Lesaka Technologies, Inc. (LSAK) Q1 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, good day and welcome to the Net 1 UEPS Technologies Q1 2017 earnings call. All participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today’s presentation. [Operator Instructions] Please also note that this conference is being recorded. At this time, I’d like to turn the conference over to Dhruv Chopra, Head of Investor Relations. Please go ahead.

Thank you, Ari. Welcome to our first quarter of fiscal 2017 earnings call. With me today are Serge Belamant, our Chairman and CEO and Herman Kotze, our CFO. Our press release is available on our website at www.net1.com and Form 10-Q is also filed. As a reminder, during this call, we will be making forward-looking statements and I ask you to look at the cautionary language contained in our press release and Form 10-Q regarding the risks and uncertainties associated with forward-looking statements. In addition, during this call, we will be using certain non-GAAP financial measures. And we have provided a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures. We will discuss our results in South African rand, which is a non-GAAP measure. We analyze our results of operations in our 10-Q and press release in rand in order to assist investors in understanding the underlying trends of our business. As you know, the company’s results can be significantly affected by currency fluctuations between the U.S. dollar and the South African rand. So, with that, let me turn the call over to Serge.

Thank you very much, Dhruv. Good morning to all of our shareholders. For our first quarter and the start of the new fiscal year, I will spend most of my discussions focused on our strategy and are we intent to create a new impetus in our rand and our currency based earnings. At the same time, I will highlight, are we planning to reduce our risk profile by relying far less on government contracts and on the South African rand. Our results are pretty good year-over-year, but EPS was down sequentially, despite bitter exchange rate, share buybacks, repayment of debt and the like. Our international businesses are showing great potential, and as a result of strengthening our management teams, our pipeline is growing meaningfully. But there is of course lag what we have achieved in South Africa thus far. To summarize our Q1 2017 performance, revenue of $156 million grew 10% in constant currency and was driven primarily by higher EPE transaction growth, lending in insurance and our master payment and T24 acquisition internationally. Our fundamental EPS in Q1 was $0.48, down 9% in constant currency, probably due to the issuance of 10 million shares to the IFC. During Q1 2017, we repurchased 3.1 million shares for approximately $32 million, which is more than our repurchases in all of fiscal 2016, while also making an unscheduled debt repayment of approximately $27 million in Korea. Net 1 is a technology company that utilizes its own technological breakthrough and products to provide affordable, flexible and secure financial services to the unbanked population of the world. What must be understood here is that technology changes extremely fast, and as a result, our ability to keep up with global trends and developments and improve our own technological solutions is probably the one of our greatest strengths. Certain technologies are implemented only in certain countries and not necessary across geographies and the ones, the top financially successful are those that are the most applicable to that particular market. A country specific level of development, regulation and infrastructure is thus a significant bearing on any technology product or business model. As an example, M-Pesa in Kenya did a superlative job and constructed a network of individuals and agents who act as computer hardware such as an ATM or point-of-sale device. Although a wonderful solution in Kenya, M-Pesa failed in South Africa, as South Africa’s national payment system is of a virtual nature and banking and forfeiture is meaningfully more established. This means that there is no need for the M-Pesa business model as better models already exist. Regulatory involvement also play a massive part in different countries, as these, when they exist, and are mature, can normally frustrate progress and innovation in order to protect the established players and legacy systems and when unavailable or not well enforced, open the door for opportunities that normally would simply not exist. It is with this experience in mind that we have tailored our products and technologies, so that they are able to operate under any legislative framework or independently of a country's infrastructures readiness. It is therefore the Net 1’s focus to ensure that the technologies we can -- we use can cater, not only for the needs of today, but more importantly also for the needs of tomorrow. Client acquisition and more importantly, client retention will become increasingly important as it becomes easier and easier for clients to swap platform, products and supplies. With this backdrop in mind, I will discuss the strategic rationale for the acquisition of approximately 14.5% of Blue Label and its impact on both the South African and international expansion activities. I would also like to update you all on all our current discussions with SASSA and of course on the pipeline for our international business activities. Let me first address SASSA and how to the best of our ability, we see our business with the South African government going forward. SASSA remains the most critical organ of state in South Africa from both a political and social point of view. The Minister of Social Development, Bathabile Dlamini who also holds important position of Chair Person of the ANC’s Women’s League has made it clear that she, as well as the state, would like the SASSA system to be operated by SASSA. She has also expressed the desire that the terms and condition associated with the use of grant money be determined by the Departments of Social Development. We refer to it as DSD and SASSA, we thought it limited the other related legislative frameworks. DSD and SASSA are fully aware that social assistance is crucial to the stability of the country and can also be used to assist with the socioeconomic development of rural areas, the creation of sustainable SNMEs and the draft responsible spending by beneficiaries. With this view, it is therefore imperative for SASSA to gain total control over the management and distribution of grants and thus in source the payment function. This goal has been elusive until now due to the current conundrum created by the incompatibility between the banking and the social development, legal and regulatory frameworks. It is clear I have a familiar report and also a interaction with SASSA that SASSA seeks to gain control, so that it is able to provide the social development programs envisaged by government. The road for SASSA to realize total independence will require many changes to the current system. For example, SASSA cards are branded MasterCard and as such, form part of the national payment system and therefore must be issued by a South African bank and must conform to all of the South African Reserve Bank and Payment Association of South Africa regulations. Each card is linked to a bank account, which is by definition also subject to the same regulations. To solve this impasse, SASSA could decide to reissue cards to beneficiaries that would only be branded SASSA and would therefore not be issued by any bank. It is possible for this card to technologically interoperate with a national payment system, point of sale and ATM network, as they could and would support the common payment application. That is, the platform which adheres to the EMV standard, but allows for issue a specific functionality to be provided. The card reissuance exercise of this scale would in our experience require a period of between 18 to 24 months from the date of the decision to do so. SASSA would also need to insource a backend card management system as well as a biometric one-to-many search engine to continue to eliminate duplicate registrations and reduce fraud. Our solution and technology platform can facilitate such a plan and as they are designed to provide this form of independence if and when required. More urgently, SASSA has asked us to propose a plan that would allow for all currently issued SASSA card to continue to operate for a further 24 months after April 1, 2017. This required us to update all cards with new MasterCard and Net 1 cryptographic key sets, and expiry date, as the current expiation of date is set to March 31, 2017. If these updates are not performed by April 1, 2017, these cards would no longer be operational in terms of the EMV standard and banking regulations. Next one has designed a plan that would allow such updates to take place at SASSA offices, Net 1 base points and Net 1 ATM. Contingency plans have also been put in place to ensure that grant distribution will not be infected after April 1, 2017 or during the SASSA insourcing or transition period. Net 1 continues to work with SASSA to achieve the objectives without any impact to beneficiaries and await SASSA’s decision to proceed according to the proposed plans. Also, any SASSA business continuity is welcomed by Net 1 if under favorable terms and conditions. Such continuation also limits our plane to utilize our mobile infrastructure to market, sell and support our financial inclusion products. This is due to the fact that our ongoing SASSA operation utilizes significant management bandwidth, while also preventing 2,500 of our current employees to focus on financial inclusion by selling and operating our financial products and services. Access to the salesforce is required in order to penetrate all areas of South Africa as quickly as possible. It is paramount for us to acquire new clients that are not wealthy and these customers, although low income earners, have increased capacity to purchase goods and services, apply for loans and insurance, perform money transfers and utilize prepaid services for electricity and water. After much consideration, we concluded that all of these 2,500 people could eventually become available to support Net 1 financial inclusion objectives. At some point in the future, we simply cannot predict with any degree of certainty when this may actually happen. We could therefore either build an additional structure ourselves or enter into some form of distribution agreement with organizations that readily have just started marketing platform available. We identified a number of platforms ranging from retail stores to small and medium enterprises, but could not find one. They did not either compete with us directly or one which could use our infrastructure in a reciprocal manner in order to gain a similar benefit. Over the years, we have engaged with Blue Label telecoms on several occasions to explore how we would work together even though we competed in a same marketplace for certain products. We did not reach a new agreement in the past, as the discussions were always focused on or the overlapping products. Blue Label has been attempting over the years to diversify their own business from South Africa and as a result invested in a e-wallet provider in India, called Oxigen, and then acquiring network of point of sale terminals in Mexico. Following our own investments MobiKwik, another leading e-wallet in India, we engage once again with Blue Label to discuss possible synergies in India and other territories outside of South Africa. We are the largest provider of the SIM card to Smart Communications in the Philippines, a supplier to MTN Africa for our VTU technology to provide top up, a supplier of security modules for use in prepaid electricity token generations and we also operate a number of advanced programs in countries such as Malawi. Our discussion with Blue Label was very constructive and it became quite clear that with many synergies between our companies which if it realizes would create greater momentum and result in shareholder value creation for our respective shareholder base. During these discussions, it also became clear that Blue Label intends to expand their presence in the South African telephony market, while also becoming a provider of financial services. These business models are very different from each other and require different skills, licenses, expertise and technology. The common factor is the salesforce, including so-called [indiscernible], mobile service centers, retail stores and the like. We thus concluded that it will be mutually beneficial to share our respective infrastructures. The end result is that we could crosssell our products and thus grow and visit your businesses more rapidly. The complementary nature of our corporation means that Blue Label’s staff could sell a banking account, insurance product and loan finance and our own staff could sell the prepaid starter pack and set an A time. Once the transaction is completed, we will define the revenue share agreements for various product lines. Blue Label also intends to repurchase a large equity stake in Cell C for ZAR5.5 billion. This created the opportunity for us to cement the spirit of our new collaboration as we agreed to invest ZAR2 billion in Blue Label in return for an approximately 14.5% of its issued share capital, which in turn will also add additional distribution in customers from Cell C. Although this deal is to be consummated pending the approval of Blue Label shareholders and other commercial Cell C related events, we, together with Blue Label, have already commenced working on defining the synergies that could be cultivated between our groups. Some of the more obvious synergies internationally include the scale and benefit that would result by extending collaboration between Oxigen and MobiKwik in India, our US banking relationship and Blue Label point of sale infrastructure in Mexico to facilitate our financial services as well as many remittances and bill payments or domestically the cross-selling of our combined products in South Africa and of course a number of savings based on economies of scale, such as the procurement of air time and electricity, SIM cards and the like. Therefore, even if the Blue Label shareholders do not approve the Net 1 and Cell C transactions, we would continue with our new establishment partnership. We would simply not own 15% of Blue Label. I must reiterate at this point that we are in favor of the Cell C investment by Blue Label as we believe it will allow us to create [indiscernible] not currently deployed anywhere in the world. Financial inclusion that includes all basic functions required such as banking, financing, insurance, mobile phone and access to all prepaid facilities and products will make our solution incredibly sticky thus limiting customer churn. We intend to continue to look at players that fit a similar profile to that of Blue label as this mixed results in the rapid growth of our salesforce and thus the acquiring of many more banking customers. We are of the view that such an approach would result in customer acquisition that could surpass 5 million new customers in the next year or two, which in turn will have the effect of doubling the profitability of our financial products and services. In South Africa, we continue to grow our EPE customers, which is now approaching 1.7 million, 1.8 million clients. These clients derive benefits from our EPE accounts by, a, not paying any monthly account fee, b, been provided with a free basic life insurance policy, c, lower onerous ATM transaction fees, d, mobile access to advanced air time and electricity products, e, access to SASSA paypoint, f, use of the MPS point of sale and ATM network and g, access to micro finance and comprehensive life insurance policy. It should be noted that SASSA as earlier this week published that it is the intention of DSD to provide life cover for elderly beneficiaries. DSD estimates the cost of such insurance to be between 37 and 70 range per month. Although we do not know when such a scheme will be launched by SASSA, we would qualify for it on what the terms and conditions or the benefit would be. We are confident that our Smart Life policies, which are designed to meet the needs of not only beneficiary, but also that of their families, will remain the preferred option for our customers. For comparison, I will also note that average price of our policies is around ZAR37.2, which is right at the lower end of the SASA a predicted estimated cost. We will continue to provide products to our customer base at prices that are the lowest in the market and with the functionality that is necessary for these to improve the quality of life of all of our users. We are continuing to develop new and innovative products in, for example, our planned medical insurance as well as portals that will allow unemployed citizens to work on an ad-hoc basis or to find permanent employment. [indiscernible] continue to experience customer growth. Even though many in the media have blamed this portal among others, to be abusive and insecure and in turn lead into unauthorized deductions, we have worked arduously to understand the issues beyond these accusations, knowing that our initial technological solution was no different to what is implemented by others banks in South Africa. Our research has revealed that due to the trust and ignorance of many of our customers, it became too easy for unscrupulous individuals, many of whom, are relatives of the beneficiaries concerned to simply abuse the channel and utilize it often without the knowledge or approval of the actual account holder. As a result, we have introduced our biometric solutions, which are far more secure than pin based authorization models for obvious reasons. You know that you could tell this for any unauthorized usage and provide leadership for the industry to try and resolve this endemic problem. The solution was implemented in Q1, 2017 and initially resulted in a decline in transactions, as beneficiary register for the new product and become accustomed to its operation. We believe that the decline we experienced will be made up very quickly and actually allow the portal to grow its number of users in a very short space of time. Let me now briefly touch on a few international initiatives in our pipeline before handing over to Herman who will go into more detail along with the financials. We are pleased that we have now installed and are operating our pilot system in Uganda with the Ministry of Health. The system is initially targeted at all electronic information exchange that is required in the medical profession. The final system will require all government employees to be registered using our biometric registration system and the allocation of the medical benefits to their current account. All government employees will then be able to visit hospital or clinics using their smartcard as an identification and payment instrument. Once the 30-day pilot is being concluded successfully, the contract we have negotiated with the Government of Uganda will be signed and the project will be deployed nationally. We will provide more details at that time. We have also rolled out a pilot system in Zimbabwe as part of our first WFP [ph] initiative. The pilot has so far proved extremely successful. Once WFP has signed off on the pilot system, the same will be deployed across the whole of Zimbabwe and then rolled out across the remaining 11 countries in our region. Separately, Zimbabwe currently faces an acute shortage of physical currency, which in turn has created an opportunity for us to deploy our system outside of the WFP, more specifically with local farmers and government. Our solution can assist with the payment of wages and the purchase of goods and services we thought using cash, thus solving the ever growing cash shortage in Zimbabwe. Since our restructuring and a subsequent employment of the new salesforce and business intelligence department, our pipeline has grown significantly. We now have written interest from countries such as Mozambique, Malawi, Ethiopia, Angola, Kenya and Benin. More countries will enter our pipeline as a result of our initiative and collaboration with the IFC. Although it is early days, our master payment and T24 acquisitions are tracking according to plan. We are pleased to report that we have been awarded our e-money financial institution license in Malta as well as in the UK. We feel that it would be more prudent to obtain both licenses, specifically while uncertainty remains as a result of Brexit. Master Payment, our German subsidiary is launching the activities in Europe, namely Italy, France, Spain and the UK while T24 will continue to provide the group with access to the market in the Far East as well as the licensing system will require for us to operate in a worldwide basis. In India, during Q1, 2017, we concluded our first investment tranche in MobiKwik of approximately $15 million as part of our agreement to invest up to $40 million of earnings to US. MobiKwik is the second largest digital wallet in India with 35 million customers, 30,000 online merchants and 70,000 offline merchants and processes 1 million transactions per day currently. The growth continues to be exponential. Since our investment just over two months ago and they’ve added more than 3 million customers. We are pleased to have already concluded our VCC agreement with MobiKwik, allowing all of the customers’ access to our virtual card technology, potentially making it one of the largest virtual card deployment by anyone globally. Our VCC technology enables wallet users universal access to spend anywhere Visa or MasterCard is accepted, adding significant value and flexibility to the users. It also opens the potential to introduce new standalone use cases in areas such as gifting, which according to a recent survey, is expected to see a 400% increase during the festive season in India this year. And equally important with two-thirds of customers have expressed a preference to receive digital cards as opposed to physical ones. Together with MobiKwik, we are currently in the final stages of identifying and contracting with various local partners and target to launch the product during our fiscal third quarter of 2017 and believe that we should be able to add over 5 million VCC customers per year after launch. Our strategic relationship with MobiKwik means that VCC is only the first product and multiple other products have been identified to launch over the next 12 months. Meanwhile our project with Oxigen continues to scale. Oxigen is a B2Cspace, is another large digital wallet player roughly with 25 million customers. In addition, their B2B and remittance business is one of the largest and supported through the extensive network of more than 200,000 agents. As of October 31, we had over 360,000 registered users on the virtual Visa product, up to 250,000 at the end of June. With the Diwali festival in October alone, we have processed more than 250% higher volume than the prior three month average. As previously mentioned, part of our Blue Label transaction rationale involves India where we intend to identify the opportunity across all organization to foster collaboration in order to introduce new scalable and relevant products in India that will differentiate these businesses in a competitive market and leverage the Indian government’s initiative to facilitate financial inclusion to all Indians across the country. To conclude, we believe that our restructuring which focuses certain executive on specific tasks, our acquisition strategy that grows our foreign currency top and bottom lines and also provides us access to new and skilled management teams, our diversification efforts in South Africa that will reduce concentration risk and increase the group's revenue and profitability and our co-operation with Blue Label should result in meaningful earnings growth for all of our shareholders, which in turn will create further value. Thank you very much for your time and at this point, I’d like to hand over to Herman. Herman, over to you?

Thank you, Serge. I will discuss the key result and trends within our operating segments for the first quarter of 2017 compared to a year ago. Where appropriate, I will try to provide additional information related to our proposed acquisition of approximately 14.5% stake in Blue Label Telecoms. For Q1 of 2017, our average rand dollar exchange rate was ZAR14.10 compared to ZAR12.96 a year ago, which negatively impacted our US dollar based results by approximately 9%. Our two major functional currencies, the rand and the South Korean won are quite volatile at the moment, primarily due to political developments. The rand has strengthened in recent days to around $13.60 against the dollar currently. Currency aside, we have continued to experience good growth in our functional currencies during Q1 and this momentum is expected to continue through fiscal 2017. Revenue for Q1 2017 grew 10% in constant currency, while fundamental net income grew 4%. However fundamental earnings per share decreased by 9%, mainly due to the dilution caused by the IFC share issue. On a consolidated basis, for Q1 2017, we reported revenue of $155.6 million and fundamental earnings per share of $0.48. Our fully diluted weighted share count for Q1 2017 was 53.8 million shares, largely as a result of the issuance of 10 million shares to the IFC in May 2016, partially offset by our significant share repurchases. By segment, South African transaction processing reported revenue of $57.6 million in Q1 2017, 13% higher 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 card holders 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 margins for both Q1 2017 and 2016 was flat at 24%. Intersegment transaction processing activities continued to make a meaningful contribution to the segment, but as always, are eliminated on consolidation. International transaction processing generated revenue of $46.2 million in Q1 2017, up 22% on a constant currency basis. The revenue increase in constant currency was primarily due to the inclusion of approximately $4 million from T24 and Master Payments, partially offset by modestly lower contributions from KSNET as a result of the regulatory changes governing fees that may be charged on core transactions. Operating income during Q1 2017 was lowered due to a decrease in revenue at KSNET and an increase in its depreciation expenses ongoing start up costs for ZAZOO in the UK and India, and was partially offset by positive contributions from T24 and XeoHealth. Operating income margin for Q1 2017 and 2016 was approximately 13% and 16% respectively. T24 and Master Payment have performed well and both achieved anticipated profitability. Last quarter, we decided to accelerate the rollout of Master Payment’s 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 scale up our organization platform and infrastructure. We believe that our investment will result in a profitable contribution from the business in fiscal 2018 with exponential growth expected in 2019 and beyond. Starting in October 2016, Master Payment hired several experienced executives across Europe which will temporarily impact the profitability of this business until we achieve the commensurate increase in revenue later in the financial year. T24 was recently awarded in the 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 Q1 2017, KSNET’s revenue declined 3% in Korean won to $41.6 million, while EBITDA margin contracted modestly to 28% from 29% last year. As previously stated recently enacted legislation in Korea has impacted all card issuers in Korean in value added networks. The changes in legislation impact the commercial relationships between KSNET and the various card issuers as well as between KSNET and its agent force. The full impact of the legislative changes will only be known when the negotiations between all these parties are complete which we expect during Q3. We expect calendar 2017 to be a challenging period for KSNET and its peers as the full impact of the fee rules become independent and based on our current information we expect the EBITDA margin to contract from the higher 20s to the mid 20s. Beyond 2017, we expect volume growth to compensate for the lower fees and for KSNET’s growth trajectory to resume. On the upside, the new legislation will significantly reduce the amount of CapEx incurred by VAN companies and KSNET will be able to materially improve its overall cash generation from calendar 2017 onwards. Our financial inclusion in the applied technology segment revenue was $63.5 million in Q1 2017, up 3% compared with Q1 2016 on a constant currency basis. in South African rand, financial inclusion in applied technology’s revenue and operating income increased primarily due to the increased volume and operating efficiencies in our lending and insurance businesses and in South African rand an increase in intersegment revenues, more ad-hoc terminal and card sales, which was offset by fewer prepaid airtime and other value added services sales. Out prepaid sales were specifically impacted this quarter by the introduction of our new biometric linking feature as described by Serge earlier which adversely impacted the number of transacting users purchasing prepaid products through our mobile channel. Operating income for the financial inclusion and applied technology segment was 24% to 25% during Q1 2017 and 2016 respectively and has decreased by merely due to the increasing branch infrastructure and stock complement which is partially offset by improved revenues from our lending and insurance businesses and increase in intersegment revenues. Our gross lending book comprising of capital out and deferred service fees at the end of Q1 2017 was approximately ZAR850 million compared to ZAR750 million a year ago. We continue to believe our financial services offerings will sustain the segment’s growth along with commensurate expansion of our branch and ATM infrastructures. The rollout of our Smart Life insurance policies continues to gather momentum and the business is already profitable as we have already sold more than 200,000 policies in our first year of operation. Smart Life’s contribution will become more meaningful as we continue to scale our operations and employ the appropriately qualified staff members 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 segment revenue. The operating margin of the segment will continue to be affected by the relative contributions of the various businesses in the segment and the adoption rate of our various financial services products. We expect our cost base for the segment to stabilize during fiscal 2017. Corporate and eliminations includes the amortization of intangibles, stock-based compensation and reversals net, US legal expenses and general corporate and overhead costs. In US dollars, our corporate expenses have decreased primarily due to reversal of stock-based compensation charges of $1.8 million, the impact of the stronger US dollar on goods and services procured in other currencies primarily the rand and lower amortization costs partially offset by modest increases in US dollar denominated goods and services purchased from third parties and director’s fees. Our Q1 2017 net interest income increased to $3.5 million, driven primarily by higher average daily South African cash balances and South African interest rates, and low average debt balance in Korea, partially offset by the lower interest earned on the US dollar cash reserves that we converted from South African rand through distributions from our South African subsidiaries. We expect our interest earned to reduce during fiscal 2017 due to higher balances held in US dollars. We expect our interest expense to increase due to the interest burden on our recently obtained ZAR1.4 billion facility partially offset of course by lower interest charge in Korea and as a result of our unscheduled date payment in July 2016. We believe that we have the necessary funding available to purchase the interest in Blue Label, however as a matter of prudence we have arranged sufficient borrowing capacity to meet our working capital requirements needs post the Blue Label share subscription. Accordingly, we have obtained ZAR1.4 billion rand in amortizing term loans which are repayable in eight equal quarterly installments through to October 2018. The Blue Label shareholder meeting to approve the issuance of approximately 118 million shares representing approximately 14.5% in Blue Label is currently scheduled for November the 17. We will pay the ZAR2 billion subscription price on or around that date from a combination of surplus cash, the proceeds from the 5 million share issuance referred to below and a portion of our ZAR1.4 million if required. Capital expenditures for Q1 2017 and 2016 were $3.4 million and $10.7 million respectively and have decreased primarily due to the acquisition of fewer payment processing terminals in South Korea and ATMs in South Africa. As I mentioned before, we expect our quarterly 2017 capital expenditures to be significantly lower due to a restriction placed on VAN companies in Korea from providing payment processing terminals to the majority of merchants operating in Korea. At September 30, 2016, we had cash and cash equivalents of $205 million down from $224 million at the June 30, 2016. The decrease in our cash balances from June 30, 2016 was primarily due to the $31.6 million spent on our share purchases and scheduled repayments of our Korean date, the investment in MobiKwik and capital expenditures which was partially offset by the expansion of most of our core businesses and the weakening of the US dollar against our primary functional currencies at quarter end. We continued to fund the group's operations and capital investments utilizing our cash reserves and cash generated from our business activities, however, if we complete the investment in Blue Label we will be required to utilize the working capital facility to fund our operations for the next 12 or 18 months. Our effective tax rate for Q1 fiscal 2017 was 31.1% compared to 31.6 % last year and was higher than the South African statutory rate as a result of nondeductible expenses including consulting and legal fees and the tax impact of distribution from our South African subsidiaries. We expect our effective rate for 2017 to be in the 33% to 35% range. Our weighted share count for Q1 2017 was 53.8 million. our share count as of September 30, 2016 was 52.5 million shares and does not restrict the sale of 5 million shares during Q2. Given the recent share issuances and repurchases we believe the weighted average share count for fiscal 2017 will be approximately 56 million shares. Let me briefly address the financial impact of our Blue Label transaction. As stated, we currently expect the transaction to close on or around November 17, 2016. There are a number of variables that are important to take note of when considering the ultimate impact of this transaction on us. First Blue Label intends to acquire 45% of Cell C, one of South African’s biggest mobile operators. Prior to this transaction taking place, Cell C will be comprehensively recapitalized and the financial structure adopted by Cell C will have a material impact on its results. This in turn will have an effect on the results reported by Blue Label following the purchase of their stake in Cell C. It is therefore not possible for us to predict the financial impact of these transactions until they are completed and all the information is made public. Second, our accounting treatment for the 14.5% investment in Blue Label will be determined by an analysis of our ability to significantly influence the financing and operating decisions at Blue Label. Although we have the right to appoint a board member to the Blue Label Board, the timing of such appointment has not yet been determined. Until we have determined significant influence we believe that we will recognize the investment as available for sale with adjustments to fair value through other comprehensive income. This accounting treatment is similar to how we recorded our investment in Finbond until we obtain significant influence in that company which subsequently resulted in a change to the equity method of accounting in fiscal 2016. Therefore, the initial impact of the Blue Label transaction on our income statement will be a reduction in net income due to the interest forgone from the payment of the purchase price utilizing surplus cash reserves as well as the interest expense related to the utilization of our working capital facilities. This maybe partially offset by any dividends received from Blue Label if they continue with the historic trend of regular dividend payments. Given the sale of 5 million shares, cash and debt utilized for the transaction excluding any synergies we believe the transaction could be $0.05 to $0.08 dilutive to fundamental earnings per share on a full year basis if we do not equity account for the investment. Serge explained the multitude of synergies that we expect to realize from our cooperation with Blue Label and Cell C. Rest assured that our investment decision is based on realizing synergies and engaging in new business opportunities to return an earnings accretive result. To conclude, given the number of variables that will ultimately have an impact on our fiscal 2017 results including the status of our SASSA contract and the financial impact of the Blue Label transaction, we anticipate our fundamental earnings per share for fiscal 2017 to be at least $1.65. In formulating our guidance we continue to assume that our contract with SASSA remains in effect for the full year on the existing terms and conditions, a constant currency base of ZAR14.38 to the dollar and updated share count of 56 million shares and a tax rate of between 33% and 35%. For clarity, while our guidance does include the issuance of the 5 million shares, the potential interest expense related to the South African debt facility has not been included as the disbursement effective is dependent on the conclusion of the Blue Label Cell C transaction and hence a transaction related event. With that we will gladly take your questions.

[Operator Instructions] First question is from Dave Koning of Baird. Please go ahead sir.

I guess first of all in the financial inclusion business, I mean it sounds like a lot of great things are happening in developing, the growth had then for several years now kind of mid teens or 50% or I mean very big growth, in this quarter was 3% and I know you explained some of the factors why but is that something that given the pipeline and everything, does that get better, like fast should financial inclusion grow over time and maybe what are a couple of the main things, you talked about so many different things but what are maybe a couple of the things that are material to that growth in the future?

Thank you David, it’s Serge here, yes, we talked about - it's actually quite simple at the end of the day we reached an asymptote in terms of the number of branches that we've opened and the number of people that we've got up there in the field. We have started deploy some of our mobile units to actually penetrate some of the other markets in South Africa or some of the other areas of South Africa where we are not present because we don't really want to become an organization that builds too much brick and mortar, most banks in the South Africa are closing the branches down in rural areas. So we don't think it's probably the right thing to do for us to build out. So we wanted to use our mobile system, we believe that at the end of the day, SASSA may not simply terminate our engagement what’s planned on the 1st of April, it might take quite some time before this will actually happen, if at all. So, we got very concerned to say well what do we do now, if we go ahead and say well we were relying on being able to use our 600 vehicles and 2,500 people. To go out then basically go where we have not been before, or do we build now, do we have to build our own infrastructure now. We believe the deal we did with Blue Label is going to make us basically jump at the decision evading to actually employ more people now and rather to have already - and already made infrastructure that is going to in my view rekindle our 20% to 25% growth quite easily, simply because we believe now that the growth will be more focused on low income earners rather than purely beneficiaries, which I think is a great thing for a number of reasons, diversification being one but also because those people have far more income or disposable income to be able to buy goods. So we believe that in fact at the moment we have reached almost a little bit of saturation because we are addressing only one market and we only addressing one market in certain areas. As soon as we open that up like for example we've started to do as well with insurance, we can see that the growth at the moment is unlimited, it’s more a question of where are you and much of that market can you seize. So I would be very disappointed if we do not start again realizing growth of 15% to 20% on all of our financial product, an effect on EPE specifically, if we do not get back in signing a 150,000 to 200,000 people a month rather than between 80 and 100.

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But in the commentary, 15% to 20% is just kind of a normal growth for the whole business over time around, right, I mean that's kind of the general growth.

There is no doubt that as you can see, through to be quite honest, we can't take the blame for everything but obviously we cannot, at the end of the day we are the ones managing the company. We have to do something in order to rekindle the momentum of the company and you can see by the numbers, the numbers were a little bit too static for my you know for certainly what I wanted to achieve and there's no doubt that we've now put the right things in place from an infrastructure management bandwidth point of view and also to really accept and stop relying purely on saying well you know we do have a beautiful contract with government, who knows it might continue, it might stop what we cannot do is to be half pregnant in this by actually saying well, we're not going to be using that infrastructure to do what we want to do with it or we are not going to be able to use it. And therefore we’re always waiting for this outcome. We've been waiting for an outcome for the last 15 years and I think we shouldn't be counting on that outcome happening in the short term. And therefore we should actually carry on with our business as usual and I really firmly believe that with what we're doing now, are getting back to 15% to 20% growth per annum is actually not going to prove that difficult.

And then one just numbers question for Herman, you mentioned $0.05 to $0.08 potential dilution from Blue Label. If I just do annually - the annualized impact of the share issuance of 5 million shares plus 101 million of debt that's like $0.20. $0.25 something like that dilutive. Are you kind of assuming the dividends are set that to get to your $0.05 o $0.08 dilution number?

Dave, so we assume obviously that would be for no more than half of the year, right, so six months. And obviously you are a tax effect, some of the interest which we will be able to get as a deduction. And of course here you have to make certain assumptions on the utilization of the full facility or not, but if you take into account the six month period and that tax effect of the interest component plus the additional share out it works to roughly sort of $0.05 to $0.08 number that I mentioned.

So basically no income, no dividends just the share issuance and interest expense and tax affected?

Yes.

[Operator Instructions] Our next question is from Porter Collins of Seawolf. Please go ahead.

Two questions for you, operating cash flow was highest in the company’s recent history at two time net income, is that right and is that decent trajectory or somewhere around that $50 million of operating free cash a quarter, a okay level. And then second, on the Blue Label, you talk a lot about the dilution associated with it, but I want to sort of think about it in a bigger context, the $144 million of shareholder money, how are you thinking about your return on investment in that. And obviously that’s a big number, what kind of IRRs and still like to see numbers on that transaction or what kind of return you think you can get on the investment. In the update call, you talked a little bit about synergies and stuff like that. But just in terms of bringing numbers to it, I know it might not be exact, but just can help us frame it for us? Thank you.

Okay. Porter, I will take the first part of it, in terms the cash flow, obviously the group's cash flows are very timing dependent. And so you just got to look at the components that drive the cash generated, so as an example movements in our lending book as well as the taxes payable components those could have quite a significant impact on the cash flows because obviously get measured at a specific point in time, but overall we are obviously quite happy with the group's cash conversion rate. It has improved, we obviously working hard to make sure that our working capital management is under tight control. Especially as far as the items that are on the direct control is concerned in terms of inventory holdings et cetera. And then obviously looking further down the cash flow statement as I mentioned we anticipate our CapEx expenditures to also reduce over the next 12 months or which will obviously result in a further increase in our cash - ultimate cash holdings out. Yes we are very happy at the moment with the group's cash conversion rate.

And the Blue Label question?

Sorry, Porter, can you just repeat your Blue Label question?

In terms of framing the Blue Label question, it's $144 million of share money. How do you think return on investment, I’m just still looking for more a little bit more concrete numbers, you talk a lot about the dilution effects of it, just how are you thinking about return on investment of this quite large investment? Thanks.

Well, I think there are a few components to this slide, the first, from our perspective I think the most important part revolves around the potential synergies that we believe we can extract from this deal, both synergies as well as new business opportunities. So the ability for us to scale up the distribution of our products and the distribution of Blue Label products through our joint sales forces I think will exponentially accelerate the rollout and the take up rate of those products. There are other synergies in terms of specific cost savings that we believe can be quite material to us. They are supply opportunities in terms of SIM cards, cryptographic solutions et cetera that become particularly relevant in a Net 1 Blue Label tie up. From that perspective alone, we are very confident that the returns that we will realize over time on the investment will be - more than warrants the investment that we will be making. And from a second and a third perspective maybe just from a pure investment point of view obviously we believe that the acquisition of Blue Label of Cell C as well as the expansion of Blue Label’s activities over time will obviously allow the Blue Label share price to increase which means that the basement that we've made which is already I think roughly ZAR400 or ZAR500 to the positive after the subscription price was determined. Obviously just from a pure investment point of view, we believe that the value of our investment will be stable or should increase materially over time. And finally, obviously when Blue Label continues with the payment of dividends as they have over the last many years that in itself will obviously also provide us with some return on the investments before we even consider the impact of the synergies. But by far the potential new business opportunities and the acceleration of our current activities I think are the most important factors that we think about when we calculate the potential return on this investment over time.

To add a little bit to this which I think is, we mustn't miss the limits and miss the fundamentals here. Is that we obviously have a plan, the plan is to grow capital base or at least banking customer base from where it is now 1.7 million to in excess of 5 million, which at end of the day we had planned I think for about 2.5 million was my latest by June next year or March, April next year. We now are saying no, that’s not going to cut it, we think that we can grow much faster than that net, other people will want to grow as well. We believe that the Blue Label is going to - acquisition is going to allow us to achieve that goal and to get to another 2 million or 3 million extra customers which by the way all of which may not or it is a majority this time will not necessary be beneficially, which means that they can add far more to our bottom line than our existing customer base. So for us, the real purpose of the Blue Label acquisition is to ensure that we have another infrastructure that we can ride on. We thought fighting each other rather helping each other for us to make some money out of what they do and for them to make some money out of what we do. But to be able to really drive what we're doing at a much, much faster rate. That’s the principle of it. Already we know like Herman Kotze mentioned it, really if you look at the share price of Blue Label alone, I think we’ve made 500 million range just based on that. Now that's not – that’s not what we were after. We were not after trying to make it back out of their shares. Our share [indiscernible] enough went up a little bit at a time, I think it went up about 15% or so, which is not really a great re-rating at this point in time. We have embarked on a plan which Blue Label is step one. There are other steps to this plan that will become clearer in the next months or not - certainly in the next quarter. And the plans are quite aggressive, the plans are I believe are fantastically well structured. And I think we want to put Net 1 back on track where we can ever grow 20% to 30% per annum, number one, because we believe that we can do it not based only on South Africa. Certainly on South Africa we want to diversify, we want to make sure that we protect our market better, we want to make sure our customers become more sticky with us and cannot move to the next guy, but we also want to move much more aggressively internationally, which we're starting to do as you can see by the pipeline. To get our company back on to a 20% or 30% growth, number one. And to get [indiscernible] not to be sitting around 6 or 7 but to go where it belongs which is more around the 15, 16 or 17. We have to do something drastic in order to be able to achieve that and we're embarked in doing this drastic thing. So mustn’t only look at the Blue Label purely at face value in terms of what does it mean right now, is it what could it mean in the next three months, six months or twelve months and we believe it is only the beginning of something much bigger rather than the end.

[Operator Instructions] Thank you very much. At this time, there are no further questions. This concludes today's conference. Thank you for joining us, you may now disconnect your lines.