing this in a sort of blind fashion. Since we’ve made the decision with our Board around nine months ago to start looking at the possibility of doing this, we’ve already been approached by numerous countries in this particular territory that are very keen on us getting – on us been directly involved with them in supplying our technological solutions. As you’re probably aware, our last business plan was more focused on utilizing organization such as MasterCard and the World Food Program to actually open a few doors and to allow us to penetrate territories, we’ve probably decided that we would be better served by doing this ourselves, anything with direct edge on sort of approach and we’ve already got, as I say around half a dozen countries that they come to us with certainly the willingness to engage and to start deploying with certain technologies, not all of them, but certainly the majority of our technology in their own territory. In order to do that right and to be able to be successful, we had to redrive or restructure the company in such a way that we would have bought senior people, as well as support people to be able to know that we would be able to support the work that needs to be done. Obviously, we will continue with MasterCard and WFP. But we do not believe that as they direction or they sort of priorities is certainly not us, but them. I think perhaps to some extent, it was probably a bit of a mistake hope that they would actually drive these sales. We thought that’s actually been directly involved. We decided to do this differently, which means that, we’re going to spend $15 million or $20 million getting the right people. We’ve already started. We’ve got headhunters working on all of this. We certainly believe that we’ve got to be very, very successful very, very quickly and already the market response to the little bit of work that we’ve already done is actually astronomical. So we feel very, very excited that, in fact, if any – for a lack of anything with respect, we should have actually done that probably a year ago.

Thank you. Our next question is from Will Settle of Woodmont. Please go ahead.

Yes. I just wonder for the MobiKwik a little more, but obviously it’s a large market, but can you give us any context for expected financial impact as you penetrate, I mean, how meaningful this be obviously you’re investing $40 million over the next couple of years, so expect some return from that?

Well, yes. Obviously, we’re not that sort of company that typically invest our money when we don’t expect to see a decent return. And you probably are aware that and in most of these markets and most of those types of technology custom acquisition happens to be the most costly part of actually penetrating a particular market. And most specifically the wallet, of course, is used in many different ways. But the so-called wallet has been based on purely almost I’m not going to pay, but customer do drain my system. Now, number one, the MobiKwik sort of focus is really different compared to most other people and they do not sponsor for lack of a bit of work with custom acquisitions or at least they dent to rather get retailers to come forward to drain the system and for them to actually want to get market penetration through the MobiKwik customers is, number one. Otherwise, candidly, we would not have gone with MobiKwik, if their model was the same with everyone else. Number two, which is very important for us is that, we know that in order to ramp up our financial product, we need to have a customer base. We did that very successful with SASSA in South Africa. In SASSA, we know it was really a AA sort. It allowed us to get a customer base of 10 million people on one end, and – which was fantastic. And based – and built – and to build on that particular base, all of our financial products that we could then sell to the same customer base. MobiKwik for us is no different. Today is 50 million, 60 million, 90 million, 100 million times, which we believe they can reach. They’re talking up to 200 million. We’re not setting our minds to 200 million, we would be quite happy with 80 million or 90 million or 100 million. And if that’s the case, we believe we can convert that base into UEPS/EMV banking customers, which of course, will allow us to actually start setting them all of the different products and services that we currently sale our customers in South Africa. And in addition to that, because we’re going to be providing VCC, which allows MobiKwik customers to basically shop online with any merchant rather than to restricted base. We believe that that in itself is going to generate another revenue stream for Net1, as in fact, MobiKwik is paying us a transaction fee for every single transaction that is going to make use of our VCC technology. So that will again generate another income stream for us outside of our shielding in MobiKwik itself. So put together, I think at the end of the day, we are getting a – we are investing $40 million to have access – unfettered access to 100 million customers over time and to be able together with MobiKwik, to be able to provide them with financial services and products, which normally you would have to try in some form or other. You would have to try to sign these particular customers before you could access them. This is basically the best of both worlds.

Okay. Just on that you mentioned a couple of times, I have seen working with them obviously got two months into that transaction. Can you give us some examples of how that’s changing the way you’re approaching the market or helping facilitate things?

Well, funded enough, the strengthening is that – are the model that we are now employing the business plan that we put together and certainly their structure. We have been playing with it for quite a while, specifically with direct approach rather than the indirect approach of sales. And candidly, the meetings we had and we had extensive meeting in Washington, which I’ve seen a number of the senior personnel, who by the way were extremely useful to us and very helpful, including a couple of meetings with the World Bank. We were able to actually convince all of us that is, in fact, the direct approach over expensive, because you have to invest another $15 million or $20 million in order to achieve it. But we felt that, that is going to buy many, many, many time, give us the return that we are that that we would like to have. But more importantly is going to allow us with their contacts, the investments in already many different financial organizations, institution, banks and other companies in developing economies, is going to allow us to focus our activities outside of South Africa, because South Africa is still financially a very small country. Sooner or later, it will be saturated in terms of White House in itslef. And I think more importantly, as well, it will remove both currency and country risk, which – yes, we believe is a primary reason why our PE ratio has been so poor and continues to actually degrade. By doing that with the IFC and penetrating and having a fairly sizable – a couple of sizable wins outside of South Africa, and building models similar to the South African model outside of these territory – outside of the South African territory, we hope that we are going to then being proceed by our shareholders in a very, very different light. And therefore, they will be in a position to actually rebuild our PE to where it should be, based not only on our financial performance, which has been strong for many, many years, but breakthroughs in technology, which are well accepted worldwide has been the best of the best. And at the end of the day, our business models, which as you know, provide financial inclusion to the billions of people with very, very few if anyone in the world has been able to achieve successfully until now.

Thank you. We have a follow-up question from Dave Koning. Please go ahead.

Yes. Thanks, guys. I guess this is the first time in probably 10 or more years that you specifically called out in a month, especially $20 million in a month that you would spend kind of in excess on sales ramping. And that makes sense if it’s going to drive growth. But I guess, I’m interested in just the timing, because now that you’ve got the World Food Program as a sales channel the World Bank IFC investment as a channel, you’ve gotten kind of unprecedented help now from other channels. And at the same time you are investing so much more than normal in sales. I’m just – I guess I’m wondering the timing of why now, why hadn’t you done this in the past and is it that you just can’t absorb this much spending through the just normal P&L that you want to call it out or I guess it’s just hard for me why this is the point in 10 years to call this out instead of in the past?

Well, David it’s obviously a very good question, but I think the fundamental reason why we believe that’s worthwhile mentioning and we should mention it is because it is very much a different direction, compared to the way that we used to be thing in the past. And we’ve always been perhaps too careful, perhaps we’ve been far too concerned about going out there and maybe taking a bigger risk for a lack of a bit of word and investing in our own future and in our own people and building a much depth much more depth in our management structure. And perhaps retrospectively that might be a mistake. Talking to organization lot for example the IFC, it has become very clear that when we compare ourselves to many other companies some successful and some not. There’s absolutely no doubt that we’ve been far too thin at the top and in order to penetrate these different new territories we cannot do it with an extremely flat structure and with the centralized management staff. It does a lot of benefit as you can well imagine in terms of controls, but at the end of the day it also strangles, they actually grow up for the company over time. So we believe it’s important to talk about $15 million to $20 million for a number of reasons. One because I’m odd is of the view that we’ve under spent in – in fact the management development of the company and the building of a – let’s call it a larger worldwide infrastructure that allows us to actually penetrate other markets. And in a way the $15 million to $20 million is in fact the KPI that we have to be able to meet and explain to our Board why it is that we’ve not spent $15 million that that’s something that is very, very, very important as well. And we must understand that a lot of the channel that we have and the sort of in order to service these particular channel. There’s not a question with our technology to say where we in a sales person. Sales person is a person that’s going to allow us to finalize a contract we need to be able to backup teams that implementation teams that are going to be able to become the eye in that particular person in order to ensure that we continue to deliver the level of service that we’re known to be able to deliver. The last thing we want to do is to start hitting two or three or four countries in one sales group and to lend up by brought in one or two of them I think that could be the end of the company. So the thing between what’s to say latching this first and you’re right we’re busy investing. The beauty about it, the WFP, the IFC some of the prospect that we’ve already got on our books means to us that we’re not going to be waiting for three years before that investment is going to give us a return. But we believe we did a next nine months to 18 months we’re going to see a substantial return on net party with the $15 million investment hopefully all of which will come from outside of the South African borders.

Thank you. Our next question is from Rich Tullo of Albert Fried. Please go ahead.

Hi, thank you very much for taking my question. Really two questions is the MobiKwik investment a down investment, straight equity or is it going to be consolidated on the income statement?

The MobiKwik investment is we’re investing in equity in MobiKwik, so over a period of two years we will hold up our position this means that initially we’ll show it as an investment on our balance sheet, but we’ll not consolidate equity accounts for it. As soon as we cross the relevant remitters that demonstrates significant minority shareholding we will probably equity account for this business in about two years time.

Fair enough. When you discussed Italy and UK could you please provide a little more color on effort those of us who may not present in the story?

So Master Payment I assume you’re referring to our Master Payment business so Master Payment is an acquisition that we did in two tranches over the last year based in Germany and Master Payment to just give you a brief description is really a PSP or a payment services provide in Europe to a number of large online merchants and as a result of the extensive experience in the PSP market identified that there was a specific need amongst merchants for working capital financing. One of the key shoulders in Master Payment was a bank based in Liechtenstein called Bank Frick. And together with Bank Frick Master Payment developed a quite a unique model that allows them to rapidly deploy working capital financing for the merchants that they service. In what we think is a very innovative way and also in a way that really reduces the risk on them as the enabler of this specific product and obviously the recoverability of the working capital finance that is provided is secured by the settlements that they place through their usual PSP acquisition platform. So this is business by Master Payment that’s been running for a couple of years that would be very successful specifically in Germany and after the acquisition of the business we had a strategic session with the management team who really convinced us that there was an opportunity specifically in Western Europe where it’s obviously a factor of investing the correct amount of capital into the business for them to deploy. And one of the key things that that they have to do is to deploy a sales force in the countries where we believe we have low hanging fruit for lack of a better word. Those countries for now include Italy, Spain, and France and the UK. So that’s where we will focus our attention for the Master Payment rollout or the big bang approach. And that’s we’ll also hire some fairly senior business development of sales teams over the next 12 months.

And more importantly, which is key to our plan is that believe that once again customer acquisition been the most expensive part of any business nowadays that through these motions we can promote the utilization of our Virtual Card simply, because as you know online merchants always suffer from charge backs and fraud and we can eliminate that, in other words by also read into these, we’ve emerged to allow these merchants to actually on sale of VCC products to their own customers, we’ll be able to reduce if not eliminate charge backs in totality and allow these merchants to secure the on business and grow their on business certificate. So we believe again, it is a sort of using a platform in order to sell onto it another product and therefore eliminate the customer acquisition at least once if not twice in the cycle.

Thank you, sir. Our final question is from Ty Carmichael of Gothic Capital. Please go ahead.

Yes, good morning thanks for taking my question. I was hoping you might be able to write some additional perspective on – and a few – I jumped on the call a little late, if you already addressed this, I apologize, but there’s some perspective on the upcoming court case against SASSA in the sense of – if this goes against you what happens at that point I mean and also, I guess more specifically within the context of the guidance you’ve given. How does that change if the court case goes against you?

Right, well the court case you’re obviously talking about is one in October, which is really for lack of a better word, it’s an order that we’re seeking for a Judge to tell us exactly what the Social Assistance Act of 2004 actually means when it refers to a deed action compared to a debit order. Now strangely enough, the word debit order does not occur in the 2004 Assistance Act in South Africa at all. So we all believe that since 2004 most of us at least have understood what the word deduction means. And I think most of us have also understood what the word debit order is. So, we’re not – on my side I’m remotely and concerned. We are not concerned at all about the fact what the judge is going to rule upon, because the answer is obvious that in fact the two things are different. However, to answer your question there’s always a possibility that the court by conduct and say while actually this action is the same as the debit order and therefore if the Act says that debit orders must be prevented then they probably would have to implement such a technological change to our systems. Now in order to do that it probably would take anything between two to six months anyway that’s number one. And we believe as we’re seeing, but now that what that would actually lead to is that most beneficiaries today that enjoyed debit orders, because they actually do need debit orders in order to transact on business, would probably then open bank accounts, such as that doing currently with ourselves as one bank called EPE. And in order to be able to continue to enjoy the flexibility that debit order is actually providing them. So if we have to look, by the time we get in the next, because even in the court cases in October and the decision made in November, there maybe an appeal as of ourselves or in fact by ourselves depending on who wins or who loses. This could take another year. It could go to the constitution of court, in other words, the final decision on that particular case might take a long, long time. That’s point number one. During that time, the status quo will remain. And during this time, of course, we will continue to advertise and to tell customers that if they want to ensure that they can continue to run their own affairs according and making their own decision, rather than to be told what to do by government. The best thing for them to do is to actually use the law itself, which is to act itself to open a bank account, where they would have the freedom to actually enjoy debit orders. So by the time, this actually happens. I actually believe that, in fact, the decision to go against debit orders, but actually help us to sign up even more EP account holders then the decision not to have debit orders. So either way we look at this, we look – we’re feeling that it’s not going to change anything drastically in anyway going forward.

So, just to add to that, in an extreme case, and let’s assume that the use of debit orders and detections and all these things are bend. And people have – don’t have bank accounts, unfortunately, you revert to the only ever method of payment for your products and services, which is cash. And I think what’s important to note is that, Net1, as the company has the most expensive cash acceptance made to work in the country. Through our EasyPay network, we’ve brought in our own point of sale network, we probably got more than 60,000 connected point of sale devices. We’ve got 1,000 ATMs between ourselves and our affiliates. We’ve got more than 500 branches. So, yes, to reach that we have across all of South Africa, I think is much more extensive than any other financial services provide us. So, if it was really had to come to worse, I think that we are in a much better position than any of our competitors or any of the other participants to enable people to still buy and pay for their financial services.

Yes, I think just to conclude on this issue, which is an important one is that, we must think that at the moment, the effect of these sort of court cases actually occur, actually it hurts us simply, because on the price point of view, people ask exactly the logical question like you’re doing at the moment, what will be the impact and what they all this is all about? And that’s the real reason further enough while we’re going to court, simply because we want clarity. So we want everybody in the country and that sort of the country to know what the hell that they mean. At the end of the day, between you and me and above, so if I don’t really care what it means, because it’s not going to make any damn difference to what we do, we do it, or candidly no longer-term, not going to make any difference to how much money we’re going to make, where it will make a difference is that we will not appear in front page of the newspapers on the very needy basis to actually for somebody to say, we’re reaching some sort of the law that we’re not reaching. And that is really the all intent of us going to court is to make sure that we have clarity, which I think would be good for the country as all, it will be good for us, and it will be good for beneficiaries. No other real reason, I think.

Thank you, sir. Ladies and gentlemen, that is all time we have for questions. Thank you for joining us. You may now disconnect your lines.