Lesaka Technologies, Inc. (LSAK) Q3 2017 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to Net1’s Third Quarter 2017 Earning Conference Call. All participants will be in listen-only mode. There will be an opportunity for you to ask questions at the end of today’s presentation. [Operator Instructions] Please note, this conference is being recorded. I would now like to hand the conference over to Mr. Dhruv Chopra. Please go ahead, sir.

Thank you, Juris. Welcome to our third quarter fiscal 2017 earnings call. With me today are Serge Belamant, our CEO; and Herman Kotze, our CFO. Our press release and Form 10-Q are available on our website, www.net1.com. As a reminder, during this call, we will be making certain forward-looking statements. And I ask you to look at the cautionary language contained in our press release and Form 10-Q regarding the risks and uncertainties associated with forward-looking statements. In addition, during this call, we will be using certain non-GAAP financial measures and we have provided a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures. We will discuss our results in South African rand, which is a non-GAAP measure. We analyze our results of operations in our 10-Q and 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. Before I hand the call over to Serge, I want to state that we will have a question-and-answer section following our prepared remarks. However, given the current sensitivities, we will not be taking any questions about SASSA or CPS. With that, let me turn the call over to Serge.

Thank you, Dhruv. Good morning to all of our shareholders. In my presentation today, we’ll focus primarily on our strategy, both for South Africa as well as our international market and how we intend to build a long-term sustainable and diversified business with rand and hard currency-based earnings streams. I will also briefly deal with the reputational challenges we face as a result of actions taken by certain individuals and institutions each with their own agendas. I will also provide a quick status update on our SASSA contract. For quarter three 2017, we reported revenue of about $148 million, which was up 10% in dollars, but down 8% in South African rand. Lower ad hoc hardware sales, fewer [ph] prepaid airtime sales is a result of the introduction of our biometric-linking feature introduced, and regulatory changes in Korea were the primary factors that adversely impacted our revenue this quarter. We also reported US$0.43 in fundamental EPS, which was flat in dollars and incorporates the higher share count. Over the last few months, the company has been subject of many adverse decisions for multiple parties regarding its business practices in FX, government relations and the alleged exploitation of 40% of the South African population. These allegations have been made by numerous parties, most of which are NGOs, such as the Black Sash and GroundUp and certain individuals employed by SASSA and the Department of Social Development. In a height of the political anxiety in February and March, some of these parties went as far as to insinuate that we were the reason for SASSA’s inability to in-source the distribution of grants, despite us having no role or influence whatsoever in the driving forward of their process. Of course, other organizations and journalists use this platform to create their own conspiracy theory in order to further their respective agendas, political, professional or otherwise. All of these allegations and insinuations have no merit whatsoever. Clearly, the mantra being followed is guilty until proved innocent. This is the reason we have embarked on providing additional transparency and validation from the likes of KPMG. We will continue to do so as long as this is necessary to ensure that our name, that of our executives and staff is cleared from all allegations of wrongdoing. For those investors who are keen to understand the facts and separate it from fiction, I would like to refer them to our website for any clarifications that may require, including the report by KPMG, which in my view, goes further than necessary to demonstrate that our vision and its implementation continues to provide the meaning with the essential services and products that they desperately seek. It is demeaning and unethical for our detractors to infer that 40% of all South Africans should not be treated equally, and as a result, they instructed what to do, because it is their view that our clients lacked the intellectual ability to choose. This chain of thought is completely foreign to Net1 and its vision for financial inclusion, which to reiterate is to allow all South Africans and citizens of any developing countries to be given an equal opportunity to better themselves and benefit their children and their community. While the company is cognizant of the pressures that they have been applied to many of the parties who have been outspoken about the way Net1 is managed and the products it offers, we believe factual accuracy need to be respected and acknowledged and that the motivation to protect one’s own reputation or self-interest does not justify demands for the company to make fundamental changes to its management, business model and practices that they’ve proven to be successful, socially responsible and ethical over the last two decades. We would, of course, consider all proposals that are intended to make the company better, stronger, and more transparent in the future. Our Board reviews the company’s vision, products and services constantly to ensure that these are not only delivered legally, but more importantly, serves the need of the many at affordable prices, continue to combat poverty and improve the way of life of all its clients now and in the future. I would like to conclude on this point by reiterating that our company disrupts many existing business models and thus will continue to receive criticism either, because we are large enough to lose our competitors and/or because the people we served form part of the greater political dynamic currently facing South Africa. Next, let me address SASSA before turning to the group strategy. We announced recently that CPS’s contract with SASSA has been extended for a further 12 months to March 31, 2018, on terms and conditions that are substantially the same as of 2012 agreement, with a few non-financial amendment, as directed by the Constitutional Court. Consistent with our service delivery track record over the last five years, the distribution of grant in April and May has gone smoothly and without any delay or interruption, and we continued to fulfill our obligations in accordance with the Constitutional Court order. We remain willing to support the smooth transition to SASSA or whomever they determine to be the most suitable service provider when our current contract expires. In the interim, we continue to provide seamless and timely access to grants for beneficiaries and our technology continues to save the South African government an estimated ZAR2 billion per annum through the identification and removal of fraudulent and ghost beneficiaries. As part of the Court’s judgment, SASSA has provided quarterly update on its state of readiness to take over the payment of social grant nationally. It must be noted that we do not have any influence on the speed or outcome of SASSA’s preparedness. These updates, however, will indicate what role if any CPS or Net1 could play in a social grant payment and distribution arena in the future. SASSA has made it clear that it intends to take over the payments of grants going forward once it is finalized, developed and tested in some payment system solution. It is unknown at this stage, what timeframe SASSA will require to be ready and able to take over the payment service or part thereof, or what phase of approach they will adopt. We will continue to work with SASSA to ensure that the payment of social grant continues with no disruption and with the highest level of service. As always, we will keep our investors updated on the quarterly basis, or when we have received and perused the first report by SASSA to the Constitutional Court. I will now spend the remainder of this call in describing the company’s strategic vision going forward and the advances we have made to globalize this particular vision. First and foremost, I would like to reaffirm that Net1 continues to provide the platforms, products and services that are paramount for financial inclusiveness to succeed. Financial inclusion cannot just be giving access to your banking account, but must include basic fundamentals, such as loan finance, insurance, loan payment, prepaid services, debit orders and most importantly, accessibility in a way that is secure, but not administratively or cost prohibited. The company has over the years realized that the greater financial benefit originate from providing the actual financial products and services rather than a technological platform that facilitates the distribution. Our technology will allows us to own the entire value chain either panacea that allows us to be more competitive, more secure, more ubiquitous, and thus, more successful. The more parties form part of this value chain, the more the end products cost and the more difficult these products become to market and distribute. The company has demonstrated how fast it can launch new products and reach millions of customers over a short period of time. Umoya Manje, SmartLife and Moneyline are three real examples of the company’s abilities and successes. I will first start with our South African strategy. Our financial services business has grown meaningfully over the last five years and continues to sustain healthy top and bottom line momentum. The reputational damage over the past few months are the only barrier preventing these businesses from growing even faster in terms of customer acquisition and the launch of other products such as aid [indiscernible] portal in medical insurance. We are evaluating various options to resolve this dilemma, which may include the introduction of a new South African empowerment or institutional partner to our grant distribution and financial services businesses separately or possibly private – public/private partnerships and it’s completely separate grant distribution from the provision of financial services. This potential partner should be ideally be an institution with the right credential regarding black empowerment, as well as facilitate economic transformation. Our company for as long as required can continue to license and provide technology to this new partner in order to ensure that CPS remains sustainable even once it is owned entirely by new shareholders. The CPS infrastructure addresses the needs of citizens who live in rural areas, where former banks have disinvested, because the volume and size of transaction is simply not large enough to cover the year-end cost of the existing business paradigm. It’s also clear that the company will be required to becoming part at the level of its financial services businesses. This should prove far easier as these businesses are not government-centric and thus not subject to political interference or third-party criticism. To this end, the company is yet to fully leverage its ownership at first, which provides white payment to more than 800,000 employees through 2,000 employers. These employees are not well-paid recipients, but are mainly low to middle income earners and thus the ideal target segment for our financial products and services. These customers have an income that is a multiple of that of the social grant recipient. And hence, their appetite for products and services in discretionary spending power is far greater. I have always stated that each one of these customers could generate 4 times more revenue than the well-paid beneficiary when taking into consideration fee income and product sales. The company can now focus on appropriately priced product for this small lucrative market while continuing to provide low-cost products and services to the poor members of the society. The company is convinced that it can achieve this market penetration quickly simply, because it has been successful in doing the same in a far more difficult market space and thus the far more difficult conditions. This model, which addresses the need of our income brackets earners can be expanded further by leveraging the BEE partners who would be substantial owners of our financial services businesses in the future. To supplement the South African strategy, we will continue to make investments or acquisitions in company that can provide us with transparency regarding certain product cost structures, so that we are able to repackage these into new products that are far more attractive to our customer base. Once again, our motives are both socially and profit motivated, so that these can make a difference to the lives of our customers while still be financially sustainable for us. This now ties to our currently contemplated acquisition of 15% of Cell C and 15% of Blue Label Telecoms, both South African company. We are of the opinion that these investments would allow us to build and provide a new range of mobile-based product that would incorporate telecom products and financial services in a way that would revolutionize these industries in a way to-date that has not been managed – that is not managed to leverage each other in order to create larger revenue streams and increase profitability. We believe that data services will become the only currency going forward and that the real profit will be generated from the use of said data to deliver financial products and other services rather than from the date then with itself. Mobile data infrastructure similar to banking infrastructure or switching system will continue to suffer from margin erosion, while the real growth in revenue and profitability will allow in the products to get delivered via these platforms. Money transfers are good example of this principle, where the real benefit is earned by the companies performing the transfers rather than the bank rails that’s are being used to deliver them. These acquisitions will allow the company to provide its clients with a full range of products and services ranging from banking to macro financed insurance and mobile services, all of which would be integrated in the same technological distribution network and technological solutions. The company has now reached the scale whereby the cost to launch a new product or service is linear increment – is linearly incremental, but our profitability becomes exponential. In the event that, that such initiative cannot be completed for whatever reason outside of our control, we have already put in place alternatives that would provide us with an equivalent opportunity, but of course, to some extent reduce our anticipated benefit. The current expectation is for these transactions to close before the end of June of 2017, and we would be better play to communicate the final touches to our South African strategy and financial metrics thereafter. I will now discuss our international strategy and our degree of readiness to execute against the same. The restructuring of our international operations, which will allow the business to develop without any South African base impediment, sorry, I missed – jumped the page. Our South African businesses are meaningful as they are and can be by themselves, cannot provide the company with significant and sustainable U.S. dollar-based growth, which would transform the company from being a small cap regional player to a medium or large-cap institution with the global and diversified operation. This can only be achieved by the globalization of our technology products and services. First of all, we need to understand where our strengths lie and how we can use these to establish and develop new businesses in other territories around the world. Our greatest strength is that, we have proven our business models and technologies under the most difficult conditions in a marketplace that is both third – first and third world. We have been working hard in acquiring or building the support infrastructure we need in order to replicate the business model we have successfully deployed in South Africa. These puzzle pieces include, but are not limited to, the appropriate banking partnership or licenses, the ability to customize our front-end systems for local consumption, the employment of the appropriate staff, the identification of the products we intend to market and distribute, our customer acquisition strategy, and the restructuring of our international operations, which will allow the business to develop without any South African base impediment. We are now in a position to implement our international strategy, which we believe is capable of delivering sustainable 15% to 20% growth at the group level. But more importantly, of a global and diversified strategy rather than the perceived reliance have been a niche South African company that relies on a single government contract. Over the last few years, we have made a number of small acquisitions or investments such as T24 in Hong Kong, Masterpayment in Germany, MobiKwik in India and One Credit in Nigeria, which will now form the basis from which we kick start the international business model. Financial inclusion continued to be the focal point of discussion in most countries of the world. Most importantly, the focus has shifted to the SMME market, as it provides an easier access path to end users. It is far easier and cheaper to sell a product to an entrepreneur rather than to an end user directly, while also allowing its entrepreneur to provide additional services to its own client. We have thoroughly evaluated the requirements of SMMEs and founded a solution that ideally suited for them, as these provide them with basic banking functionality, the transacting platform, as well as the access to the funding they’re required to expand their businesses. We can provide this complete service in an online environment and set up a business account in less than 24 hours. By contrast, in Europe, this can take up to six months, if at all. Our systems provide all of the transactional requirements of the SMME versus account management, debit holders, EFT, ACH credit and acquiring platform, debit and credit cards, savings accounts and alike. Furthermore, we provide such SMMEs with the ability to offer banking services not only to the employees, but in certain instances to their own clients. This methodology creates a B2B model, which automatically incorporates B2B2C without carrying the substantial cost of customer acquisition. As an example, Masterpayment in Germany will offer all of its current online merchants with a digital banking facility, which will cement their relationship on the one end, but more importantly, minimize our risk exposure when lending to them as both the banking account and the inquiry will be performed by us. In addition, each of these online businesses will market our digital banking offering to their clients, some of which may will be interested in the financial products we offer, including our PayLink and money transfer solutions. In India, our participation in MobiKwik has allowed us to implement our B2C platform, which could soon be used by tens of millions of customers who wish to transact without restrictions on any online merchant sites. This breakthrough changes the entire offering by MobiKwik, as the wallet users will not be able to transact on any online site, including those that currently bar the use of the MobiKwik Wallet for competitive reasons, although, as we do not wish to accept wallet at all. As a condition to our ongoing investment in MobiKwik, we have agreed to offer our digital banking platform to all of their wallet clients, thus removing the need for them to transfer cash from one bank account to a traditional wallet on the one end, but also to have access to the financial services and products we offer, such as microfinance insurance, prepaid services, money transfer and alike. Further, MobiKwik too has realized the potential of the SMME market in part demonetization in India six months ago have gone from having 100,000 merchant clients to almost 1.5 million today. This methodology, which we have named reverse marketing allows us to acquire end customers without having to pay substantial acquisition fees and also create an environment, which is sticky for these customers thus preventing churn, which is often the result of visible, but really short-term benefit. In Nigeria, we intend to leverage our investment in One Credit and provide the same electronic banking products to their customers who currently only subscribe for macro loan. Banking each of these individuals ensures that the loan provided is paid into a bank account thus eliminating cash and its inherent risk and cost. But also online, the customer to transact using this account thus generating new to income. The visibility we will have on these accounts also allows us to minimize our credit risk and offer additional and lucrative financial services. As part of our international plan, with our open intent to capitalize on these investments to grow our international business rapidly before we enter new countries. India, Nigeria, Germany and the United Kingdom will form part – will form the basis for our initial expansion and will commence our globalization initiatives. We are well aware that for our investors to fully appreciate the strategy laid out, these need to be tangible – there needs to be tangible metrics and milestone of which they can evaluate our progress, growth and ultimately the return on the investment. We expect to be in a position to provide a lot more granular detail by the time we report on our quarter four results in late of August. Having said that, the implementation of our strategic plan internationally will require us to make further investment of approximately $10 million to $15 million over the next 12 to 18 months, and we believe the business will start to become accretive to the group within this period. More importantly, this growth will be driven by non-range sources and allow us to create direct links between first and third-world developing economies. This is yet to be done successfully by any other organization as yet as no one has been able to create the business model that is both attractive and relevant, both in developed and developing economies. We believe that [indiscernible] can offer this breakthrough by providing B2B in developed countries and B2B and B2B2C in the developing world. With this successful – the successful execution of our international strategic plan, we believe that within three years, our earnings from our international operations should exceed those of our South African operations. I will now hand over to Herman to discuss some of the business metrics and financials. Herman, over to you.

Thank you, Serge. I will discuss the key results and trends within our operating segments for the third quarter of 2017 compared to a year ago. For Q3 of 2017, our average rand/dollar exchange rate was ZAR13.22 compared to ZAR15.82 a year ago, which resulted in a positive impact in our reported results. We continue to absorb our growth investments and managed through certain regulatory constraints in Korea, which in turn will help us drive improved growth in fiscal 2018. In U.S. dollars, revenue for Q3 2017 increased by 10%, while fundamental net income grew 19%, and fundamental earnings per share was flat. Ad hoc software sales and the lower managerial revenues due to the introduction of our biometric-linking features had a $10 million adverse impact on our Q3 reported revenues. On a consolidated basis for Q3 2017, we reported revenue of $148 million and fundamental earnings per share of US$0.43. Our GAAP EPS and fundamental earnings per share was impacted by the weighted average issuance of 5 million shares of our common stock in February 2017 and 10 million shares in Q4 2016, partially offset by buybacks of 5.5 million shares. By segment, South African transaction processing generated revenue of $64 million in Q2 2017, up 26% in dollars. In rand, the 6% increase in segment revenue was primarily due to higher EPE transaction revenue, increased intersegment transaction processing activities and a modest increase in the number of social welfare grants distributed. Operating income decreased primarily due to the impact of annual salary increases granted to our South African employees, partially offset by higher EPE transaction revenue and a modest increase in the number of social welfare grant distributed. Our fees earned from SASSA for the distribution of special welfare grant has remained unchanged. The Constitutional Court has ordered that should we seek an increase in our fee, we would need to approach the National Treasury with such a request and motivation. We will determine our approach to this matter once we have considered all the relevant factors and cost drivers. Our operating income margin for Q3 2017 and 2016 was 24% and 26%, respectively, due to the reasons mentioned above. While the intersegment transaction processing activities continue to make a meaningful contribution to the segment, that all as always eliminated on consolidation. International transaction processing generated revenue of $42 million in Q3 2017, up 2% in dollars. The revenue increase was primarily due to the inclusion of approximately $3.8 million from T24, C4U and Masterpayment, partially offset by modestly lower contribution from KSNET as a result of the regulatory changes governing fees that may be charged on card transactions in South Korea. Operating income during Q3 2017 was lower due to a decrease in revenue at KSNET, growth-related expenses incurred by Masterpayment, as it expands its staff to execute its expansion plans into new market, and ongoing ZAZOO start-up cost in the UK and India, which was partially offset by a positive contribution by T24. Operating income margin for Q3 2017 and 2016 was 5% and 12%, respectively. T24 and Masterpayment have performed well and both exceeded their anticipated targets. T24 recently successfully completed the required audit and was granted membership of the third-party Payment Proceeds Association in the U.S. The accelerated rollout of Masterpayment’s working capital finance product across Europe during fiscal 2017 has resulted in operating losses for this business. We expect this trend to continue 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 this business in late fiscal 2018, with exponential growth expected in 2019 and beyond. For Q3 2017, KSNET revenue declined 7% in Korean won to $35.9 million, while EBITDA margin was flat sequentially at 26% and declined from 29% a year ago. As previously stated, the amendments to legislation in Korea has impacted all card issuers and Korean value-added networks. We expect calendar 2017 to be a challenging period for KSNET and its peers, and the full impact of the new fee rules become evident. And based on our current information, we expect revenue growth to resume in fiscal 2018 with contraction in the EBITDA margin from the higher 20s to the low to mid-20s. On the upside, the new legislation has significantly reduced the amount of CapEx incurred by VAN companies, which will result in a lower depreciation charge going forward So the impact on operating income margins will be much less pronounced than on EBITDA margin. KSNET’s overall cash generation has improved accordingly. Our financial inclusion and applied technologies segment revenue was $57 million in Q3 2017, up 5% when compared to Q3 2016 in dollars. In South African rand, segment revenue declined primarily due to fewer prepaid airtime and other value-added services sales, as well as fewer ad hoc terminal sales, partially offset by increased volumes in our lending and insurance businesses and an increase in intersegment revenues. As mentioned previously, lower ad hoc sales and managerial services contribution had a $10 million adverse impact on reported segment revenues. Operating income margin for the financial inclusion and applied technologies segment was 25% and 21% during Q3 fiscal 2017 and 2016, respectively, and has increased primarily due to improved revenues from our lending and insurance businesses and an increase in intersegment revenues and fewer low-margin prepaid product sales, offset by fewer ad hoc terminal and annual salary increases granted to our South African employees. Our gross lending book comprising of capital out and deferred service fees at the end of Q3 2017 was approximately ZAR863 million compared to ZAR825 million at the end of Q2. We continue to believe our financial services offerings will sustain the segment’s growth along with commensurate expansion of our branch and ATM infrastructures. Our life insurance business, Smart Life, continues to sustain its momentum and we have sold approximately 350,000 policies as at the end of April 2017. The operating margin of this 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. Our corporate expenses have increased primarily due to higher corporate finance transaction-related expenditures of $1.4 million, higher amortization cost and modest increases in U.S. dollar-denominated goods and services, purchase from third parties and directors’ fees. Our Q3 2017 net interest income increased to $4.7 million, driven primarily by higher average daily South African rand cash balances and South African interest rates, interest earned on our loan to Finbond and lower average debt balance in Korea, partially offset by the lower interest earned on the U.S. dollar cash reserves that we converted from rand through distributions from our South African subsidiary. We expect that our proposed investments in Blue Label Telecoms and Cell C for ZAR4 billion, and our investment in Bank Frick will be finalized by the end of fiscal 2017, although, there may be certain factors beyond our control that could delay these transactions. Capital expenditures for Q3 2017 and 2016 were $1.9 million and $8 million, respectively, and have decreased primarily due to the acquisition of fewer payment processing terminals in South Korea and ATMs in South Africa. At March 31, 2017, our cash and cash equivalents were $223 million and exclude $45 million of restricted cash related to amounts held in escrow pertaining to the ZAR2 billion guarantee issued to Blue Label. The decrease in our cash balances from June 15, 2016 was primarily due to repurchase of shares of our common stock; unscheduled repayments of our Korean base; payment of taxes; the investment in MobiKwik, C4U, Malta and Pros Software; a loan to Finbond; and capital expenditures, which was partially offset by the sale of 5 million shares of our common stock and expansion of most of our core businesses. We continue 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 and Cell C, we may be required to utilize our new working capital facility with R&D to fund our operations for the next 12 to 18 months. Our effective tax rate for Q3 fiscal 2017 was 35% compared to 34.2% last year and was higher than the South African statutory rate as a result of nondeductible expenses. We expect our effective rate for 2017 to be in the 33% to 35% range. Our weighted share count for Q3 2017 was 54.6 million shares. Our share count as at March 31, 2017 was 57.6 million shares. Given the recent share issuances and repurchases, we believe the weighted average share count for fiscal 2017 will be approximately 54.5 million shares and 57.6 million shares for the fourth quarter of 2017, which includes the weighted impact of the 5 million shares sold pursuant to the share purchase agreement concluded in October 2016. To conclude, as we expect most of our ongoing corporate transactions to only be substantially closed by the end of June 2017, we anticipate a limited impact on our full-year results and reaffirm our fundamental earnings per share guidance for fiscal 2017 to be, at least, $1.69 using a constant currency base of ZAR14.38 to the dollar, a share count of 54.5 million shares and a tax rate between 33% and 35%. With that, we will gladly take your questions. But as Dhruv mentioned at the onset, we are unable to take any questions related to SASSA or CPS at this time.

Thank you very much, sir. [Operator Instructions] The first question comes from David Koning of Baird.

Yes. Good morning, guys, and thanks for taking my call. I guess, my main question, I guess, my first question is not that long ago, maybe a year or two ago now, you entered the relationship with the World Food Program and then you did the deal with IFC. Just wondering an update as you make big partnerships like that, are those helpful in generating new sales, new revenue distribution channels, et cetera?

David, let me perhaps give you my sort of two cents worth on this one. And the World Food Program we said from the beginning was a program which we entered into as part of our responsibility in our view to assist, to develop financial services in different developing countries, we have commenced, as you know, operations in Zimbabwe. And one thing we have found with the World Food Program is that, it appears to take a huge amount of time for them to be able to then come out with an international plan, where they could, for example, deploy one specific technology in multiple countries at a time. The reason for that, it has been told is that, they have to consult and work with local partners in each of the countries, although, that they might be saying to them we have a generic solution, we have to convince each country individually that the solution is the toughest solution that each of these countries wishes to have. This is taken, therefore, as delayed the implementation in other countries. We believe it will happen, but we’ve never really counted to make a substantial amount of money out of the World Food Program. What we wanted was to have the ability to have a foothold in these particular countries, build on the World Food Program that would allow us then to actually grow our own technology core platform faster and obviously to start offering our financial services as well as our banking platform to other citizens that are not on the program. So that’s the World Food Program. When it comes to the IFC, the IFC, as you know, is a different animal entirely. We continue to work closely with the IFC. And candidly, the IFC have been quite useful to us already to identify, for example, banking partners in India with whom we’re currently working or finalizing certain transactions. We believe that the IFC are also very, very keen on pushing our international expansion to go a lot faster in different developing countries, where they themselves would love to be. So we will continue to work with them, and I believe they will continue to work with us in order to sort of nurture and kick off new UEPS-based solutions in different developing countries, knowing that financial inclusion is obviously the basically the golden apple, Net 1 is expecting to reach. So that’s where we are with these two. I think is it going as fast as we thought it would? The answer is probably not. We are dealing with very, very, very big organizations one which requires to get money from donors in order to be able to deploy programs and needs to be very politically correct in every country they go into. The IFC on the other hand is a different animal entirely. And their job is really to open a few doors for us, facilitate a few introduction, but for us to run with them. And I think they were waiting for us to finalize our own financials, our own international plan in order for them to be able to add as much value as possible as two things that will be possible in the future.

Okay, great. Thank you. And then, I guess, my follow-up question, you talked about investing, kind of, $15 million into the international segments. You think it can grow rapidly across many countries and finding links between first and third-world countries. Will that fall within like ZAZOO and Masterpayment, et cetera, or is there almost a new bucket of revenue or new types of products that will be sold? So I’m just, I guess, wondering if it falls within the current product suite, or are there kind of new groups or revenues that are coming?

It’s a bit of both. In other words, the idea is to put all of the international businesses under one roof and candidly these businesses will all be called Net1 and they want to have their own generic name, that’s very important. More importantly, we believe that all of those businesses are not going to be built on top of our digital bank, which is our UEPS/EMV platform. And because we will have the platform as the underlying technological solution, each of these businesses will not be able to promote other financial services, which they do not promote today. So Masterpayment today might be, for example, signing up or becoming the acquirer for online merchant and providing them with some finance. But they are not today providing the same client with the banking platform, EFTs, debit orders or any other formal banking product. The idea is for them to start doing that as well. So it’s not only growing what they are currently doing, but it is also providing to the existing and new customers the ability to provide far bigger, far greater, far different, different types of products, specifically in the financial arena. So that’s Masterpayment. If you look at what I explained in India, it’s the same thing. You kick off with a company that happens to be basically a wallet company. And as we all know, wallets, either you believe in them or you don’t, we believe wallets are fantastic way of doing cheap or low-cost customer acquisition, but long term, that would simply die a natural death. As soon as we introduce these wallets and convert them to a banking account, where you can start selling these clients financial services, you are no longer making money out of that interchange fee, you are making money out of the products that you are selling client and making, of course, the client far more sticky. So once again, we are looking for all of these different opportunities through the investments we’ve made in order to really get low-cost customer acquisition and to convert those particular business models into a banking platform, a digital banking platform in order to be able to sell not only small businesses, but the clients of small businesses, the financial products that we currently know that we can sell in South Africa. So I don’t know if it answers your question precisely. But the idea is, yes, let us use what we’ve got and grow it, but let’s give it a chance to grow faster because of the underlying products we can not offer, on the one end, but more importantly to make sure that we can provide different services and other services, therefore, making sure that their income streams that we can generate are also new not only growing from the traditional businesses. So it’s a little bit of both, but the plan looks very, very exciting to us.

Great. Thank you.

David, it’s true.

Yes.

Sorry, I just wanted to add one quick point to what Serge said. So, obviously, the UEPS/EMV digital banking platform is a cornerstone. And all of the individual products kind of plug into that platform. So it is obviously giving you examples that are very relevant. And just I wanted to throw up one other one out there, which is these products were, say, Masterpayment’s working capital finance. Wherever the platform is deployed, automatically it will pull through those products like a working capital finance into India, Nigeria and other places in there. And so that the banking platform is what will enable us to really go out and scale these businesses quickly.

Okay, gotcha. Thank you.

Thank you. The next question comes from Porter Collins of Seawolf Capital.

Everybody, I don’t have a question more of a statement. I just want to comment the Board for listening to its two largest shareholders and improving some of the corporate governance, because the stock has traded for too cheap for too long. And one of the most important assets of the company is cost of capital, and selling 5 million shares at 2.5 times EBITDA is – seems crazy to me. So, increasing the number of Board members as you’re seeking to do that, I would say, increasing the independent Board members who are technically proficient in this – in your business is a great idea. And splitting the Chairman and CEO roles, as you can see, most of U.S. companies that’s the norm these days and I commend you on doing that. And then lastly, and in terms of the reviewing the relevant parts of the business, as you know, I’ve said that for the last couple of calls in terms of putting numbers out there and in terms of accretion to all the deals you’ve done, you have a lot of puzzle pieces out there, and making new right moves now is imperative. And whether it’s internally reviewing or bringing in outside consultant, I don’t really care. But I think these next moves are important ones, because you have a lot of pieces out there that you can put a great puzzle to work. You would just need to do it effectively, whether it’s Blue Label or Cell C, I don’t know, there has been – obviously, been some changes in those recently. So I just commend – I’m happy with the Board changes, and I think that there’s needed to be more done and do quickly, because you have a lot of things lining up over the next year. So I would say, please move with speed on that. So thank you very much.

Thanks, Porter.

Thank you. [Operator Instructions] The next question comes from Tyler Baron of Sentinel Rock Capital.

Hi, guys. Thank you for taking my question. This is – I like to spend sometime on Blue Label and Cell C. I know the transaction is not done yet, but just a back of the envelope calculation based on publicly available information suggests that could add about $0.50 or $0.60 or more per share in earnings. Are our calculations on point? And could you delve more into that?

Sure, Tyler, it’s Herman here. So, obviously, it will depend to a large extent on the accounting treatment that will be adopted. For those two investments, both of those are under the 20% threshold. And the Board has yet to make the determination exactly how we will account for them, so either as equity accounted investments or using a fair value approach. That determination will be done over the next quarters, or certainly by the time we get to our end of year results in August, we should be able to provide you with that specific information. I obviously can’t really comment on the quantum of what you’ve calculated without really seeing the details of it. But I think the other important thing to realize is that, other than the revenues that are generated by these businesses and obviously the profitability generated by both of these businesses, the other very important aspect to bear in mind here is that, we believe there’s enormous and logistic upside in combining our logistical infrastructure and our ability in South Africa to markets and sell products across a number of clients and customer groups. That in itself, we believe will be of a huge benefit and an accretive benefit to the shareholders. So regardless of the independent performance of those two businesses, and I have to add the third element here, which is a business called DNI, which we will acquire probably shortly after the Blue Label and Cell C investments have been made and it’s all related to those two in any event. But if we look at the picture and its entirety, we bring a specific element into the complete solution. Obviously, Cell C brings the mobile license and the ability to product – to bring product and to price product in accordance with what we believe is required in our market space, whereas Blue Label and DNI bring also very specific distribution and customer fits into the equation. So that for us is also the exciting upside of completing these acquisitions.

[Multiple Speakers] give you a little bit – yes, to give you just a little bit more color on this, because I think Herman is obviously right on the pattern is that, what’s important here is that these acquisitions for us are not made purely because of the fact that we are investing in Blue Label or Cell C. We believe that both of those investments will be actually – would give us a very good return. What’s exciting for us is that, we believe that we can build our business far more by cross-selling products and our financial services products into the Blue Label and the Cell C base, and for them to do the reverse. In other words, for us to start definitely acquiring clients that will require data or voice services or cell phones or any other mobile-driven applications on the one end. And on the other side for them to be able to offer their clients with financial services, including, for example, a very, very low-cost banking account. So if you put the two together and by the way, this has been tried in South Africa numerous times by many of the other operators and they failed, simply because they think don’t there was enough basically skinning the game between the parties. And there were two mutually exclusive from each other, and everybody wanted to take the biggest part of the profit, and that’s why it didn’t worked. We believe by doing what we are doing now, we are breaking down that surface tension, which is going to allow us to really actually generate brand new income streams and to be able to probably, at least, double our customer base, not only on the financial service side, but hopefully double the customer base on the mobile side as well. So for us, it’s a greatly exciting prospect regardless of the fact that we have a 15% in Blue Label or 15% in Cell C. These things would necessary in our view not only to make the deal happen, but more importantly, to make sure that we are all involved and we become part of the big family rather than to work independently of each other.

Thank you, both. That was very, very interesting and exciting, so good luck for closing that deal. My second question is about CapEx and free cash flow. You’ve really after years of CapEx spending, heavy spending on infrastructure, POS systems, ATMs, you’ve substantially reduced CapEx over the last few quarters and you are on track to do about $100 million in free cash flow 2007. Is that going to remain – is that CapEx spend going to remain over the next few years? I mean, do you envision it going up or down, or is it going to remain a new normal?

Yes. Based on our current projections and information just on an add is basis and assuming that our current group remains in the same form and shape, I think that the CapEx expenditure rate that we’ve seen in 2017 will become the new standard rate going forward. The big contributor to CapEx, as you know, over the last couple of years has really been KSNET, where – in terms of the model followed in the South Korean merchant processing market, the VAN companies were responsible for the acquisition and really donation, if we lack of a better word, our point-of-sale devices into the retail base. The current legislation or the legislation that was changed over the last year or so has completely revolutionized that specific model. In other words, the VAN companies are no longer giving away these point-of-sale devices to their clients and not allowed to do so in the most circumstances. And so the savings that you’ve seen in the CapEx is really a result of the change in the business model in South Korea. Over the last year, we obviously also had quite a significant investment in our ATM infrastructure, and we rolled out approximately 1,000 of those in South Africa over a fairly short period of time. Although, we are expecting to continue the rollout of our ATM network here, it will be at a much slower pace as we identify the most optimal spots for those. And if we look at all of the other businesses and specifically the plan as it’s been communicated by Serge, none of our other businesses on the international side, on the digital banking side of things are really capital-intensive businesses. So these are all specifically service-focused businesses. And so I would not expect our CapEx to increase to the levels that we saw in 2015 and 2016 anytime soon.

Thank you, Herman. That’s very helpful.

Ladies and gentlemen, it is just turned 9:00 AM and we have come to the conclusion of our conference call. On behalf of Net1, that concludes our today’s conference. Thank you for joining us. You may now disconnect your lines.